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Downloadable Resources for this chapter available at www.wiley.com/go/portablembainfinance Understanding Financial Statements Balance Sheet: Liabilities + Equity Internet Links You can access an excellent 45-minute tutorial on understanding financial statements at www.baruch.cuny.edu/tutorials/statements/. Here are short videos about each of the financial statements: “What Is a Balance Sheet?” www.youtube.com/watch?v=v_EpPu5tiXY&feature=related “What Is an Income Statement?” www.youtube.com/watch?v=KqNEvgT71l8& feature=related “What Is a Cash Flow Statement?” www.youtube.com/watch?v=-eietCf5nNI&feature=related The following Web site provides a great deal of information on financial statements and related topics, plus many useful links: http://CPAclass.com/arp/. Guidance on understanding financial statements from IBM Corporation is available at www.ibm.com/investor/tools/guides.phtml. Notes and exercises on financial and managerial accounting are at www.middlecity.com/index.shtml..
For Further Reading Horngren, Charles T., Gary L. Sundem, John A. Elliott, and Donna Philbrick, Introduction to Financial Accounting, Charles T. Horngren Series in Accounting (Upper Saddle River, NJ: Prentice- Hall, 2005). Ingram, Robert W., and Thomas L. Albright, Financial Accounting: Information for Decisions (Florence, KY: South-Western College Publishing, 2007). Stickney, Clyde P., and Roman L. Weil, Financial Accounting: An Introduction to Concepts, Methods and Uses (Florence, KY: South-Western College Publishing, 2006). Weygandt, Jerry J., Donald E. Kieso, and Paul D. Kimmel, Accounting Principles, 7th ed., with PepsiCo Annual Report (Hoboken, NJ: John Wiley & Sons, 2004). Wild, John J., Financial Accounting: Information for Decisions, 4th ed. (New York: McGraw-Hill, 2006). 2 Les Livingstone Analyzing Financial Statements How to Analyze Financial Statements Imagine that you are a health professional, such as a nurse or a physician, and that you work in the emergency room of a busy hospital. Patients arrive with all kinds of serious injuries or illnesses, some barely alive or perhaps even dead. Others arrive with less urgent problems, or minor complaints, or only vaguely suspected ailments. Your training and experience have taught you to perform a quick triage, in order to identify and prioritize the most endangered patients by means of vital signs, such as respiration, pulse, blood pressure, temperature, and reflexes. Next, there follows a more detailed diagnosis, based on appropriate medical tests. We check the financial health of a company in much the same fashion, by analyzing the financial statements. The vital signs are tested mostly by various financial ratios, which are calculated from the financial statements. The financial vital signs can be classified into three main categories: 1. Short-term liquidity. 2. Long-term solvency. 3. Profitability.
Page 1 and 2: Table of Contents Title Page Copyri
Page 3 and 4: Chapter 6 - Planning Capital Expend
Page 5 and 6: For Further Reading Part IV - Manag
Page 7 and 8: Successful Postmerger Implementatio
Page 10 and 11: This book is printed on acid-free p
Page 12 and 13: Syllabus How Chapter Topics in This
Page 14 and 15: Some of these experts are full-time
Page 16 and 17: About the Contributors Richard T. B
Page 18 and 19: Advances in Quantitative Analysis o
Page 20 and 21: enterprise development. Dr. Zachara
Page 22 and 23: The left side shows Nutrimin‟s in
Page 24 and 25: Gail, let‟s go over this balance
Page 26 and 27: Gail, do you have any questions abo
Page 28 and 29: 11. Not all expenses are cash outfl
Page 30 and 31: Financial Statements: Who Uses Them
Page 32 and 33: profitability to keep investing for
Page 34 and 35: Financial Accounting Standards It i
Page 38 and 39: Next, we explain each of these thre
Page 40 and 41: liquidity. Or, more simply, achievi
Page 42 and 43: If these ratios are seriously defic
Page 44 and 45: The debt-to-equity ratio is evaluat
Page 46 and 47: year 1 to year 3. The net effect wa
Page 48 and 49: to rate of return on the equity. Th
Page 50 and 51: Other types of comparisons of finan
Page 52 and 53: income/sales), asset turnover (sale
Page 54 and 55: successful businesspeople should ha
Page 58 and 59: More than a decade ago, a special c
Page 60 and 61: companies is used for illustration.
