BUSINESS ACTIVITIES

 Planning activities: in business plan that describes the company’s purpose, strategy, and tactics for its
activities  help managers focusing their efforts and identifying expected opportunities and obstacles
 Financing activities: how to raise money for business plan
- External financing:
o Equity investors (shareholders/ owners): risk and return
o Creditors (lenders): risk and return but received a fixed-rate
 Debt creditor: directly lend money to the company
 Operating creditor: company owes money as part of its operations; no
interest incurred (buy on credit /mua trả chậm/ or tax authority)
- Internal financing: RE
 Investing activities: acquisition and maintenance of investments for purposes of selling products and
providing services, and for the purpose of investing excess cash
- Operating assets: PPE, human capital, tech, etc.  Generate product
- Financial assets: securities, gov bonds, MM fund  Value from ownership rights
 Operating activities: carrying out of the business plan given its financing and investing activities. At
least 5 components:
o R&D
o Procurement
o Production
o Marketing
o Administration

FINANCIAL STATEMENTS REFLECT BUSINESS ACTIVITIES

 Balance sheet
Accounting equation: A = L + E
- Liabilities: fund from creditors, represents company’s obligation or creditors’ claim on
assets
- Equity:
o Contributed capital: form shareholders
o Retained earnings: accumulated earnings in excess of distributions to owners
Reflect a point in time

Working capital = CA - CL
Total investing = Creditor financing + Owner financing (= Total financing)

 Income statement (Representation of operating activities)

Earnings (aka Net income)
Gross profit (aka Gross margin) = Sales – COGS
Earning from operation (aka Operating income) = Sales – COGS – selling, administration expenses – DEP
GAPP: Income first, expenses following; Income reported when earned, even though no real cash received
Net income
Earnings per share , basic=
Outstanding shares

Net income
Earnings per share , diluted =
Outstanding shares including convertible bonds

Outstanding shares=Issued shares – Treasury shares

 Statement of Cash Flows

Increase from Cash balance can be from the operating activities, investing activities and financing activities
Analysis tools:
1. Comparative financial statement analysis
2. Common-size financial statement analysis
3. Ratio analysis
4. Cash flow analysis
5. Valuation

 COMPARATIVE FINANCIAL STATEMENT ANALYSIS (aka horizontal analysis)

Review consecutive balance sheets, income statements, or statements of cash flows from period to period.
2 techniques of comparative analysis:
o Year-to-year change analysis: short time period, 2-3 yrs

Page 29

o Index-Number Trend Analysis: long-term

Choose a base period – a normal year
Current year balance Yr 3 Index
Index number= x 100 Change ¿ yr 2 ¿ yr 3=
Base year balance Yr 2 Index

Year 3 balance−Year 2 balance

Change ¿ Year 2 ¿ Year 3= ∗100
Base year balance

COMMON-SIZE FINANCIAL STATEMENT ANALYSIS (aka vertical analysis)

Analyze a balance sheet, a common-size analysis stresses two factors:
 Sources of financing—including the distribution of financing across current liabilities, noncurrent
liabilities, and equity.
 Composition of assets—including amounts for individual current and noncurrent assets.
For BS, set TA = 100%, accounts within these groupings are expressed in accordance
For Income statement, set Sales = 100%. Except for income taxes, related to pre-tax income and not sales.
The impact on the financial statement if the cost of equipment is capitalized versus expensed.

Accrual accounting: #units of revenue = #unit of expenses (even though not receiving the AR for all #unit yet,
still recorded)

Given the profit we have recognized, equity also increases, suggesting that you could eventually take away
more than what you invested in the venture. Financed by you only, increase will likely belong to your equity

ACCRUALS AND CASH FLOWS

Operating cash flow CFO: cash from a company’s ongoing operating activities; đảm bảo hoạt động kinh
doanh bthg
CFO=Net income∋+ Noncash charges NCO – Working capital Investment WCInv
CFO=( Sales−COGS−SGA expenses−Dep−Interest )∗(1−t)
Free cash flow FCF: the added effects of investments and divestments in operating assets; the cash free to be
paid to both debt and equity holders.
FCF=CFO – FCInv
FCInv: money investing long-term assets
FCFF=FCF + Interest∗(1 – Tax rate)
FCFF=EBIT∗(1 – t)+ Dep−Capital Expenditure – Δ Net working capital
Free cash flow to equity FCFE: FCF deduct debts, cash flow available for equity holders
FCFE=FCF + Net borrowing
FCFE=FCFF – Interest∗(1 – t)+ Net borrowing
Net borrowing=Debt granted ¿

Net cash flow NCF: the change in the cash account balance that is reported on the statement of cash flows.

