CHEESECAKE FACTORY PRACTICE PROBLEM SOLUTION

Shown below are the actual financial statements for the restaurant company
Cheesecake Factory for 2009 and 2010. Use these financial statements
to make the following computations:

- Compute Invested Capital two ways (operating and financial)

- Compute NOPAT two ways (operating and financial)
- Compute ROIC (Note that it is only possible to compute ROIC for one of the two years.)

The solutions are posted on a separate spreadsheet. Try the calculations on

your own, first, before looking at the solutions.

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
As of end of December
2009 2010
ASSETS
Current assets:
Cash and cash equivalents 73,715 81,619
Accounts receivable 11,352 16,184
Income tax receivable 1,875 3,840
Other receivables 27,475 27,296
Inventories 22,202 23,036
Prepaid expenses 27,871 28,345
Deferred income taxes 7,737 5,732
Total current assets 172,227 186,052
Property and equipment, net 788,402 755,468
Other assets:
Trademarks 4,338 4,498
Prepaid rent 54,243 50,391
Other 27,541 31,988
Total other assets 86,122 86,877
Total assets 1,046,751 1,028,397

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable 33,948 32,651
Other accrued expenses 166,513 170,054
Total current liabilities 200,461 202,705
Deferred income taxes 87,048 86,918
Deferred rent 64,209 67,258
Deemed landlord financing liability 51,802 51,954
Long-term debt 100,000 0
Other noncurrent liabilities 27,118 27,225
Commitments and contingencies
Stockholders’ equity:
Preferred stock, none issued 0 0
Junior participating cumulative preferred 0 0
Common stock, $.01 par value 834 849
Additional paid-in capital 386,562 428,527
Retained earnings 639,544 721,257
Accumulated other comprehensive loss (4,619) 0
Treasury stock (506,208) (558,296)
Total stockholders’ equity 516,113 592,337
Total liabilities and stockholders’ equity 1,046,751 1,028,397

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)
2009 2010
Revenues 1,602,020 1,659,404
Costs and expenses:
Cost of sales (394,409) (412,855)
Labor expenses (528,578) (536,954)
Other operating costs and expenses (402,877) (408,362)
General and administrative expenses (97,432) (95,729)
Depreciation and amortization expenses (75,184) (72,140)
Impairment of assets (26,541) 0
Preopening costs (3,282) (5,153)
Total costs and expenses (1,528,303) (1,531,193)
Income from operations 73,717 128,211
Interest expense (23,433) (16,808)
Interest income 372 192
Other (expense)/income, net 651 (506)
Income before income taxes 51,307 111,089
Income tax provision (8,474) (29,376)
Net income 42,833 81,713

Invested Capital (operating approach) NOTES

Accounts receivable 11,352 16,184 Part of the day-to-day operation
Income tax receivable 1,875 3,840 No cost of capital associated wit
Other receivables 27,475 27,296 Part of the day-to-day operation
Inventories 22,202 23,036 Part of the day-to-day operation
Prepaid expenses 27,871 28,345 Part of the day-to-day operation
Property and equipment, net 788,402 755,468 Part of the day-to-day operation
Trademarks 4,338 4,498 Part of the day-to-day operation
Prepaid rent 54,243 50,391 Part of the day-to-day operation
Other 27,541 31,988 "Other" accounts on the balance
Accounts payable (33,948) (32,651) Part of the day-to-day operation
Other accrued expenses (166,513) (170,054) "Other" accounts on the balance
Other noncurrent liabilities (27,118) (27,225) "Other" accounts on the balance
Total invested capital 737,720 711,116

Invested Capital (financial approach)

Deferred income taxes 87,048 86,918 Deferred income taxes are custo
Deferred rent 64,209 67,258 A gray area, but it appears to be
Deemed landlord financing liability 51,802 51,954 A financial item.
Long-term debt 100,000 0 A financial item.
Total stockholders’ equity 516,113 592,337 A financial item.
Cash and cash equivalents (73,715) (81,619) Not invested in the business yet,
Deferred income taxes (7,737) (5,732) Deferred income taxes are custo
Total invested capital 737,720 711,116

NOPAT (operating approach)

Revenues 1,659,404 Part of the day-to-day operation
Cost of sales (412,855) Part of the day-to-day operation
Labor expenses (536,954) Part of the day-to-day operation
Other operating costs and expenses (408,362) Part of the day-to-day operation
General and administrative expenses (95,729) Part of the day-to-day operation
Depreciation and amortization expenses (72,140) Part of the day-to-day operation
Impairment of assets 0 Related to the operating assets o
Preopening costs (5,153) Part of the day-to-day operation
NOPBT 128,211
Income tax provision (29,376)
Reverse nonoperating tax effects:
Interest expense tax effect (6,723) Use the standard 40% marginal
Interest income tax effect 77 Use the standard 40% marginal
Other (expense)/income tax effect (202) Appears to be a nonoperating ite
Change in deferred income taxes:
Asset 2,005
Liability (130)
NOPAT 93,861

NOPAT (financial approach)

Net income 81,713
Reverse nonoperating items:
Interest expense 16,808
Interest income (192)
Other (expense)/income, net 506
Reverse tax effects of nonoperating items:
Interest expense (6,723)
Interest income 77
Other (expense)/income, net (202)
Change in deferred income taxes:
Asset 2,005
Liability (130)
NOPAT 93,861

ROIC 12.7%
SUBSIDIARIES
he day-to-day operations of the business, so it's an operating item.
of capital associated with this, so it's just another receivable.
he day-to-day operations of the business, so it's an operating item.
he day-to-day operations of the business, so it's an operating item.
he day-to-day operations of the business, so it's an operating item.
he day-to-day operations of the business, so it's an operating item.
he day-to-day operations of the business, so it's an operating item.
he day-to-day operations of the business, so it's an operating item.
accounts on the balance sheet are customarily treated as operating items.
he day-to-day operations of the business, so it's an operating item.
accounts on the balance sheet are customarily treated as operating items.
accounts on the balance sheet are customarily treated as operating items.

income taxes are customarily treated like equity: a financial item.

ea, but it appears to be a part of the financing of the facility.

sted in the business yet, so it's a nonoperating item.

income taxes are customarily treated like equity: a financial item.

he day-to-day operations of the business, so it's an operating item.

he day-to-day operations of the business, so it's an operating item.
he day-to-day operations of the business, so it's an operating item.
he day-to-day operations of the business, so it's an operating item.
he day-to-day operations of the business, so it's an operating item.
he day-to-day operations of the business, so it's an operating item.
o the operating assets of the business, so it's an operating item.
he day-to-day operations of the business, so it's an operating item.

tandard 40% marginal tax rate for individual line-item adjustments.

tandard 40% marginal tax rate for individual line-item adjustments.
to be a nonoperating item, since it's not included in "Income from operations."