1. Financial Statement Analysis I: Chapter 2 ©NACM

2. General Chapter Notes A. Debtor’s Decisions, An Example: Legal Form of the Debtor 1. What Legal Form Means 2. The Six Typical Forms: Sole Proprietorship, General Partnership, Limited Partnership, LLC, Subchapter S Corp., Chapter C Corp. B. Forms with Personal Liability for Business Debts: Sole Proprietorship, General Partnership C. Forms with Limited Liability: LLC, Subchapter S and Chapter C Corporations, Limited Partnerships D. Relevance of Business Balance Sheet for Sole Prop., Part. E. Limited Liability and Guarantees of Account F. Legal Form and Taxes on Business Income Slide 2-1

3. General Chapter Notes (continued) G. Liquidity and the Ordering of the Balance Sheet H. Public Reporting Accounting and Tax Accounting I. Going Concern Value, Market Value, Book Value, and Liquidation Values for Assets J. Assets Outside of the Balance Sheet K. Information on the Priority and Security Position of Liabilities L. Liquidity and the Operating Cycle (see next slide) Slide 2-2

4. Cash Flows of the Firm Slide 2-3

5. Notes for Particular Parts of Chapter 2 A. Consolidation B. Fiscal Year-end Dates C. Introduction to Trend Analysis D. Common Size Statements Slide 2-4

6. Notes for Particular Parts of Chapter 2 (continued) E. Marketable Securities and Why Firms Hold Them F. Accounts Receivable G. Inventory 1. The importance of inventory investment 2. Why firms hold finished goods inventory 3. LIFO, FIFO, and actual inventory practice 4. Inventory accounting and price levels H. Taxes, Inventory Accounting, and Cash Flow I. PP&E, Depreciation, Amortization, and Market Value J. Other Assets Slide 2-5

7. Notes for Particular Parts of Chapter 2 (continued) K. Accounts Payable L. Current Maturities of Long-Term Debt M. Accrued Liabilities N. Deferred Income Taxes and Depreciation O. Long-Term Debt P. Capital Leases, Operating Leases, Owned Assets, and the Balance Sheet Q. Preferred Stock R. The Three Common Equity Accounts 1. The three accounts defined 2. Where retained earnings go 3. Book equity versus market value 4. Relevance of equity value for trade creditors Slide 2-6

8. Problem 2.11 Public Accounting Tax Accounting Revenue $800,000 $800,000 Other Expenses $350,000 $350,000 Depreciation $130,000 $200,000 Earnings Before Taxes $320,000 $250,000 Tax Bill (34% of EBT) $108,800 $85,000 Increase in Deferred Taxes $23,800 Slide 2-7

9. Problem 2.14a Inventory in order of purchase: Unitsx Cost = Total Beginning inventory 600 x $10 = $ 6,000 First purchase during the year 1,000 x 11 = 11,000 Second purchaseduring the year 900 x 12 = 10,800 Third purchase during the year 700 x 14 = 9,800 Total 3,200 $37,600 Sales for the year = 1,900 units Ending inventory = 3,200−1,900 = 1,300 units Total for new inventory purchases: $37,600−$6,000 = $31,600 Slide 2-8

10. COGS and Inventory Balance using Weighted Average Cost per Unit: Weighted average cost = $37,600/3,200 = $11.75 per unit COGS = $11.75 x 1,900 units = $22,325 Ending inventory balance = $11.75 x 1,300 units = $15,275 Slide 2-9

11. COGS and Inventory Balance using FIFO: COGS calculation: 600@$10 = $6,000 entire beginning inventory 1,000@$11 = $11,000 entire first purchase 300@$12 = $ 3,600 partial from second purchase Total COGS $20,600 Remaining at $12 per unit from second purchase: 900-300 = 600 units Ending Inventory: 600@$12 = $ 7,200 remaining from second purchase 700@$14 = $ 9,800 entire third purchase Total $17,000 Slide 2-10

12. COGS and Inventory Balance using LIFO: COGS calculation: 700@$14 = $ 9,800 entire third purchase 900@$12 = $10,800 entire second purchase 300@$11 = $ 3,300 partial from first purchase Total COGS $23,900 Remaining at $11 from first purchase: 1,000−300 = 700 units Ending Inventory: 600@$10 = $ 6,000 entire beginning inventory 700@$11 = $ 7,700 remaining from first purchase Total $13,700 Slide 2-11

13. Problem 2-11 parts b, c, and d Contrast of three inventory accounting methods Method COGS Ending Inventory Weighted Average $22,325 $15,275 FIFO $20,600 $17,000 LIFO $23,900 $13,700 Actual cash outflow for purchasing inventory: $31,600 (does not depend on accounting method chosen) Reduction in taxes from using LIFO over FIFO: $23,900−$20,600 = $3,300; $3,300*0.34 = $1,122 a cash flow savings Slide 2-12

14. Problem 2.18 Dean Corporation Year200820092010 Beginning Retained Earnings$700$890$1,045 Net Income$250$225$40 End Ret. Earns., no Dividends$950$1,115$1,085 Act. Ending Ret. Earnings$890$1,045$1,010 Cash Dividends$60$70$75 Slide 2-13

15. Problem 2.19 Balance Sheet at December 31, 20XX Assets Current Assets Cash $1,500 Accounts receivable 6,200 Inventory 12,400 Prepaid expenses 700 Total Current Assets $20,800 Property, plant and equipment 34,000 Less accumulated depreciation (10,500) Net property, plant and equipment $23,500 Land held for sale (an Other Asset) $9,200 Total Assets $53,500 Slide 2-14

16. Problem 2.19 (continued) Liabilities and stockholders' equity Current liabilities Accounts payable $4,300 Notes payable 8,700 Accrued interest payable 1,400 Current portion of long-term debt 1,700 Total current liabilities $16,100 Deferred taxes payable 1,600 Bonds payable 14,500 Total liabilities $32,200 Slide 2-15

17. Problem 2.19 (continued) Stockholders' equity Common stock $2,500 Additional paid-in capital 7,000 Retained earnings 11,800 Total stockholders' equity 21,300 Total liabilities and stockholders' equity $53,500 Calculation of Retained Earnings: $53,500−$32,200−$2,500−$7,000 = $11,800 Current Ratio = Total Current Assets/ Total Current Liabilities = $20,800/$16,100 = 1.29 Slide 2-16