Page 62 and 63: The identification of nonrecurring
Page 64 and 65: The Dow Chemical single-step income
Page 66 and 67: is a pretax measure, but income fro
Page 68 and 69: Sources: Companies‟ annual report
Page 70 and 71: Exhibit 3.11 Examples of discontinu
Page 72 and 73: amortization purposes, the Company
Page 74 and 75: Examples of nonrecurring items disc
Page 76 and 77: During Fiscal 2006, inventory quant
Page 78 and 79: The nonrecurring items of Boston Sc
Page 80 and 81: The disclosure presented earlier in
Page 82 and 83: gains or losses that appear as part
Page 84 and 85: ecurring as for Kimberly-Clark, the
Page 86:
Summarizing Nonrecurring Items and
Page 89 and 90:
This example of using the SEB works
Page 92 and 93:
Exhibit 3.27 Other income (expense)
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Source: Pfizer, Inc., annual report
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Exhibit 3.30 Acquisitions note: Pfi
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Source: Pfizer, Inc., annual report
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Exhibit 3.33 Cost-reduction initiat
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Exhibit 3.36 Share-based payment no
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The Pfizer Worksheet Analysis: Down
Page 110 and 111:
Some Further Points on the Pfizer W
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• It is common to treat items as
Page 114 and 115:
FedEx Corporation (2007) First Sola
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1 The American Institute of Certifi
Page 118 and 119:
28 These alternative translation me
Page 120 and 121:
If you need some instruction in Exc
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To solve using Excel, open your Exc
Page 124 and 125:
As you can see from the previous ex
Page 126 and 127:
C6 = 5 • Now enter the “=” si
Page 128 and 129:
Ordinary Annuity An ordinary annuit
Page 130 and 131:
To confirm that the number of payme
Page 132 and 133:
The FV of this first payment into t
Page 134 and 135:
Exhibit 4.15 Finding the future val
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Exhibit 4.18 Finding the present va
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From Exhibit 4.20, we see that as t
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Exhibit 4.22 Amortization schedule
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Exhibit 4.25 Regular cash flows wit
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Internet Links For Further Reading
Page 148 and 149:
Investors who are risk averse will
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considering the risk of a single as
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Portfolio Risk Stand-alone risk is
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In spite of unique or diversifiable
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If a particular stock is highly sus
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The formula tells us that, to begin
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for the entire market of stocks sin
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The dividend per share for preferre
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If you are able to determine the cu
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Debt finance is the lower-cost meth
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We don‟t observe many firms whose
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Capital Structure in Practice Finan
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are able to observe regularities in
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dividends and capital gains. We wil
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where EBIT is earnings before inter
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Since long-term debt holders have a
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accept more investment projects. Re
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A beer company is considering build
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accounts receivable, and tabulates
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profit by the tax rate determines t
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Accounting profit often mixes varia
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The concept that future cash flows
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Like project A, project C also cost
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The after-tax interest rate is the
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equal mix of debt and equity, its d
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The payback period rule stipulates
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The IRR rule is appealing in that i
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complete with its real options is g
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What does it matter that one invest
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Exhibit 7.3 Time line in dollars an
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There are a number of countries in
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eturn of 10% on its investments in
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Exhibit 7.12 Summary of exchange ra
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and so will the value of the liabil
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Source: CIA, World Factbook, availa
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Exhibit 7.18 Net present value of c
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equired interest payments to be pai
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So if the assistant treasurer was r
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This theory is far from perfect, as
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The Consulting Firm Jennifer, Jean,
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part by a statute, the Uniform Limi
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formation in Delaware (or any state
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purpose of requiring qualification.
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Phil‟s death may terminate the bu
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the transfer. This means that if Br
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These rules extend to tort liabilit
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In the absence of a meeting, stockh
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A more detailed discussion on the b
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Partnerships If possible, the resul
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associated with this arrangement ar
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Partnerships are also not separate
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For most start-up businesses, howev
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form, even at the risk of some unli
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likely that our consultants will be
Page 260 and 261:
Thus, the corporation and LLC, with
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It is not possible to fully describ
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usiness corporation for all purpose
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a cash-basis taxpayer to be taxed a
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The Tax Reform Act of 1986 substant
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limit is the product of the value o
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he would have spent anyway. In fact
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protect Brad from the scenario of h
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paying for the privilege. If the st
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The second tax scenario attaches to
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include that nullity in his taxable
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then the capital gain to be taxed h
Page 286 and 287:
Most relevant to Morris is Section
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To begin with, the ESOP will have t
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general partner of a limited partne
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small businesses) is also subject t
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oth Lisa and Brad would be free to
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Assume that a limited liability com
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corporations, and had been audited
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There is plenty of blame from the c
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• An important study about top ma
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• The federal government made at
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$79.7 million for other services, a
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Budgets offer a variety of benefits
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determine the impact of specific pr
Page 312 and 313:
Exhibit 11.2 Budget variance report
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udget, we just add more to it next
Page 316:
income statement. The financial bud
Page 319 and 320:
For a manufacturing company, cost o
Page 321 and 322:
C&G‟s Gift Shop has a policy to m
Page 323 and 324:
Meeting cash obligations as they co
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was unusually low, say, due to the
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A fixed budget, sometimes called a
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A large part of the budget selling
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• Centralized resource allocation
Page 333:
Merewitz, Leonard, and Stephen H. S
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This chapter starts with a discussi
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Interestingly the numbers for quart
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Exhibit 12.4 Scenarion analysis.
