# BALANCE SHEET Assets Current Assets + Cash + Short-term investments + Accounts receivable - Allowance for Doubtful Accounts

(ADA) + Deferred Tax Assets + Inventory - Accumulated Amortization (Bond Interest) + Prepaid expenses + Total Current Assets

QUICKLY FINDING NET INCOME NI = Revenue - ( COGS + Other Expenses ) NI = ∆RE + Div NI = ∆A - ∆L - ∆CC + Div ∆C = ∆L + ∆SE - ∆N\$A

Long-term Investments + Long-term notes receivable + Land + Marketable Securities + Marketable Securities Adjustments + Total Long-term investments

Property, Plant, & Equipment + Property + Plant - Accum. depreciation (Property/Plant) + Equipment - Accum. depreciation (Equipment) + Total Property, plant, and equipment

Intangible Assets + Goodwill + Patent + Trademark + Total intangible assets Total Assets

Liabilities Current Liabilities: + Accounts payable + Wages payable + Taxes Payable - Deferred Tax Liabilities + Interest payable + Short-term notes payable + Current maturities of long-term debts 4. The eventual collection of cash is reasonably assured CASH PAYMENT VS. REVENUE RECOGNITION Cash received CONCURRENT TO earning Rev. Prior Period EB Reverse Engineering ADA and A/R Estimation Methods: Aging, Historical Estimation. Convert using algebra 1. Mention “I assume all the sales were on account.” 2. [B/S] Pick BB & EB of Accounts Receivable and Allowance for Doubtful Accounts. Usually the A/R values on BS are “Net” values including ADA. 3. [Income S.] Pick sales (net revenue) value (assuming all on account). Current Period + Cash (A) = + Rev. (SE) Subsequent Cash received BEFORE earning Rev. Prior Period + Cash (A) = + Def. Rev. (L) Current Period 0 = - Def. Rev. (-L) + Rev. (SE) Subsequent Cash received AFTER earning Rev. Prior Period Current Period + A/R (A) = + Rev. (SE) Subsequent + Cash (A) - A/R (-A) = 0 CASH PAYMENT VS. EXPENSE RECOGNITION Cash paid CONCURRENT TO using resource to generate rev Prior Period Current Period - Cash (-A) = + Exp. (-SE) Subsequent Straight-Line Double-Declining Percent Purchase Asset Construct Asset Cash paid BEFORE using resource to generate revenue Prior Period - Cash (-A) + Productive Asset (A) = 0 Current Period - Productive Asset (-A) = + Exp. (-SE) Subsequent Cash paid AFTER using resource to generate revenue Prior Period Current Period 0 = + Accrued Liability (L) + Exp. (-SE) - Cash (-A) = - Accrued Liability (-L) Subsequent The "Productive Asset" could be inventory, Prepaid Insurance, PP&E, etc. In the case of PP&E, we would reduce the value of the asset through the contra-asset Accumulated Depreciation. The "Accrued Liability" could be Accounts Payable, Accrued Wage Expense, Interest Payable, etc 4. 5. 6. 7. Recovery (b) Ending Balance + recovery EB (recovery) EB (WO) + recovery + cash

