Exam 1 - Financial Statements Flashcards
Financial Statements (Purpose)
- Helps potential creditors and investors make rational decisions about investments, credit, etc
- Helps estimate timing of cash flows from dividends, interest payments, etc
- Provides information on economic resources and claims
- Assets, liabilities and equity
Financial Statements (Limitations)
- Limited nonfinancial information
- customer service, sales pipelines, quality measures
- Limited info on soft assets
- knowledge base, quality of personnel
- Limited real-time information
- Information not forward-looking
Balance Sheet
- A listing of distributor’s assets, liabilities and capital as of a particular date
- “Snapshot” of what the distributor owns and what it owes
- Assets = Liabilities + Shareholder’s Equity
- Distributor’s Assets
- Current Assets
- Management expects to use these assets within the next accounting period
- Ex: cash, accounts receivable, inventory
- Management expects to use these assets within the next accounting period
- Current Assets
Current Assets (Cash & Cash Equivalents)
- Is money in the bank, cash on hand, Treasury bills
- Cash is required to pay employees, suppliers, tax, interest etc
- Cash represents approx. 2% of a distributor’s asset
- Controller or financial manager is responsible for forecasting the distributor’s cash inflows and outflows
Current Assets (Accounts Receivable)
- Largest or 2nd largest asset on distributor’s balance sheet
- Accounts receivable and inventory make up 80% or more of total assets for many distributors
- estimate the % of receivables that might turn bad
Net Accounts Receivables = Accounts receivables - Estimate of Doubtful Accounts
Current Assets (Inventory)
Largest or 2nd largest asset for distributors
Valuation of distributor inventory is an accounting challenge
Current Assets (Other)
Unexpired insurance premium is a current asset
Unused advertising expenses
Prepaid expenses would have been otherwise cash in bank (asset)
Deffered Charges
Expenditures whose benefits are reaped for periods after one year from the balance-sheet date
Not current asset
Fixed Assets
Non current assets are not expected to be completely used during the next business period
-Land and buildings
-Office furniture and fixtures
-Warehouse racks and equipment
-Trucks and other vehicles
The figure is the book value (not mkt. value), since the assets are not sold or replaced in the near term
Fixed assets are depreciated; Land is NOT
Depreciation is an EXPENSE
Other Assets
Goodwill is an asset that is typically found on the balance sheet that has aquired other businesses
Price of the acquired business - Fair value of the assets
Company’s name and reputation, customer base, intellectual capital, workforce, relationships
Writing off goodwill is called amortization
Distributor Liabilities (Current Liabilities)
Liabilities that are due for payment in the next accounting period
Accounts payable
Short-term notes payable
Current portion of long-term debt
Accrued Expenses
-Accrued salaries, accrued bonuses
Deferred Income Taxes
Accelerated depreciation for Tax purpose - reduces the tax
Normal Depreciation - Financial Statements
Tax gained now is paid back in years to come
Considered as Long-term Liability
Distributor Liabilites (L-T Liability & Equity)
Long Term Liabilities
- Are amounts due after a year from the date on the B.S.
- Dist. L-T debt is usally owed to a bank or other commercial lender
- Some distributors borrow L-T funds from individuals or other investors
Equity
- Capital invested and/or left in the business
- Shares (common & preferred stock)
- Preferred stock holders are given priority to the common stock holders for dividends and the proceeds from liquidation
Income Statement
Shows results of a company’s operations for a given period of time
Sales Revenue
Proceeds from sales of products and services to customers
Service Revenues
Equipment repairs and maintenance
Product assembly, kitting
Repackaging, labeling and other services
Returns and Allowables
Customer returns are very significant in some wholesale distribution lines of trade
-Books, Records, Periodicals
Sales allowances include
-Rebates, Promotional allowances
Sales Revenues = Sales - (Sales returns + Sales Allowances)
Cash Discounts to Customers
Discounts for prompt payment
An expense
Cost of Goods Sold
It is the cost of merchandise shipped to customers
Includes price paid to suppliers, minus discounts and allowances such as rebates and promotional allowances
Cash Discounts from Suppliers
Cash discounts earned from suppliers for prompt payment of their invoices, are generally not deducted from cost of merchandise
Reported as income
Gross Margin %
Gross margin divided by sales revenue equals gross margin %
Provides an insight into the strategies followed by different companies
Deteriorating gross margin % is a sign of inefficient management
Operating Expenses
Expenses may be reported in detail, may be grouped into categories or may be reported only in total
People Expenses
Personnel Costs, including salaries, wages, comissions, bonuses, health insurance, retirement plans, payroll taxes
People cost as a % of gross margin dollars is referred to as personnel productivity ratio (PPR)
Key to distributor profitability is to operate with a small number of experienced, qualified and highly effective people
Selling General & Administrative Expenses (SG&A)
Sales agents’ salaries and commissions
Advertising and promotion
Travel and entertainment
Executive and Admin salaries
Non People Expenses
Delivery Expenses
Taxes
Insurance
Computer and telecommunications expenses
Utilities
Travel Costs
Rent
Non-operating Income or Loss
Interest earned on idle cash
Income from outside investments
Gains in sales of assets
Service charges from late-paying customers
Cash discounts
Statement of Cash Flows
Reconciles increase or decrease in company’s cash balance from beginning to end of reporting period
Shows sources of a company’s cash inflows and uses of cash outflows
The Cash Flow Cycle
The Supplier ships merchandize to a distributor
-Most suppliers offer invoice terms of 15 to 30 days
Products are received by the dist. and placed into stock
Products are then shipped to a customer
Cash Flow Cycle starts w/ payment of an order to the supplier
Cash Flow Cycle ends with payment to the distributor
Cash Flow Cycle typically varies from 45 to 105 days
Profit & Loss Statement
A managerial tool that combines financial metrics from both the income statement and the balance sheet to reflect the profitability of a given operation for a given period
P&L (Potential Contents)
Rent Factor
Inventory Charge
Receivable Charge
Internal Costs
