1. Fundamentals of Finance Bob Donchez
CUBIC 2012 Section 2
Fundamentals of Finance
Bob Donchez

2. Question (2.0)
After completing the CUBIC accounting module, describe your opinion regarding knowledge of financial statements:
A. I am very comfortable with them
B. I have a general understanding but lack details
C. I saw much, but retained little

3. Question (2.1)
“A statement of assets, liabilities, and net worth at a point in time” best describes what?
A. The income statement
B. The balance sheet
C. The statement of cash flows
D. The reconciled balance position

4. 2-0 Financial Statements and Analysis
Topics
2-1 Balance Sheet
2-2 Income Statement
2-3 Cash Flows
2-4 Financial Analysis—Ratios
2-5 Case #1: Financial Analysis: Chipotle Mexican Grill, Inc.

5. Financial Statements and Analysis 2-1 Balance Sheet
What is owned, what is owed, and the difference (equity) at a specific point in time
Assets
Current Assets
Long Term (Fixed) Assets
Liabilities
Current Liabilities
Long Term Liabilities
Equity/Net Worth

6. Balance Sheet Identity:
Total Assets = Total Liabilities + Shareholder Equity

7. Financial Statements and Analysis 2-1 Balance Sheet
Chipotle Mexican Grill, Inc.
Balance Sheet
as of December 31, ($000)
Assets Liabilities & Stockholders’ Equity
Cash $ Accts Payable & Accruals $
Accounts Receivable Notes Payable
Inventory & Other CA Current Liabilities
Current Assets
Long-term liabilities
Common Stock
Retained Earnings
Fixed Assets Treasury Stock
Total Equity
Total Assets $ 1,122 Total Liabilities & SH Equity $1,122

8. Financial Statements and Analysis 2-2 Income Statement
Money made, expenses incurred, and the difference (profit) over a specified period of time
Accrual versus Cash Accounting
Revenue
Expenses
Variable, direct, COGS
Fixed, overhead, SGA
Depreciation
Earning before interest and tax (EBIT)
Interest
Taxes
Net Income

9. Financial Statements and Analysis 2-2 Income Statement
Chipotle Mexican Grill, Inc.
Income Statement
January 1, 2010 to December 31, 2010
Sales $ 1,836
-Cost of sales ,347
-General and admin expenses
-Depreciation
-Total operating expenses 1,548
=Earnings before interest and taxes (EBIT) $288
-Interest paid (earned)
=Taxable income (earnings before tax—EBT) $289
-Taxes
=Net income $179
Dividends $0
Addition to retained earnings $179

10. Financial Statements and Analysis 2-3 Cash Flows
Operating Cash Flow
OCF = EBIT + Depreciation – Tax

11. Financial Statements and Analysis 2-3 Cash Flows
Other Cash Flow Measures:
Capital Spending
CAPX = Fixed Assets(1) – Fixed Assets(0) + Depreciation
Change in Net Working Capital
CNWC = NWC(1) – NWC(0)
(NWC = current assets – current liabilities)
Putting it Together: Free Cash Flow (CF from Assets)
OCF - CAPX - CNWC

12. Financial Statements and Analysis 2-3 Cash Flows
On-line resource on financial statements:

13. Question (2.4.1)
Company ABC made $1.0 million profit in 2010 and $1.2 million in The 2011 result is:
A. Clearly good relative to 2010
B. Clearly bad relative to 2010
C. Really depends….

15. Financial Statements and Analysis 2-4 Financial Analysis--Ratios
Ratio Analysis
Introduction to Ratios
Categories of Ratios
Common sized statements
Short term Solvency/Liquidity
Long term Solvency/Leverage
Debt
Coverage
Profitability
Market

16. Financial Statements and Analysis 2-4 Financial Analysis--Ratios
Putting it all together:
Trend and Comparison Analysis
The DuPont Framework

17. Financial Statements and Analysis 2-4 Financial Analysis--Ratios
Common Size Statements
Income Statement
State all items as percent of sales
Balance Sheet
State all items as a percent of total assets

18. Financial Statements and Analysis 2-4 Financial Analysis--Ratios
Common Size Statements—Balance Sheet: Chipotle 2010
Current Assets
2010 %
Cash & ST Invest
350
31.2%
Accounts rec. 6
0.5%
Inventory 7
0.6%
Other CA 44
3.9%
Total current assets
407
36.3%
Fixed assets
Net PP&E
677
60.3%
Goodwill 22
2.0%
Other assets 16
1.4%
Total fixed assets
715
63.7%
Total Assets
1,122
100.0%
Current Liabilities
2010 %
Accounts Payable
123
11.0%
Notes Payable
0.0%
Total current liabilities
Long-term liabilities
Long term debt
Other LT liabilities
188
16.8%
Total LT liabilities
Total Liabilities
311
27.7%
Shareholder Equity
Common stock
595
53.0%
Retained earnings
457
40.7%
Treasury stock
-241
-21.5%
Total Equity
811
72.3%
Total L&E
1,122
100.0%