ESSENTIAL RATIOS Type Numerator Ratio Denominator Intuition Return on Equity (ROE) NI Profitability Avg. SE Return on Assets (ROA) NI + Interest Exp.(1-Tax Rate) Avg. Total Assets (>) Measures a firm's performance in using assets to generate earnings Profit Margin for ROA NI + Interest Exp.(1-Tax Rate) (>) Measures a firm's ability to control expenses relative to sales Net Sales Return on Sales Net Sales NI + Interest Exp.(1-Tax Rate) INDIRECT CASH FLOW STATEMENT Return on Capital Equity (ROCE) - (Preferred Dividends) (>) Measures a firm's performance in using financing assets to generate earnings NI Avg. Equity Sales Net Income Profit Margin for ROCE NI - (Preferred Dividends) (>) Indicates the portion of the sales dollar that is left over for the common shareholder Gross Margin Gross Profit Sales Gross Profit Adjustments for Operating Activities Sales - COGS + Depreciation Expense Common Equity Leverage NI NI + Interest Exp.(1-Tax Rate) Leverage + Amortization Expense Capital Structure Leverage Avg. Total Assets Avg. SE Indicates proportion of assets provided by common shareholders vs. creditors - Gain on Sale of Machinery Debt / Equity Ratio Avg. Total Liabilities The more stable a firm's earnings and cashflows, the higher debt ratio deemed acceptable Avg. SE Long-term debt ratio Long-Term Liabilities - Increase in Accounts Receivable Total Assets Proportion of a firm's long-term financing provided by debt-holders Solvency Current Assets + Increase in ADA Current ratio (prefer > 1) Indicates a firm's ability to meet short-term obligations Current Liabilities - Increase in Inventory Cash + Marketable Securities + Net A/R Current Liabilities (>) A Measurement of Liquidity Quick ratio + Increase in Accounts Payable Average Current Liabilities (>40%) Indicates a firm's ability to meet short-term obligations Cash Flow From Operations CFO to CL Ratio + Increase in Deferred Taxes or Taxes Payable CFO to Total Liabilities Ratio Cash Flow From Operations Total Liabilities Considers availability of Liquid Assets to cover Debt - Increase in Prepaid Expenses (>) Indicates relative protection operating profitability provides to bondholders NI + Tax Exp. + Interest Exp. Interest Exp. Asset Turnover Interest Coverage Ratio + Increase in Deferred Revenue A/P Turnover Ratio COGS Avg. A/P + Increase in Interest Payable A/P Turnover Ratio Days A/P Outstanding 365 + Increase in Wages payable Receivable turnover Net Credit Sales Avg. A/R Net cashflow from operating activities A/R Turnover Sales Avg. A/R (>) Indicates how quickly a firm collects cash Days Receivable Outstanding 365 A/R Turnover Ratio Inventory turnover Adjustments for Investing Activities COGS Avg. Inventory Increases caused by inventory shortages could signal a loss of customers - Cash paid for land Days Inventories Held 365 Inventory Turnover Ratio - Cash paid for PPE Fixed assets turnover Sales Avg. Fixed Assets Low or decreasing may indicate a firm preparing for growth + Sale of machinery Total assets turnover Sales Avg. Total Assets (>) Measures a firm's ability to generate sales from a particular level of asssets - Capital Expenditures Earning per share (EPS) NI Avg. # of Shares Outstanding Has limited use in comparing firms Financial - Cash paid for intangibles Price / Earning Ratio (PE) Market Price per Share Earnings per Share (> Indicates Growth) How much investors are willing to pay per \$1 of earnings + Sale of intangible assets Dividends per Share Market Price per Share Dividend Yield Ratio + Proceeds form sale of investment securities Return on Investment (ROI) Market Price1 – Market Price0 + Dividends Market Price0 Net cashflow from investing activities Dupont Analysis RoE (NE+IE)/(Assets) x [NI/(NI+IE) x Assets/SE] The DuPont ratio, while not the end in itself, is an excellent way to get a quick snapshot view of the overall performance of a firm in three of the four critical areas of ratio analysis, profitability, RoE Operating Performance x Capital Structure operating efficiency and leverage. By identifying strengths and/or weaknesses in any of the three Adjustments for Financing Activities Operating Performance Profit Margin for ROA x Asset Turnover areas, the DuPont analysis enables the analyst to quickly focus his or her detailed study on a + Proceeds from issuing equity Capital Structure Common Equity Leverage Ratio x Capital Structure Leverage particular spot, making the subsequent inquiry both easier and more meaningful. + Cash from debt financing ROA Profit Margin for ROA x Total Asset Turnover Ratio - Principal payment on short-term notes Return on Sales x Total Asset Turnover Ratio ROA - Principal payment on long-term debt ROCE Profit Margin for ROCE x Total Assets Turnover x Capital Structure Leverage - Cash Dividends to stockholders REVENUE RECOGNITION CRITERIA ALLOWANCE FOR DOUBTFUL ACCOUNTS ACCOUNTING - Principal payment on notes payable INVENTORY ACCOUNTING Basic Inventory Calculation Balance Sheet Net cashflow from financing activities 1. Significant portion of production and sales effort complete 2. The amount of revenue can be objectively measured Beginning Balance Cash A/R -ADA =RE COGS = Purchases + Production - ∆ Inventories Cash/Cash equivalents at beginning of year 3. The major portion of the cost has been incurred and the Credit Sale + credit sale + credit sale Beginning Inventory + Purchases - Ending Inv = COGS remaining be reasonably estimated + Net cashflow for operating activities costs can Bad Debt Expense +BDE (BDE) End Inv FIFO = Beg Inv FIFO + Inputs - COGS FIFO Cash Collection Write Off Recovery (a) (cash) (WO) + recovery No Effect No Effect No Effect EB

