lecture cp2 no2.ppt

8/10/2019 Lecture cp2 no2.ppt

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Contemporary Engineering Economics, 4th

edition. 2007 1

Understanding the Financial

Statements

Lecture No.2

Chapter 2

Contemporary Engineering Economics

Copyright 2006


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Contemporary Engineering Economics, 4thedition. 2007 2

Understanding Financial Statements

Accounting: TheBasis of Decision-

Making Financial Statements:

Financial Status forBusinesses

Financial Ratios:Using Ratios to MakeBusiness Decisions


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Chapter Opening StoryDell Computer

Corporation 1983Michael Dell starts business of preformatting IBM PC

HDs on weekends 1985 - $6 million sales, upgrading IBM compatibles for local

businesses 1986 - $70 million sales; focus on assembling own line of PCs

1990 - $500 million sales with an extensive line of products 1996Dell goes online; $1 million per day in online sales; $5.3B

in annula sales 1997Dell online sales at $3 million per day; 50% growth rate

for third consecutive year, 7.8B in total annual sales

2005 - $49.2 B in sales

How would you evaluate the financial performance ofDell Corporation?


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A. Why Engineers need to understand the financial

statements?


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AccountingThe Language of Business


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Financial Status for Business


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B. Understanding the Balance Sheet

1. The basic accounting equation and thedefinition of capital

2. How to instantly determine liquidity and too

much debt

3. How the firm gets equity: only two ways


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The Basic Accounting Equation

For the Balance Sheet Presentation

For the Financial Analysis

Assets - Liabilities = Owners Equity

Assets = Liabilities + Owners Equity


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How Items Are Arranged on the Balance

Sheet

AssetsLiabilities

Owners

Equity


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Using the Four Quadrants of the Balance

Sheet and Why?

ASSETS LIABILITIES

CurrentAssets

Long-Term Assets

CurrentLiabilities

Long-Term Liabilities

Equity

=

1. Owner Contributions

2. Retained Earnings


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CurrentAssets

Long-term

Assets

Current

Liabilities

Long-term Liabilities

Equity

The Balance Sheet StatementDell Computer

Corporation


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How to Instantly Determine Liquidity and

Too Much Debt?

Liquidity

Too Much Debt?

Current Ratio (2:1)

Debt To Equity Ratio


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LiquidityCurrent Ratio

ASSETS LIABILITIES

Current Assets

Long-Term Assets

Current Liabilities


Equity1. Owner Contributions



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Too Much Debt?Debt to Equity Ratio

ASSETS LIABILITIES

Current Assets

Long-Term Assets

Current Liabilities


Equity1. Owner Contributions


Debt

Equity


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How the Firm Gets Equity: Only Two

Ways

Owners Contributions

By issuing stocks through financial markets

Retained Earnings

By retaining operating profits instead of paying


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1. How to Use profit check points

2. Why gross margin is the critical measure

for engineers?3. How does inventory production impact

profit?

C. Using the Income Statement to Manage

a Business


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Basic Income Statement Equation

Revenue

Expenses

Net Income (Loss)

-


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Why Gross Margin is the Critical Measure

for Engineers?

Sales

Cost of Goods Sold

Gross Margin


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How Inventory Production Impacts Profit

Calculating the Cost of Goods Sold

Beginning Inventory

+ Additions to Inventory

- Ending Inventory

Cost of Goods Sold


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How to Use Profit Check PointsABC Company, Inc.

Statement of Operations(Year Ended December 31, 200x)

Sales $5,000,000 100.0%

Less: Cost of Goods Sold 3,250,000 65.0%

Gross Profit 1,750,000 35.0%

Less: Selling, G&A Expenses 1,000,000 20.0%

Operating Profit 750,000 15.0%

Less: Interest 250,000 5.0%

Net Income Before Taxes (NIBT) 500,000 10.0%

Less: Taxes 175,000 3.5%

Net Income $325,000 6.5%

Bottom line


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The Income StatementDell Computer

Corporation

18.32%

8.65%

6.18%

18.32%

100.00%

Gross margin

Operating margin

Net margin

FY 2005


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1. The business operating cycle: Howa business earns its cash

2. Sources and Uses of Cash3. The engineers focus on the

investing section: Capital Budgeting

D. Understanding the Statement of Cash

Flows


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Shareholders

Fixed Assets

Debt holders

Inventory

Government

Customers

CASHFrom cash sales

To pay taxes

From credit

sales To pay labor,materials, andoverhead

To pay interestand principal

From saleof debt

To purchase

From sale

To pay dividend,To purchase backshares

From saleof shares

Cash Flow Transactions within Business


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The Cash FlowBusiness Cycle

Inventory

Production

Cash

Accounts

receivable

Fixed assets

CashSales

Credit

Sales

Collection of

receivable

Investment

Depreciation

Changes in equityChanges in liabilities

Pay taxesPay interestPay dividends

LaborMaterials

Overhead


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The Cash Flow StatementDell Computer Corporation


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