finmgmt22
| FIN534 Week 2 Scenario Script: Financial Statements and Reports, Financial Analysis, Corporate ratios and benchmarking | ||
| Slide # | Scene/Interaction | Narration |
| Slide 1 | Scene 1
| FIN534_2_1_Linda-1: Hello, I hope you are ready to get started today because Don gave us our first analysis project. He would like us to review some of TFC’s financial reports. FIN534_2_1_Don-1: Hello everyone. I just came from the accounting department where I was able to get TFC’s balance sheets and income statements for the prior two years. The accounting department also provided an estimate of TFC’s balance sheet and income statement after the acquisition, considering it occurs. I would like for you to review the statements and determine the financial strength of our company. We pride ourselves in having a strong cash base. We are hoping this project will keep our cash account strong. Let’s go to the conference room so I can show you the reports and review some of the accounts with you. FIN534_2_1_Linda-2: (Phone rings)Hello. (wait a few seconds). Thank you. I will be right over. FIN534_2_1_Linda-3: Sorry I cannot join you as an important matter came up at one of our facilities. FIN534_2_1_Don-2: Not a problem. I have faith in our Strayer intern. So, we will review the forms in the conference room. |
| Slide 2 | Scene 2
| FIN534_2_2_Don-1: So, it looks like this one is all on you. Here is the balance sheet and the income statements. I was able to gather the information from the last two years of TFC’s annual report, which you know also includes the statement of stockholders’ equity and the statement of cash flows. FIN534_2_2_Don-2: Let’s take a quick look at the Balance Sheet. It shows a snapshot of TFC as of December 31st of the past two years as well as this year which is an estimated number. It is pretty much showing us what the company looks like at those points in time. The amounts can change significantly from one day to the next. For example.if there is a big cash payment, then the cash account will go down overnight! There are three main areas to a Balance Sheet and they include assets, liabilities, and equity. The Balance Sheet also says everything should add up or balance and the formula for this is: assets equal liabilities plus equity. |
| Slide 3 | Scene 3
| FIN534_2_3_Don-1: Assets are what TFC owns and the accounts consist of current and long term assets. Current assets are typically considered by TFC to be those accounts that will be turned into cash within one year. The long term assets also known as fixed assets are those that have longer than one year of an expected life on the books. Now let’s take a look at the other side of the Balance Sheet equation. |
| Slide 4 | Scene 4
| FIN534_2_4_Don-1: Liabilities are what TFC owes to creditors. The same understanding applies to current liabilities as they are what TFC will pay in cash in the following year, while long term liabilities are more than a year. Also accounts payables are those payments that are due to other companies while notes payable are typically due to lending institutions. FIN534_2_4_Don-2: Equity basically represents the owners of the company and any net income that is not paid out in dividends over time gets transferred into our Retained Earnings account. Please take some time to look over the balance sheet. FIN534_2_4_Don-3: As you can see cash is a common theme and we need to have good management of it. |
| Slide 5 | Scene 5 Check Your Understanding: Review Balance Sheet Items
User: Use matching where user has to put account in proper bucket (Asset, Liability or Equity) See addendum Scene 5 CYU | |
| Slide 6 | Scene 6
| FIN534_2_6_Don-1: I sure hope everything is fine with Linda. In the business world, these “putting out the fire” actions happen all the time. We are all about making the Body Builder’s experience the most enjoyable experience every time so when that standard is not being met, action needs to be taken A.S.A.P! FIN534_2_6_Don-2: Before I digress anymore let’s take a look at the income statement. This statement is different from the balance sheet as it occurs over a specific time instead of at one point in time. It, too, has a simple formula of revenue minus expenses equals profit or loss. FIN534_2_6_Don-3: On our income statement we call revenue net Sales because we already have deducted any discounts we gave to our Body Builders. The expenses are also listed starting with depreciation. FIN534_2_6_Don-4: Let’s talk about depreciation. It is a non cash item, meaning that when aLong Term Asset is purchased we own it, but since we plan on using it over a number of years, we spread the cost of it over years instead of all at once. Think of a work out building. Since we plan on having our Body Builders use it for years, we expense it or depreciate it over a number of years. We also have to make sure we are following accepted accounting rules when depreciating. FIN534_2_6_Joe-1: I see you are discussing the financial statements. How is the company looking? FIN534_2_6_Don-4: Funny, you should ask. We were just going to get into the analysis. |