Net income = Operating cash flow + Accruals

Accruals:
 Short-term: short-term timing differences between income and cash flow
o Working capital items
 Long-term: arise from capitalization
o Dep
o Amortization

Accrual Process
 Revenue recognition
o Earned when the company delivers its products or services
o Realized when cash is acquired for products or services delivered
o Realizable when the company receives an asset for products or services delivered (often
receivables) that is convertible to cash.
 Expense matching: Expenses matched with their corresponding revenues
o Product costs – arise in the production
o Period costs – marketing, administrative expenses

Relevance of accrual accounting

Financial performance: Revenue recognition and expense matching yield an income number superior to cash
flows for evaluating financial performance.
Financial condition: Accrual accounting produces a balance sheet that more accurately reflects the level of
resources availability to the company to generate future cash flows.
Predicting future cash flows: accrual income is a superior predictor of future cash flows than are current cash
flows

Limitations of accrual accounting

- Arbitrary rules: methods can be used for record inventories
- Estimation errors: recognizing revenue, if estimate of % received from the customer
- Earnings management: managers cook the book for their own interest

NOPAT (net operating profit after tax): operating income is that it excludes all expenses (or income) that
arises from the business’s financing activities (i.e., the treasury function)
Nonoperating income: including such interest expense and investment income

Demand for Accounting Analysis

 Accounting distortions are identified and adjusted so that accounting information better reflects
economic reality
o Accounting Standards – attributed to
 Accounting principles: the historical cost principle, inventory rules (LIFO vs FIFO)
 Conservatism – write down impaired assets
o Estimation Errors – attributed to estimation errors inherent in accrual accounting (sold on
credit)
o Reliability vs Relevance – attributed to over-emphasis on reliability at the loss of relevance,
trade-off bw reliability and relevance
o Earnings Management – attributed to window-dressing of financial statements by managers to
achieve personal benefits
 Accounting information usually requires adjustments to meet the analysis objectives of a particular
user.

EARNINGS MANAGEMENT STRATEGIES

 Increasing Income – managers adjust accruals to increase reported income
 Big Bath – put all the bads into 1 year, and the next year will be clean; why? The company already
worse, make the worst and next year sense of doing better  Sense of company is growing
 Income Smoothing – managers decrease or increase reported income to reduce its volatility; distribute
income to bad year to make the company more stable

Process of Accounting Analysis

 Evaluating earnings quality
o Identify and assess key accounting policies
 Aggressive or reasonable?
 Consistent with industry norms?
 Impact on financial statements
o Evaluate extent of accounting flexibility

The accounting for industries that have more intangible assets, greater volatility in
business operations, a larger portion of its production costs incurred prior to production,
and unusual revenue recognition methods requires more judgments and estimates
o Determine the reporting strategy
 Is the company adopting aggressive reporting practices?
 Does the company have a clean audit report?
 Has there been a history of accounting problems?
 Has the management of the company had a reputation for integrity, or are they known to
cut corners?
 Examine incentives for earnings management and evaluate the quality of a company’s
disclosure
o Identify and assess red flags
  Poor financial performance,
 Reported earnings consistently higher than operating cash flows,
 Qualified audit report (as their some exceptions), auditor resignation or an unusual
auditor change,
 Unexplained or frequent changes in accounting policies,
 Sudden increase in inventories in comparison to sales.
 Frequent one-time charges and big baths
 Adjusting financial statements
o Identify, measure, and make necessary adjustments to financial statements to better serve one’s
analysis objectives

