1. SRT510 Business Case Studies Financial Statements: Introduction to the Balance Sheet

2. Financial Statements The Big Three: Balance Sheet  Snapshot of what company owns & owes Income Statement  Net Income (= revenue – expenses) Cash Flow Statement  Where cash comes from and where it goes  NB: We are not going to discuss this in any detail

3. Financial Statements Why do we care? Understand financial “health”  Diagnose ills  Prescribe useful remedies  Anticipate financial consequences  Measure Investment (in IT) Tolerance  Avoid severe illness & “death”

4. Some Definitions Fixed Assets:  Long-term tangible material goods that a business owns and uses in the production of its income.  Fixed assets are not expected to be consumed or converted into cash for at least a year.  Examples: buildings, real estate, equipment, furniture

5. Some Definitions Accounts Receivable (A/R): “If a company has receivables, this means it has made a sale but has yet to collect the money from the purchaser. Most companies operate by allowing some portion of their sales to be on credit. These type of sales are usually made to frequent or special customers who are invoiced periodically, and allows them to avoid the hassle of physically making payments as each transaction occurs. In other words, this is when a customer gives a company an IOU for goods or services already received or rendered.” (http://investopedia.com/terms/a/accountsreceivable.asp) Examples?

6. Some Definitions Accounts Payable (A/P): “Money which a company owes to vendors for products and services purchased on credit. This item appears on the company's balance sheet as a current liability, since the expectation is that the liability will be fulfilled in less than a year. When accounts payable are paid off, it represents a negative cash flow for the company.” (http://www.investorwords.com/51/accounts_payable.html)http://www.investorwords.com/51/accounts_payable.html Examples?

7. Foundation Of All Accounting Assets = Liabilities + Shareholder’s Equity (SE) SE = Assets – Liabilities SE = “what you own” – “what you owe” SE = “value of the shareholders’ investment in the company”

8. Foundation Of All Accounting SIMPLE EXAMPLE: In 2009: You buy a $260,000 car (2006 Ferrari F430 Spider F1). You put $60K down and take a car loan for $200K2006 Ferrari F430 Spider F1 You have $260K in assets, $200K in liabilities and $60K in SE If you pay off $50K in one year, and your car increases in value (that model is in demand) to $300K then you have $300K in assets, $150K in liabilities and $150K in SE

9. Foundation Of All Accounting SAME EXAMPLE, a bit more complex: You can’t afford the car on your own so you buy it with a (wealthy) aunt. You decide on a 60/40 split. In 2009: You & your aunt buy the $260,000 car, putting $160K down--$156K (60% of $260K) from your aunt, $4k from you. You also take a car loan for $100K Together, you have $260K in assets, $100K in liabilities and $160K in SE Individually:  your aunt has $156K in assets, $0 in liabilities, and $156K in SE  you have $104K in assets, $100K in liabilities and $4K in SE

10. Cash Flow-Production Cycle Cash A/R Fixed Assets Inventory Production ($ are used to create inventory—raw materials, salaries, etc.) Investment ($ used to purchase fixed assets) Depreciation (fixed assets are used up as inventory is created) Taxes, dividends Payments towards liabilities (loans, A/P)

11. Cash Flow-Production Cycle Cash A/R Fixed Assets Inventory cash sales credit sales (sales in which $ are not paid right away; e.g. perhaps within 30 days. Note: this typically does NOT include 3 rd party credit card (e.g. VISA) sales.) Collection (customers who bought on credit, pay what they owe) Money Borrowed (Loans)

12. Cash Flow-Production Cycle Cash A/R Fixed Assets Inventory Production cash sales Investment Depreciation credit sales Collection Taxes, dividends, liability payments Loans

13. Assets Or Liabilities? AssetLiability Cash Fixed Asset Inventory A/R A/P Loan

14. TABLE 1-1 Worldwide Sports Financial Transactions 2005 ($ thousands) Analysis for Financial management, Higgins, 8e

15. TABLE 1-1 Worldwide Sports Financial Transactions 2005 ($ thousands) Analysis for Financial management, Higgins, 8e

16. TABLE 1-1 Worldwide Sports Financial Transactions 2005 ($ thousands) Analysis for Financial management, Higgins, 8e

17. TABLE 1-2 Harley-Davidson, Inc. Balance Sheets ($ millions) Analysis for Financial management, Higgins, 8e

18. TABLE 1-2 (Continued) Analysis for Financial management, Higgins, 8e