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Pitfalls Although this analytic tec
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Exhibit 12.6 Variable cost element
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Variable Cost as a Function of Outp
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If scenario 2 yields a lower profit
Page 351 and 352:
Microsoft certainly does not price
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If it is determined that dumping ha
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Leaving government agencies and not
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transaction processing. Each proces
Page 361 and 362:
Exhibit 13.3 E-commerce transaction
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To summarize the analysis, the busi
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Capacity costs are probably the mos
Page 367 and 368:
which it was, but for the inventory
Page 369 and 370:
They called this strategic cost man
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A closer study, however, revealed s
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the benefits of business planning.
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The last type of plan is called a d
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The Business Plan We will progress
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Hook the Reader That means having t
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Industry The goal of this section i
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upscale suburban client who wants p
Page 385 and 386:
Company and Product Description Com
Page 387 and 388:
Exhibit 14.8 shows the competitive
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Exhibit 14.9a Advertising schedule.
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Scope of Operations What is the pro
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Development Time Line A development
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By law, most organization types req
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As mentioned in the development pla
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that can be depreciated, you should
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1 Special thanks to Matt Feczko, Mi
Page 405 and 406:
For better or worse, the business e
Page 407 and 408:
Leeson bet and lost. Japanese stock
Page 409 and 410:
Between February and April 1994, Da
Page 411 and 412:
LTCM could be picky when it came to
Page 413 and 414:
An investor who wished to invest in
Page 415 and 416:
Similarly, the swaps market has rev
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speculator would suffer losses equa
Page 419 and 420:
American manufacturer will suffer l
Page 421 and 422:
The ease with which futures facilit
Page 423 and 424:
Exhibit 15.1 Call option payoff dia
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Exhibit 15.2 Payoff diagram for a w
Page 427 and 428:
Notice that the put option payoff r
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Bank, owns a large block of NASDAQ
Page 431 and 432:
can be tailored so that the money r
Page 433 and 434:
Finally, the last step is to choose
Page 435:
3 Fischer Black, who co-invented th
Page 439 and 440:
not include assets that the firm ha
Page 441 and 442:
Thus, a business valuation will usu
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Negative • Acme is highly depende
Page 445 and 446:
Exhibit 16.3 Acme Manufacturing, In
Page 447 and 448:
Profitability ratios reflect the re
Page 449 and 450:
When we talk about the value of a b
Page 451 and 452:
This example illustrates that with
Page 453 and 454:
Income Approach: Discounted Cash Fl
Page 455 and 456:
Exhibit 16.5 Acme Manufacturing, In
Page 457 and 458:
Victoria explains that the second p
Page 459 and 460:
Victoria analyzes Acme‟s audited
Page 461 and 462:
In summary, the discounted cash flo
Page 463 and 464:
Adjustment for Illiquidity As previ
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51% position sells for a higher pri
Page 467 and 468:
examples. The proper application of
Page 471 and 472:
The subject of this chapter is grow
Page 473 and 474:
Finally, an acquisition can be effe
Page 475 and 476:
M&A activity has been the focus of
Page 477 and 478:
companies continue to make the same
Page 479 and 480:
equals was taking on a distinctive
Page 481 and 482:
Anatomy of a Successful Acquirer: T
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employees kept their original jobs
Page 485 and 486:
where ΔCF t is the incremental cas
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where it‟s ultimately buried. Suc
Page 489 and 490:
The following example summarizes th
Page 491 and 492:
make sure that you are at least awa
Page 493 and 494:
acquisition, there is no immediate
Page 495 and 496:
its vascular business, which was so
Page 497 and 498:
While all employees should be part
Page 499 and 500:
makes strategic and financial sense
Page 501 and 502:
Bhagat, Sanjai, Ming Dong, David Hi
Page 505 and 506:
The 2008 financial crisis underscor
Page 507 and 508:
Source: Plunkett’s Outsourcing &
Page 509 and 510:
To summarize: Trends • Large numb
Page 511 and 512:
Companies are becoming increasingly
Page 513 and 514:
What steps should a company follow
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• Results of meetings with vendor
Page 517 and 518:
• Breach of contract and remedies
Page 519 and 520:
Assuming the project or service rev
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The answer is: profits. The company
Page 523:
19 Information Technology and You D
Page 527 and 528:
People‟s lives have been turned u
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its self-contained rechargeable bat
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Random-Access Memory (RAM) Random-a
Page 533 and 534:
On laptop computers and PDAs, the s
Page 535 and 536:
Operating System An operating syste
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the spreadsheet software together w
