MAKING SENSE OF BALANCE SHEETS. Ronald Sereika, CCE, CEW

Transcription

1 MAKING SENSE OF BALANCE SHEETS Ronald Sereika, CCE, CEW

2

3 How to start analysis process The user of a firm s annual report can expect to encounter a great quantity of information that encompasses the required information- Financial statements, notes to the financial statements, the auditors report, a five year summary of key financial data, management s discussion and analysis of operations as well as material that is included in the report at the imagination and discretion of management.

4 Starting the analysis process To understand how to navigate the vast amount of information available to financial statement users, background on the accounting rule-making environment is necessary. Financial statements are prepared according to generally accepted accounting principles (GAAP) that have been adopted in order to achieve a presentation of financial information that is understandable by as well as relevant and reliable for decision making.

5 Continuing the analysis process The SEC regulates US companies that issue securities to the public and requires issuance of a prospectus for any new security offering. The SEC also requires regular filings of: Annual reports 10-K Quarterly reports 10-Q Other reports- if you change auditors that would be a 8-K.

6 Who regulates the SEC The SEC has congressional authority to set the accounting policies and has issued rulings called Accounting Series Releases (ASRs) and Financial Reporting Rulings (FRR s). For the most part however, accounting rule making has been delegated to the Financial Accounting Standards Board (FASB). The FASB is comprised of seven full time paid members. The Board issues Statements of Financial Accounting Standards and Interpretations, usually after some lengthy process of deliberations. The SEC and FASB work together to develop accounting policy, with the SEC playing mainly a supporting role.

7 Where to find financial information Corporate financial statements are available from several sources. All publicly held companies must file a form 10-K annually with the SEC. The information in this document is mandated by the SEC and contains uniform content, presented in the same order for all filing companies. Documents filed with the SEC can usually be accessed through the Electronic Data Gathering, Analysis, Retrieval (EDGAR) database at the SEC s website

8

9 Which Financial statements to use Balance Sheet- Shows the financial position assets, liabilities, and stockholders equity of a firm on a particular date, such as the end of quarter or year. The statement is a summary of what a firm owns (Assets) and what the firm owes to outsiders (Liabilities) and to internal owners (Stockholders Equity)

10 The Balance Sheet The accounts balances on a balance sheet must balance, meaning the total of all assets must equal the sum of the liabilities and stockholders equity. Assets= Liabilities + Stockholders equity A=L+OE

11 Balance Sheet and P&L Related Balance sheet - one point in time Profit and loss - running summary of time period Statement of Cash Flows- Cash must be generated for a company to remain in business even if they are showing increases in sales and profits

12 Balance Sheet current assets fixed assets current liabilities long term liabilities net worth

13 Current Assets Cash Marketable Securities Accounts Receivable Inventory Prepaids Current assets include cash or those assets expected to be converted into cash within one year or one operating cycle, whichever is longer.

14 Fixed Assets Land Buildings Depreciation Long term Notes Goodwill Intangible These assets produce economic benefits for more than one year for the company.

15 Current Liabilities Accounts payable Short term notes due bank Current maturities of long term debt Accrued liabilities Taxes Current Liabilities are the claims against the assets that must be paid in one year or one operating cycle, whichever is longer.

16 Long term Liabilities Long term debt long term notes to suppliers, owners Capital leases Pension liability Long term Liabilities are obligations by the company of greater than one year that will need to be satisfied.

17 Net Worth / Equity Capital Stock Paid In Capital Retained Earnings Treasury Stock Shareholder/Stockholder equity is the residual interest in assets that remains after deducting liabilities.

18 Working Capital formula Current Assets Current Liabilities = Working capital If this calculation ever shows a negative number than the company you are reviewing is BANKRUPT

19 Current Assets Balance Sheet ABC Company As of 12/31/2015 Current Liabilities Cash and Cash Equivalents $50,000 Accounts Payable $490,000 Accounts Rec. Less Allowance for $590,000 Accrued Liablilites $40,000 Doubtful Acounts $10,000 Income Taxes Paybale $25,000 Inventories $990,000 Current Maturities of LT Debt $125,000 Prepaid Expenses $5,000 Short term debt $50,000 Total Current Assets $1,635,000 Total Current Liabilities $730,000 Property Plant & Equip Deferred Federal Income Taxes $30,000 Land $1,000,000 Long Term Debt $150,000 Buildings and leasehold Improve $650,000 Total Liabilities $910,000 Equipment $250,000 $1,900,000 Stockholders Equity Less: Accumaulated Depreciation $60,000 Common Stock Par Value $1.00 Net Property Plant and Equipment $1,840,000 1,000,000 Shares issued, $1,000,000 GoodWill $325,000 Additonal Paid in Capital $250,000 Other Assets $75,000 Retained Earnings $1,715,000 Total Assets $3,875,000 Total Stockholders Equity $2,965,000 Total Liabilities and Stockholders $3,875,000