| Slide 7 | Scene 7 (Interaction- Multiple choice)
| FIN534_2_7_Don-1: Well we reviewed what each statement is, now let’s dive in deeper by doing some analysis. The cash account is very important to us at TFC. Two years ago we had cash of twenty million dollars. Last year our cash position was thirty million dollars. That is a fifty percent gain. FIN534_2_7_Don-2: To get that we took the Ending Cash minus theBeginning Cash and divided that amount by the Beginning Cash.This year we are projecting to have a cash position of ten million dollars. What type of gain or loss would that be? FIN534_2_7_Don-3: (Correct Answer): Nice work! It is a loss of sixty seven percent. FIN534_2_7_Don-4: (Incorrect Answer): Try again. Remember, use the formula Ending Cash minus theBeginning Cash and divide that amount by the Beginning Cash. |
| Slide 8 | Scene 8 | FIN534_2_8_Don-1: Doing year over year comparisons are good to get an idea of the direction of the company. As you can see our cash account is expected to go down significantly which is a concern to us especially during this expansion. FIN534_2_8_Don-2: (Phone rings) Hello. (pauses a few seconds). Okay, I’ll be right there. FIN534_2_8_Don-3: Well – another fire has to be put out. I have to go now but I am going to leave you with the financial statements and ask that you review them and draw some conclusions. |
| Slide 9 | Scene 9 - Check Your Understanding: See addendum CYU Slide 9 | |
| Slide 10 | Scene 10
| FIN534_2_10_Linda-1: I just bumped into Don. Great work on the analysis. He told me you were hard at work. A Financial analysis is very important for any company. Besides looking over the balance sheet and income statement; financial analysis also includes examining the statement of cash flows, calculating and examining the return on invested capital, calculating and examining free cash flow, and performing ratio analysis using benchmarks as a guide. Let’s focus on ratio analysis with benchmarks. |
| Slide 11 | Scene 11
| FIN534_2_11_Linda-1: When I was attendingStrayer University for my MBA, ratio analysis became a personal favorite of mine. I believe it helps you see the entire picture of the company, especially when you compare them to benchmarks, which are usually ratios for the particular industry. You can say that ratio analysis standardizes all companies, or puts them on the same playing field when comparisons are made. FIN534_2_11_Linda-2: There are typically five areas of ratio analysis and they include liquidity, asset management, debt management, profitability, and market value. |
| Slide 12 | Scene 12
| FIN534_2_12_Linda-1: Liquidity ratios are used to see what position the company is to pay those obligations that are due in the short term. At TFC we usually look at two different ratios, the current and quick also known as the Acid Test. FIN534_2_12_Linda-2: Let’s take a look at the current ratio. Two years ago our current ratio was three point two two and three point five seven, meaning we have over three times more current assets than current liabilities. However, we are projected to only have one point three four times as much this year. Is it enough? That is a question no one knows, but we can do a comparison to the industry to see where we stand. FIN534_2_12_Linda-3: Let’s look at the industry for the current ratio from our spreadsheet. As you see, we are well above the industry average for the last two years, indicating we are in a strong position to meet current obligations. However, looking at the current year tells a different story. Our current ratio is one point three four, while the industry average is two point zero. This is why I am nervous. We pride ourselves at TFC to be liquid but this project is really going to put us on the edge. Let’s now look at some asset management ratios. |
| Slide 13 | Scene 13