4 TYPES OF AUDIT REPORTS:

• Unqualified opinion: free of misrepresentation
• Qualified opinion: some exceptions
• Disclaimer opinion: do not have enough or suitable in4 to express
• Adverse opinion: not according with accounting standard

LEASES
Leasing - popular form of financing, especially in certain industries.
 Capital lease: leases that transfer substantially all benefits and risks of ownership—accounted for as an
asset acquisition and a liability incurrence by the lessee, and as a sale and financing transaction by the
lessor.
o 4 criteria to be classified as capital lease, if not, operating lease
 Lease transfers the ownership of the property to lessee by the end of the lease term
 Lease contains an option to purchase the property at a bargain price
 Lease term is 75% or more of estimated economic life of the property
 The present value of minimum lease payments at the beginning of lease term is 90% or
more of the fair value of leased property
 Operating leases: the lessee (lessor) accounts for the minimum lease payment as a rental expense
(revenue), and no asset or liability is recognized on the balance sheet.

LEASE CLASSIFICATION AND REPORTING

Capital Lease Accounting:
§ Recorded at an amount equal to the present value of MLP (both in A and L)
§ The leased asset and the lease obligation (lease liability) are recognized on the balance sheet. đối ứng
trên BS nếu là leasing asset
§ The leased asset must be depreciated
§ Interest expense is accrued on the lease liability. Có khuynh hướng giảm dần, do dư nợ giảm dần
Operating Lease Accounting (đơn giản hơn do chỉ coi nó là expense thôi)
§ Minimum lease payments MLP are recognized as a rental expense (income)
§ No asset or liability is recognized on the balance sheet
ACCOUNTING FOR LEASES—AN ILLUSTRATION
A company leases an asset on January 1, 2005—it has no other assets or liabilities.
Estimated economic life of the leased asset is five years with an expected salvage value of zero at the end of five
years. The company will depreciate this asset on a straight-line basis over its economic life.
The lease has a fixed noncancellable term of five years with annual minimum lease payments of $2,505 paid at
the end of each year.
Interest rate on the lease is 8% per year.
Lease Amortization Schedule

5
2505∗( ( 1+8 % ) −1)
PV = 5
=1000 0
8 %∗(1+ 8 %)

INCOME STATEMENT Effects of Alternative Lease Accounting Methods

PV
Dep= =2000
5

Interpretation of capital leasing:

Income nhg năm đầu nếu làm theo capital lease thì sẽ bị thấp hơn so với những năm sau do interest expense
có tính giảm dần cho những năm sau
Xem giống như là tài sản nên sẽ đc tách làm 2 phần:
+ khấu hao (chi phí hoạt động đc chuyển thành)
+ có nợ thì sẽ có lãi
 Tổng expense cho capital lease thì gồm có khấu hao và lãi

BALANCE SHEET Effects of Capitalized Leases

 For operating lease
Pay MLP of 2505, cash reduce (2.505), recorded the same (2.505) in equity of the BS
At the end of the lease, the cumulative amount expensed, $12,525 (as reflected in equity), is equal to the
cumulative cash payment (as reflected in the negative cash balance)
  For capital lease

Equity is cumulative of total expense (=

interest expense + dep), see the schedule
above

leased asset declines by the amount of depreciation ($2,000 annually), while the lease liability declines by the
amount of the principal amortization (for example, $1,705 in year 2005)

Impact of Operating Lease versus Capital Lease:

 Operating lease understates liabilities—improves solvency ratios such as debt to equity
 Operating lease understates assets—can improve return on investment ratios and asset turnover ratios
 Operating lease delays expense recognition—overstate income in early term of the lease and understate
income later in lease term
 Operating lease understates current liabilities by ignoring current portion of lease principal payment—
inflates current ratio & other liquidity measures
 Operating lease includes interest with lease rental (an operating expense)—understates both operating
income and interest expense -> inflates interest coverage ratios.