+ + + +

Deposits Warranties Deferred revenues Other payables

+ Net cashflow from investing activities + Net cashflow from financing activities Cash/Cash equivalents at end of year

+ Total current liabilities

DIRECT CASH FLOW STATEMENT

End Inv LIFO = Beg Inv LIFO + Inputs - COGS LIFO EI FIFO - EI LIFO = BI FIFO - BI LIFO + COGS LIFO - COGS FIFO ∆ LIFO Reserve = COGS LIFO - COGS FIFO Inventory EB = Inventory BB + Purchases + Production - COGS Balance Sheet Effects Increase Purchase Materials Use Raw Materials Complete Production Sell Inventory Pay Manufacturing Wages Depreciate Asset (Capitalize) RMI WIP FGI Cash WIP WIP -Accum Dep Cost Flow Summary LIFO: Last In First Out; COGS are assumed = costs of most recently purchased units in the financial records FIFO: First In First Out; COGS are assumed = cost of oldest available units in financial records Averaging: COGS are assumed to be equal to a per-unit weighted average cost at the end of the period

Long-term Liabilities: + Long-term notes payable

Operating Activities

+ Bonds payable + Bond Premium

+ Cash Collections from Sales + Cash Collections from A/R

- Bond Discount + Mortgage payable

- Cash paid to suppliers - Cash paid to employees

+ Total Long-term liabilities Total Liabilities

- Cash paid to selling activities - Cash paid to interest and taxes

Stockholders' Equity:

- Cash paid for inventory Net cashflow from operating activites

[Schedule] Pick “Bad Debt Expense”, “Write-Off” (if any), and “Recovery” (if any). [Calc] Calculate a missing cell in ADA column (normally “Write-off”). [Calc] Calculate a missing cell in A/R column (normally “Cash-collected”). [Check] Check if values in each column match. PROPERTY PLANT & EQUIPMENT ACCOUNTING Depreciation Methods (Purchase - Salvage) / (Estimated Useful Life) (2 * Book Value) / (Estimated Useful Life) (Purchase - Salvage) / (Amount Used / Total Amount)

+ Common Stock + Preferred Stock

Investing activities

+ Additional Paid in Capital + Treasury Stock + Other Comprehensive Income

- Cash paid for land - Cash paid for PPE + Sale of machinery

Comparing LIFO and FIFO LIFO provides better balance sheet by increasing ROA FIFO provides better Income Statement by decreasing COGS

+ Retained earnings

- Capital Expenditures

+ Dividends Payable + Total stockholders' equity Total Stockholders' Equity

- Cash paid for intangibles + Sale of intangible assets + Proceeds form sale of investment securities Net cashflow from investing activities

Financing Activities + Proceeds from issuing equity + Cash from Debt financing - Principal payment on short-term notes - Principal payment on long-term debt - Cash Dividends to stockholders - Principal payment on notes payable Net cash flow from financing activities