| FIN534_2_13_Linda-1: Asset management ratios focus on how well TFC is using its assets to create wealth. From my Strayer MBA days, we covered a lot of them. The two we like to focus on at TFC are the total assets turnover and days sales outstanding. Let’s look at both of them. FIN534_2_13_Linda-2: The total assets turnover ratio measures how well Assets are generating sells. The ratio for the last two years was point six eight and point seven zero, respectively. To figure out the ratio we use the formula: total asset turnover equals sales divided by total assets. When comparing to the benchmark of point five zero, TFC’s ratio is in line with the industry. FIN534_2_13_Linda-3: Days sales outstanding, also known as the average collection period is used to see how long it is taking TFC to collect on its accounts receivables. The benchmark is thirtydays but TFC has been collecting its receivables a lot less than that. |
| Slide 14 | Scene 14
| FIN534_2_14_Linda-1: Let’s now look at debt management ratios. These are the ratios that show how well a company leverages itself with debt. Here at TFC we want to stay around the industry average which is fifty percent. Two years ago we weren’t there but we made changes to how we finance our assets and we did much better last year. However, for the current year, we are projected to be a higher than we would like. New project financing is doing this to us. FIN534_2_14_Linda-2: Times-interest earned or TIE for short is the other ratio we at TFC look at closely. Don’t get me wrong, we are concerned with all the ratios, but some we look at more closely than others. This ratio is concerned with how well our earnings are covering our interest expense. The higher ---the better for us. The prior two years we were a lot higher than the industry average of ten. Our profits have been great and we grew at a controlled rate so we were able to manage our debt well. |
| Slide 15 | Scene 15
| FIN534_2_15_Linda-1: We are really going in unchartered waters for TFC. FIN534_2_15_Linda-2: Let’s now look at what our shareholders are concerned about which are profitability ratios. FIN534_2_15_Linda-3: Shareholders invest to see a nice return. At TFC, we have been doing that. Two measurements we look at closely are the Net Profit Margin and Return on Equity. (Joe comes in…..) FIN534_2_15_Joe-1: Hi everyone. I would like to talk about this group of ratios. As I mentioned, I am not your financial wizard. However, as CEO, I have to keep our shareholders happy so I really look at these ratios. FIN534_2_15_Joe-2: The net profit margin percentage tells us how much of each dollar we are selling at TFC stays with the company. The industry average is ten percent or ten cents for each dollar. Here at TFC, we have been beating the industry continuously. Last year we earned twenty one percent or twenty one cents for each dollar sold. Great results for our shareholders and us especially! FIN534_2_15_Joe-3: The return on equity or ROE, more closely relates to what investors are returning on their money. Over the last two years our investors were able to earn a return of twenty five percent and twenty three percent, respectively. The industry average is twelve percent so we are doing great. FIN534_2_15_Linda-1: Thanks Joe. If you stay for a few minutes, we were just going to run our projected numbers. |
| Slide 16 | Scene 16 Determine the Return on Equity (ROE) for the year 2013?
| |
| Slide 17 | Scene 17
| FIN534_2_17_Linda-1: Great job! So, we are projected to be less than the industry which is a concern for us and our shareholders. FIN534_2_17_Linda-2: We also look at our price/earnings ratio which is our market value ratio. This gives us an idea of how our stock price compares to that of others in our industry in particular to our earnings. Since we have had very good earnings, our stock price has gone up in value. We considered a stock split but we decided against it as investors were seeing some growth. We do pay a small dividend, as well. When looking at our P/E Ratio, we are aligned with the industry. We will revisit this lateras we review other analyses. |
| Slide 18 | Scene 18
[Check Your Understanding here. Intern will be given the category as in Liquidity and say whether it is stronger, the same, or weaker than the industry] (1) Regarding Liquidity, when looking at the Current Ratio for the prior years is TFC Stronger, Same, Weaker when compared to the Industry? Answer: Stronger but in the projected year that is not the case Same – Nice try but the Current Ratio has gotten stronger albeit by a small amount. This shows good coverage for debts due in the current year Weaker – Nice try but look from at the last two years and the ratios are above the industry average (2) Regarding Asset Management, when looking at the Total Asset Turnover Ratio for the prior years is TFC Stronger, Same, Weaker when compared to the Industry? Answer: Stronger: The ratios are a little bit higher than the industry which means that assets are generating