Financial lease Operating lease

Assets Increase No
Liabilities Higher Lower
NI (first year) Lower Higher
NI (next years) Higher Lower
Total NI Same Same
EBIT (operating income) Higher Lower

STATEMENT OF CASH FLOWS

Purposes of Statement of Cash Flows
 Provide information on cash inflows and outflows for a period
 Distinguishes among the sources and uses of cash flows by separating them into operating, investing, and
financing activities
Contrast: Accrual accounting and Cash basis accounting.
 Net cash flow as the end measure of profitability as cash is that used to pay loans, etc.
 Cash flow analysis helps in assessing liquidity, solvency, and financial flexibility.
o Liquidity is the nearness to cash of assets and liabilities
o Solvency is the ability to pay liabilities when they mature
 o Financial flexibility is the ability to react and adjust to opportunities and adversities

CLASSIFYING CASH FLOWS

 Operating Activities: Earnings-related activities
Inflows Outflows
Cash collected from customers Cash paid to employees and suppliers
Interest and dividends received Cash paid to other expenses
Sale proceeds from trading securities Acquisition of trading securities
Interest paid on debt or leases
Taxes paid

 Investing Activities: Involve assets expected to generate income

Inflow Outflows
Sale proceeds from PP&E and intangibles Acquisition of PP&E and intangibles
Sale proceeds from debt and equity investments Acquisition of debts and equity investments
Principal received from loans made to others Loans made to others

 Financing Activities: Means of contributing, withdrawing and servicing funds to support business
activities
Inflows Outflows
Principal amount of debt issued Principal paid on debt or leases
Proceeds from issuing stock Payment to reacquire stock
Dividends paid to shareholders

Effect on Cash
Transaction Increase Decrease No effect
Amortization/ Dep X
Conversion of preferred stock to common stock X
Sales on account X
Purchase of inventory on account X
Declaration of a div X
Payment of AP X
Sales of a building at loss X
Retirement of debt through issuing stock X
 Operating Investing Financing
Payment of federal income taxes X
Div payment to shareholders X
Repayment of long-term debt X
Loans made to another company X
Collection of AR X
Salaries paid X
Payment of interest on bond debt X
Div received from investments X
Cash paid to acquire Treasury stock X
Purchase of equipment for cash X

Constructing the Cash Flow Statement

 The indirect method (Ko nêu rõ các mục)
o Net income is adjusted for noncash income items and accruals.
 The direct method (Thu, chi đc giải thích, nêu rõ từng mục)
o Report gross cash receipts and cash disbursements related to operations

Preparation of the Statement of Cash Flows

Cash generated by CA and CL can be: Change in AR

Steps in Constructing the Statement of Cash Flow

1. Start with Net Income
2. Adjust Net Income for non-cash expenses and gains
3. Recognize cash inflows (outflows) from changes in current assets and liabilities
4. Sum to yield net cash flows from operations
5. Changes in long-term assets yield net cash flows from investing activities
6. Changes in long-term liabilities and equity accounts yield net cash flows from financing activities
 7. Sum cash flows from operations, investing, and financing activities to yield net change in cash
8. Add net change in cash to the beginning cash balance to yield ending cash

CREDIT ANALYSIS
 Liquidity: ability to convert assets into cash or to obtain cash to meet short-term obligations
 Capital structure and solvency
o Capital structure: company’s sources of financing and its economic attributes
o Solvency: a company’s long-run financial viability and its ability to cover long-term obligations

Current assets: cash and other assets reasonably expected to be realized in cash or sold or consumed within
one year
 Cash and Cash Equivalents
 Marketable Securities
 AR
 Inventories
 Prepaid expenses
Current liabilities: obligations expected to be satisfied within one year, typically include
 AP
 Notes payable
 Short-term bank loans
 Taxes payable
 Accrued expenses
 Current portion of long-term debt