Page 539 and 540:
Exhibit 19.5 Pro forma sales and in
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Database Software A database is a c
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Internet e-mail addresses often con
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Personal Finance Software There are
Page 547 and 548:
There are several different approac
Page 549 and 550:
One of the major attractions of the
Page 551 and 552:
While not a new version of the Web
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industrial revolution, and has occu
Page 555:
Dummies Inc. has a series of books
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organization. This chapter is desig
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As technology has evolved, the term
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While the software mentioned earlie
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Most of the focus of the investor c
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Data Access and OLAP Before the lat
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Exhibit 20.5 illustrates a differen
Page 571 and 572:
Productivity Tools Workers expect t
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Client-server technology is based o
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Today, most programmers write in C+
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Exhibit 20.6 is a model of a typica
Page 579 and 580:
No treatment of relational database
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Online analytical processing (OLAP)
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server) and the rest on the users
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the other operational departments w
Page 587:
The world of business has changed d
Page 591:
Chaffey, Dave, E-Commerce and E-Com
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According to the results of the sur
Page 597 and 598:
understand the financial situation
Page 599 and 600:
MBA graduates who are hoping to ent
Page 601 and 602:
Summary Financial services opportun
Page 603 and 604:
Let‟s begin with the “I left it
Page 605 and 606:
MBA student: “Well, I go to [Grea
Page 607 and 608:
Aiming for Your Goals For career ch
Page 609 and 610:
Networking is generally regarded as
Page 611 and 612:
Let‟s begin with some key assumpt
Page 613 and 614:
like, or moving ahead in the compan
Page 618 and 619:
Accrual accounting: An accounting m
Page 620 and 621:
Cash flow: Cash that is spent or re
Page 622 and 623:
Distribution channel: A chain of in
Page 624 and 625:
Goodwill: As it relates to valuatio
Page 626 and 627:
Management’s discussion and analy
Page 628 and 629:
Ordinary annuity: An annuity that p
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Securities and Exchange Commission
Page 632 and 633:
Vertical merger: A merger in which
Page 634 and 635:
about activity-based costing progre
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Application systems ARPAnet Arthur
Page 638 and 639:
Bell Labs Benefit measurement Beta
Page 640 and 641:
goal orientation legal and contract
Page 642 and 643:
segment information note share-base
Page 644 and 645:
process of purpose of real world us
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uy/build decision capital budget in
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written resume Careers in corporate
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Cell Center for Research in Securit
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Compensation and ownership Competit
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Corporate culture Corporate debt in
Page 656 and 657:
profit planning from an internal pe
Page 658 and 659:
Data Data access and OLAP Database
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Askin Capital Management Barings Ba
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market approach publicly traded gui
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Electronic data interchange (EDI) E
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Extensible markup language (XML) Ex
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short term liquidity users and uses
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Fourth generation programming (4GL)
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Going private Going private transac
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Hypertext links Hypertext markup la
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Information technology and the firm
Page 678 and 679:
International Accounting Standards
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Last-in-first out (LIFO) vs. curren
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Long call option payoff Longer-term
Page 684 and 685:
Market risks Market size and struct
Page 686 and 687:
Motivation to outsource Multiple IR
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Nonrecurring items defined disclosu
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Operational complexity Operational
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Outsourcing metrics Overhead Over-t
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Personal end game Personal expense
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Price competition Price decreases P
Page 698 and 699:
Projected cash flow statements Proj
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Relevant range Relevant range assum
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Risk sharing Risk transfer Risk vs.
Page 704 and 705:
Short call option payoff Short part
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Spot price Spreadsheet software Spr
Page 708 and 709:
Summarizing nonrecurring items and
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acquisition the business dividends
Page 712 and 713:
Timmon‟s Model of Opportunity Rec
Page 714 and 715:
U.S. immigration quotas U.S. Intern
Page 716 and 717:
discounting with discount rate form
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