sales. However, as assets become aged, that may not be the case. TFC should look at this ratio each year to determine if action is needed Same – Nice try but the ratios are the same year over year but they are still higher than the industry, which is good but should be a concern if they go down Weaker – Nice try the ratios are about the same for the last two years which show stability but should be a concern if assets are not generating sales in the future (3) Regarding Profitability, when looking at the Net Profit Margin Ratio for the prior years is TFC Stronger, Same, Weaker when looking at year over year? Answer: Same – TFC is above the industry average but is relatively flat which may be the reason to expand. Stronger – Nice try but while the ratios are better than the industry they still didn’t not improve by a wide amount from one year to the next Weaker – Nice try but look from at the last two years and the ratios are above the industry average | FIN534_2_18_Linda-1: So how are we looking regarding our ratios? With all of your studies from Strayer University what do you think of the ratios when compared to the industry and year over year? |
| Slide 19 | Scene 19
| FIN534_2_19_Linda-1: Let’s now summarize the five areas offinancial ratios. FIN534_2_19_Linda-2: First is liquidity – We currently are very strong compared but it appears we will be having some cash concerns during this expansion year. FIN534_2_19_Linda-3: Next, asset management – We really are doing well, especially in the days it takes us to collect what is owed to us. FIN534_2_19_Linda-4: Third, debt management – Currently we are doing well but we need to pay close attention to our debt in the projected year. FIN534_2_19_Linda-5: Fourth, profitability ratios – Same story as debt management. We are doing fine now but projections say we will be below the industry. FIN534_2_19_Linda-6: And lastly, market value – We are doing fine now, but projections say we will be below the industry. FIN534_2_19_Linda-7: So, financially, we are financially strong; however, if we proceed with this expansion project we really need to watch it closely. Our initial projections have TFC taking out a large sum of debt to finance this project. In doing so, it is really going to hurt our financial strength and possibly make us vulnerable. If we do proceed, we need Joe to really sell it to our shareholders. He is great at telling the story in such a positive way. |
| Slide 20 | Scene 20
| FIN534_2_20_Linda-1: Great work this week. To recap, we discussed the different types of financial statements and how important they are for our company. We also discussed the many different types of ratios that TFC uses for comparison to the industry. These ratios and financial statements are the building blocks for companies and are used to paint a financial picture of where the company is currently and where it may be headed. At TFC, we are financially strong now, but going forward, we have to see if that will still hold true. FIN534_2_20_Linda-2: There are many areas of finance and financial analysis is only one area. Cash is also a key concern and we will explore that next week with time value of money concepts as well as bonds, which is one of the areas that we plan on exploring at TFC to raise capital. FIN534_2_20_Linda-3: As a reminder, please complete your weekly discussions based on your learning experience today. |
CYU Addendum (No recording Necessary):
Scene 5 CYU:
Put each of the Balance Sheet Accounts in the appropriate bucket. Student can check and have them try again if all are not correct
| Asset – what company owns | Liabilities – what company owes | Equity – Owners and income preserved |
| Cash | Accounts Payable | Common Stock |
| Accounts Receivable | Sales tax Payable | Preferred Stock |
| Inventory | Notes Payable | Retained Earnings |
| Prepaid Expenses | Accruals | Paid In Capital in Excess of Par Value |
| Land | Long Term Bonds | |
| Accumulated Depreciation | ||
| Goodwill | ||
| Furniture and Fixtures |
Scene 9 CYU:
Using the spreadsheet, match up the scenario to the percent of gain or loss from year over year. If get wrong remember the formula (Ending – Beginning)/Beginning * 100
Change in Accounts Receivablefrom 2012 to 2013 = +47%
Change in Depreciation Expense from 2011 to 2012 = +11%
Change in Long Term Debt from 2012 to 2013 = +122%
Change in Accruals from 2012 to 2013 = +133%
Change in Total Equity from 2012 to 2013 = +87%
Change in Total Current Assets from 2012 to 2013 = -20%
Change in Net Income Available to Common stockholders from 2012 to 2013 = -50%
Change in Net Income Available to Common stockholders from 2011 to 2012 = +8.2%