MEASURE OF LIQUIDITY
 Working Capital: Excess of current assets over current liabilities  Widely used measure of short-term
liquidity
* Working capital of 2 companies may be equal but there could be difference in ratio of size  not
necessarily the same liquidity
 Current Ratio
CA
Current ratio=
CL

o Trend analysis

During a recession  an increase in the current ratio, creditors less confident to make
loans to firms; inventories are accumulated; AR increases (customers have no money to
pay)
 During a successful period  an decrease in the current ratio, vice versa
o Rule of Thumb Analysis: Current ratio should be
 2:1 or better (superior coverage of CL, in case value of CA decrease), but not too high
(inefficient use of resources and a reduced rate of return)
  Below 2:1 - deficient coverage of current liabilities
Note:
Consider quality of CA and the composition of CL (note payable, interest-bearing debt – most
dangerous; taxes, salary can be delayed) when assessing current ratio
Working capital requirements vary with industry conditions and the length of a company’s net
trade cycle

OTHER LIQUIDITY MEASURES

 Net trade cycle
Days’ sale in AR
+ Days’ sale in Inventories
- Days’ purchase in AP

= Net trade cycle

Receivables
AR= ∗360
Sale

Ending inventories
Inventories= ∗360
COGS

Payables
AP= ∗360
Purchases

Note: it’s the company purchases for goods or material bla bla
  Cash-Based Ratio
o Cash to Current Assets Ratio
Cash+Cash equivalent + Marketable securities
Cash ¿ Current Asset ratio=
CA

The larger this ratio, the more liquid are current assets.
But too high meaning that inefficient use of resources

o Cash to Current Liabilities Ratio: measures the cash available to pay current obligations
Cash+Cash equivalent + Marketable securities
Cash ¿ Current Liabilities Ratio=
CL
Money ready to pay for debt

 AR Liquidity Measures
o AR Turnover
Net sales on credit Net sales on credit
ARturnover = =
Average AR Beginning AR+ Ending AR
2

Số vòng các khoản phải thu, càng cao thì khả năng thu tiền về càng cao, càng sớm

o Days’ Sales in Receivables

' Ending AR
Day s Sales∈ Receivables= ∗360
Sales

o Receivables collection period

360
Receivables collection period=
AR turnover

INVENTORY TURNOVER MEASURES

Note: Cost of goods sold in place of sales as Inventories are measured in terms of costs.
 Inventory turnover ratio: the average rate of speed at which inventories move through and out of a
company
COGS
Inventory turnover=
Average inventory

High inventory turnover means effective inventories management

 Days’ Sales in Inventory: The number of days required to sell ending inventory assuming a given rate
of sales
' Ending Inventories
Day s Sales∈ Inventories= ∗360
COGS
  Days to sell inventory: The number of days required to sell average inventory for the period
360
Days ¿ sell inventories=
Inventory turnonver

 Conversion period (operating cycle)

LIQUIDITY OF CURRENT LIABILITIES

Current liabilities are important in computing working capital and current ratio as
 Used in determining whether sufficient margin of safety exists.
 Deducted from current assets in arriving at working capital

AP turnover: The speed at which a company pays for purchases on account

Purchases Ending inventories+COGS−Beginninginventories−Dep of COGS
APTurnover= =
Average AP Beginning A P+ Ending A P
2

Days’ Purchases in AP: the average time the company takes in paying its obligations to suppliers
' Ending AP
Day s Purchases ∈ AP= ∗360
Purchases

The longer the payment period, the greater the use of suppliers’ capital
Days Payable outstanding
360
Days Payable outstanding=
AP Turnonver

CA composition: Quality of CA, measures the components of CA

 Acid -Test (Quick) ratio
Cash+Cash equivalent + Mktable securities + AR
Quick ratio=
CL

 Cash Flow Ratio: dynamics as using CF to pay off debt

OperatingCF
Cash flow ratio=
CL

CAPITAL STRUCTURE – equity and debt financing of the company

Equity capital: risk capital of the company, contributing to a company’s stability and solvency
 Uncertain or unspecified return
 Lack of any repayment pattern
 Permanent, persistent in time of adversity
 No mandatory DIV required
Debt capital: need to be paid or not, sued
Financial leverage: the use of debt to increase earnings
 For investors in common stock, debt reflects a risk of loss of the investment, balanced by the potential
of profits from financial leverage
 For creditors, increased equity capital is preferred as protection against losses from adversities