20 Common-Size Balance Sheet 2015 % 2014 % Current Assets Cash and Cash Equivalents $50, % $30, % Accounts Rec. Less Allowance for $590, % $425, % Doubtful Acounts $10,000 Inventories $990, % $750, % Prepaid Expenses $5, % $4, % Total Current Assets $1,635,000 $1,209,000 Property Plant & Equip Land $1,000,000 $1,000,000 Buildings and leasehold Improve $650,000 $536,000 Equipment $250,000 $125,000 $1,900,000 $1,661,000 Less: Accumaulated Depreciation $60,000 $45,000 Net Property Plant and Equipment $1,840, % $1,616, % GoodWill $325, % $340, % Other Assets $75, % $45, % Total Assets $3,875,000 $3,210,000

21 Common-Size Balance Sheet 2015 % 2014 % Current Liabilities Accounts Payable $490, % $285, % Accrued Liablilites $40, % $25, % Income Taxes Paybale $25, % $15, % Current Maturities of LT Debt $125, % $140, % Short term debt $50, % $60, % Total Current Liabilities $730,000 $525,000 Deferred Federal Income Taxes $30, % $18, % Long Term Debt $150, % $175, % Total Liabilities $910,000 $718,000 Stockholders Equity Common Stock Par Value $1.00 1,000,0000,Shares issued, $1,000, % $1,000, % Additonal Paid in Capital $250, % $124, % Retained Earnings $1,715, % $650, % Total Stockholders Equity $2,965,000 $2,492,000 Total Liabilities and Stockholders $3,875,000 $3,210,000

22 Liquidity Ratios Current ratio Current Assets/Current Liabilities 2015 $1,635,000 / $730, : $1,209,000/ $525, :1 Quick ratio Current Assets-Inventory/Current Liabilities

23 Days sales outstanding DSO Accounts Receivable/Sales/365 This will tell you how fast you are collecting AR Educate your management that this formula is driven more by sales than collections, avoid having DSO as a measurement for your review. To show how well you are collecting cash take the amount of cash you collect in a month and divide the AR balance from the beginning of that month into the amount you collected- compare months

24 Days Payable outstanding DPO Accounts Payable/CGS/365 This will tell you how fast the company is paying their bills This is helpful if you are looking to set up a new customer and you want to see on average how they are paying their bills, can they meet your payment terms?

25 Leverage Ratios Debt Ratio -Total Liabilities/Total Assets Shows the proportion of all assets what are financed with debt. Debt to Equity Total Liabilities /Stockholders Equity Measures the total debt relative to your equity. Times Interest earned- Operating Profit/Interest Expense Measures how many times interest expense is covered by operating earnings. the amount of cash you collect in a month and divide the AR balance from the beginning of that month into the amount you collected- compare months

26 The 5 C s of Credit #1 Character- The moral qualities and actions of a credit applicant which oblige the applicant to pay debts as they become due. #2 Capacity- The ability to pay when debt is due #3 Capital- The financial strength of a risk as measured by the equity or Net Worth of an applicant. #4 Collateral- Those possessions or equities from which the customer or debtor might be expected to draw upon should character and capacity fail. #5 Conditions-The current and expected general economic situations as they might affect the applicant.

27 How to make a credit decision just from a Balance Sheet Look at the Working Capital ratio first to make sure they have enough assets to cover debt for coming year Do ratios; Current Ratio, Debt to Equity, DPO, DSO Look at the total they have in Accounts Payable, see what the percentage of what you want to sell to them or loan them is of the AP total. #1 answer- Call and talk to the controller, ask them about your concerns and she how he/she responds (Character) To show how well you are collecting cash take the amount of cash you collect in a month and divide the AR balance from the beginning of that month into the amount you collected- compare months

28 QUESTIONS Ronald A Sereika, CCE,CEW Copyright 3/1/2016