INCOME STATEMENT Sales - Discounts - Returns Net Sales - Cost of Good Sold (COGS) Gross Profit - SG&A - Wage Expense - Rent Expense - Interest Paid - R&D Expense - Depreciation Expense - Amortization Expense Operating Profit + Other revenues - Other expenses - Disposals Income Before Taxes - Taxes Net Income

Cash/Cash equivalents at beginning of year + Net cashflow for operating activities + Net cashflow from investing activities + Net cashflow from financing activities Cash/Cash equivalents at end of year

STATEMENT OF RETAINED EARNINGS Beginning Retained Earnings Balance + Net Income - Dividends Ending Retained Earnings Balance

REVENUE RECOGNITION & TAXES 1. All cash revenue collections are considered taxable revenue regardless of timing 2. Collecting cash before recognizing revenue creates a asset (DTA) 3. Recognizing revenue before collecting payment creates a deferred tax liability (DTL)

and increasing Net Income Purchase Price Calculation = NI (LIFO) + LIFO Reserve – Additional Tax Price + Installation Costs + Transportation Costs NI (FIFO) Direct Construction Costs + Financing Costs (Capitalize Interest) = NI (LIFO) + (1 – tax rate) * LIFO Reserve Balance Sheet ∆ LIFO Reserve = COGSLIFO - COGSFIFO Beginning Balance Cash PPE - Accum. Dep. RE COGSFIFO = COGSLIFO - ∆ LIFO Reserve Cumulative LIFO Reserve = FIFO Inventory - LIFO Inventory Acquisition (purchase) +purchase Depreciation + depr exp (depr exp) Effect of Liquidating LIFO Layers 1. Decrease LIFO COGS (possibly less than FIFO) Write Down + depr exp (depr exp) Disposal + cash (disposal) (accum dep) + gain on sale 2. Increase profitability (Offset goes to Net Income) Ending Balance EB EB EB EB 3. Decrease LIFO reserve Reverse Engineering PPE 4. Decrease turnover ratio Cost of Sales = LIFO RESERVE lower 1. [B/S] Pick BB and EB of “Gross PPE” and “Accumulated depreciation.” Income before tax provision = LIFO RESERVE higher (Sometimes this information is in foot notes) 2. [SCF] Pick “Additions to PPE” (Investing section), “Depreciation” (Operating section) Provision for Income taxes = t * LIFO RESERVE Same Income as before or NI = (1 – t) * LIFO RESERVE and “Write down” (if any. Operating section). 3. [SCF] Pick “Proceeds from sales of PPE” (meaning cash received. Investing section) Effects of Changing Prices and “gain/loss” (Operating section) Comparing P Rising COGS LIFO > FIFO LIFO < FIFO 4. [Calc] Calculate depreciation value for disposal (use Acc. Dep’n column) Pre-Tax Income LIFO < FIFO LIFO > FIFO 5. [Calc] Calculate BV for disposal (use Disposal row) Tax Expense LIFO < FIFO LIFO > FIFO 6. [Check] Check if the Gross PPE column is balanced. Tax Implications EB Inventory LIFO < FIFO LIFO > FIFO Depreciation is accounted for using more rapid methods when accounting for taxes ITO LIFO > FIFO LIFO < FIFO Taxes paid to the IRS is based on accellerated depreciation schedule Tax Impact Difference builds a timing-related Deferred Tax Asset that is later decremented Cumulative Tax Savings = Tax Rate * Cumulative LIFO Reserve Tax Saving per year = Tax Rate * ∆ LIFO Reserve Non-cash Transactions Omitted from SCF Acquisition of assets by assuming liabilities or by issuing equity Exchanges of non-monetary assets Refinancing of long-term debt Conversion of debt or preferred stock to common stock Issuance of equity securities to retire debt

ACCOUNTING FOR SHARES OF STOCK Issues Proceeds = # Shares * Par Value + APIC Authorized > Issued > Outstanding

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