19. Financial Statements and Analysis 2-4 Financial Analysis--Ratios
Common Size Statements—Income Statement 2010
Chipotle Mexican Grill
2010 %
Sales
$ ,836
Operating costs
1,346
73.3%
General and admin
133
7.2%
Depreciation 69
3.8%
EBIT
288
15.7%
Interest
(1)
-0.1%
Taxable income
289
Taxes (40%)
110
6.0%
Net income
179
9.7%

20. Question (2.4.2) A. 14.0% B. 16.7% C. 20.0% D. 24.0% E. 36.0%
Company ABC has total assets of $10 million, revenue of $12 million, and current assets of $2 million. What is the common size percentage of current assets?
A %
B %
C %
D %
E %

21. Financial Statements and Analysis 2-4 Financial Analysis--Ratios
Short Term Solvency Ratios: firm’s ability to meet short term obligations with short term assets.
Current Ratio
Quick Ratio

22. Financial Statements and Analysis 2-4 Financial Analysis--Ratios
Long Term Solvency/Debt Ratios: how much debt the firm has relative to size.
Total Debt Ratio
Debt to Equity Ratio
Equity Multiplier (Leverage Factor)

23. Financial Statements and Analysis 2-4 Financial Analysis--Ratios
Long Term Solvency/Coverage Ratios: how well the firm’s profit “covers” its debt obligations.
Times Interest Earned

24. Financial Statements and Analysis 2-4 Financial Analysis--Ratios
Asset Management/Efficiency Ratios: how well the firm’s assets generate sales.
Total Asset Turnover
Inventory Turnover
Accounts Receivable Turnover

25. Financial Statements and Analysis 2-4 Financial Analysis--Ratios
Profitability: how much profit the firm has relative to size.
Profit Margin
Return on Assets
Return on Equity

26. Question (2.4.3)
Calculate equity multiplier, given the following information:
Total debt = $35,000 Net income = $10,000
Equity = $15,000 Revenue = $55,000 A B C D
E. Can’t be calculated with info provided

27. E. Can’t be calculated with info provided
Question (2.4.4)
Calculate return on assets, given the following information:
Total debt = $35,000 Net income = $10,000
Equity = $15,000 Revenue = $55,000
A. 18%
B. 20%
C. 25%
D. 67%
E. Can’t be calculated with info provided

28. Financial Statements and Analysis 2-4 Financial Analysis--Ratios
Market Value Measures: ratios utilizing market prices.
Price Earnings (PE) Ratio
Example: Dell Computer
Earnings per share = $ 1.88
Price per share = $ 16.85
PE Ratio = / = 8.96x

29. Compute the 2011 PE multiple for Chipotle.
Question (2.4.5)
Compute the 2011 PE multiple for Chipotle.
Net income = $215 M
Shares outstanding = 31.2 M shares
End of 2011 stock price = $338 A B C D
E. Can’t be calculated with info provided

31. What ratio category do you think lenders would be most interested in?
Question (2.4.6)
What ratio category do you think lenders would be most interested in?
A. Short term liquidity
B. Long term solvency (debt and coverage)
C. Asset management/efficiency
D. Profit
E. Market

32. Financial Statements and Analysis 2-4 Financial Analysis--Ratios
Ratio Analysis
The DuPont Framework

33. Financial Statements and Analysis 2-4 Financial Analysis--Ratios
Ratio Analysis
The DuPont Framework

34. Financial Statements and Analysis 2-4 Financial Analysis—Ratios
Ratio Analysis
Issues/Drawback in Ratio Analysis
Book values (past) versus market values (present)
How close are comparisons
Only as good as reported
Must look “behind” the numbers
On-line resources for financial statements and ratios :

35. Tasks for Case Preparation Case Review case information
Financial Statements and Analysis 2-5 Financial Analysis Case: Chopotle Mexican Grill, Inc
Tasks for Case Preparation
Case Review
case information
case spreadsheet
case questions
Teams prepare and discuss case numbers
Teams address case questions
Class discussion
Link to Case Information
Link to Case Spreadsheet