1 The Magic of Financial Statements Presented by: Robert E. Mark Chief Financial Officer Rowe Incorporated

2 “ I’ve worked myself up from nothing to a state of extreme poverty.” -Groucho Marx

3 OVERVIEW Balance Sheet Profit and Loss (Income) Statement Statement of Cash Flows

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5 The Balance Sheet LIABILITIES (Amounts owed to outside creditors) + EQUITY (Or net worth) _________________ = ASSETS (Resources of the business)

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7 Liabilities Assets

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10 BASIC MATH 101 1, , , , ,100

11 The Income Statement Sales - Pass thru billing = Net Sales - Direct Expenses = Gross Profit - Admin & Depreciation Expenses = Income from Operations +/- Other Income or Expenses = Income before Taxes - Taxes_______________ = Net Income

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13 The Statement of Cash Flows Cash from operations +/- Cash provided by or applied to investing activities +/- Cash provided by or applied to financing activities = Net increase or decrease in cash

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16 FINANCIAL RATIOS Bank most interested in Come from the Balance Sheet Owners most interested in Come from the Income Statement

17 CURRENT RATIO Test of short term solvency

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19 RULE OF THUMB Current Ratio should be 2.0 : 1 or greater PSMJ 2001 Median: 1.92

20 THE ACID TEST RATIO Quick Ratio

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22 RULE OF THUMB Acid Test Ratio should be 1.0 : 1 or greater PSMJ does not calculate this ratio

23 DEBT TO EQUITY RATIO Total liabilities Stockholder Equity

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25 RULE OF THUMB Debt to Equity Ratio should be less than 1.0 PSMJ 2001 Median: %

26 QUICK REVIEW SAFETY & LIQUIDITY Balance Sheet Current Ratio – 2 : 1 or greater Acid Test Ratio – 1 : 1 or greater Debt to Equity Ratio – less than 1

27 RETURN ON SALES RATIO Net Income Before Taxes Net Sales Revenue PSMJ does not calculate this ratio

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29 RETURN ON EQUITY Return on Investment PSMJ 2001 Median: 16.51%

30 RETURN ON EQUITY Net Income (Income Statement) Stockholders’ Equity (Balance Sheet)

31 RETURN ON EQUITY $794,132 = 33.9% $2,342,431

32 RETURN ON ASSETS RATIO Net Income (Income Statement) Total Assets (Balance Sheet) PSMJ 2001 Median: 6.46%

33 RETURN ON ASSETS RATIO $794,132 = 15.8% $5,022,194

34 AVERAGE COLLECTION DAYS Avg Accounts Receivable (Bal Sht) Avg Daily Sales (Income Statement) PSMJ 2001 Median: days

35 AVG ACCOUNTS RECEIVABLE Prior yr Accts Rec + Current yr Accts Rec 2

36 AVERAGE DAILY SALES Annual Gross Sales 365

37 AVERAGE COLLECTION DAYS (1,608, ,098,234) / 2 9,765,492 / 365 = 50.6 DYS PSMJ 2001 Median: days

38 ZETA FACTOR 1. Working Capital (Current Assets – Current Liabilities) / Total Assets ___ X 1.2 = ___ 2. Retained Earnings / Total Assets ___ X 1.4 = ___ 3. Net Income before Tax & Interest / Total Assets ___ X 3.3 = ___ 4. Owner’s Equity / Total Debt ___ X 0.6 = ___ 5. Sales / Total Assets ___ X 1.0 = ___ Total ____

39 ZETA FACTOR 1. Working Capital (Current Assets – Current Liabilities) / Total Assets 0.26 X 1.2 = Retained Earnings / Total Assets 0.45 X 1.4 = Net Income before Tax & Interest / Total Assets 0.18 X 3.3 = Owner’s Equity / Total Debt 0.75 X 0.6 = Sales / Total Assets 1.94 X 1.0 = 1.94 Total 3.92

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