The effect of Financial Leverage

 Interest reduces taxes while DIV are not
o The income available to security holders can be much larger
o Nonpayment of interest  bankrupt
o Nonpayment of DIV  nothing
 Interest is tax deductible while cash dividends to equity holders are not
 The income available to security holders can be much larger
 Nonpayment of interest can yield bankruptcy whereas nonpayment of dividends does not

 Magnify the profit, meaning a high ROE (also loss)

o The effects of leveraging are magnified in both good and bad years.
o If ROE > cost of debt, okay to debt financing, vice versa
Cost of debt=r∗(1−t)

CAPITAL STRUCTURE COMPOSITION AND SOLVENCY

 Common-Size Statements in Solvency Analysis
 Composition analysis
– Performed by constructing a common-size statement of the liabilities and equity section of the
balance sheet.
– Reveals relative magnitude of financing sources.

•
•
•
•
•
•
•
•
•

Total Debt to Total Capital Ratio (Total debt ratio)

Total Debt Current Debt + Longterm debt+Others
Total debt ratio= =
Total capital Total debt + Equity (including preferred stock )

Others could be deferred taxes and redeemable preferred

• Total Debt to Equity Capital
Total debt
'
Shareholder s equity

• Long-Term Debt to Equity Capital

– Measures the relation of LT debt to equity capital.
– Commonly referred to as the debt-to-equity ratio.
Longterm debt
'
Shareholder s equity

• Short-Term Debt to Total Debt

– Indicator of enterprise reliance on short-term financing.
Usually subject to frequent changes in interest rates.

Earning coverage – Times interest earned

– Considers interest as the only fixed charge needing earnings coverage
– Numerator sometimes referred to as earnings before interest and taxes or EBIT
Income +Tax expense+ Interest expense
Interest expenses
RETURN ON INVESTED CAPITAL (ROE & ROA)
Define as:
Income
ROI=
Invested capital
Common Measures:
• Net Operating Assets
• Stockholders’ Equity

¿ ∗Total assets
¿ Total assets
ROE= = (1)
Total equity Total equity
Equity multiplier
(1) To increase ROE:
 Increase ROA
 Use debt efficiently

¿ ∗Sales
Sales
∗Total assets
Total assets
ROE= (2)
Total equity

(2)
 Increase Profit margin
o Control cost: Compare cost and sales if it is effective managed
o Reduce cost comparative to sales
  Total asset turnover
o Assets use efficient
o Increase sales
 Use debt efficiently

NET OPERATING ASSETS

Operating activities: the most long-lasting and relevant for the determination of stock price; the core
activities of the company
Operating activities typically include
 Income statement
o Sales
o GOGS
o Selling and general and administrative (SG&A) expenses
 Balance sheet: operating activities are represented by the asset and liabilities relating to these income
statement accounts
o AR
o Inventories
o PPE
o AP
o Accrued expenses
Return on net operating assets RNOA
Net operating income after tax NOPAT
Net operating assets NOA
NOPAT
RNOA=
Average NOA
Operating assets=Total assets−Financial assets
Operating liabilities=Total liabilitites−Interest−bearing debt
NOA=Operating assets−Operating liabilites=NFO +SE
NOPAT = ( Sales−Operating expenses )∗(1−t)
Operating assets
 Cash
 AR
 Inventories
 Prepaid expenses
 Deferred tax assets
 Property
 Plant and equipment (PPE)
 Long term investments related to strategic acquisitions (Kiểm soát vđề về vốn, mua slg lớn, lâu dài hạn,
phục vụ hđộng kdoanh chính not financing)

Non-Operating assets
 Investments in marketable securities
  Nonstrategic equity investments
 Investments in discontinued operations prior to sale
 Note payable

Operating liabilities (Except of interest-bearing debt)

 AP
 Accrued expenses
 Deferred income tax liabilities
 Tax payable
 Pension and OPEB liabilities

Non-operating liabilities
 Bonds and other long-term interest-bearing liabilities
 Noncurrent portion of capitalized leases
 Dividends payable

Non-operating = Financial
Net financial obligation NFO = Non-operating liabilities - Non-operating assets

COMMON EQUITY CAPITAL

Return on common equity ROCE
Preferred÷¿
ROCE=¿− ¿
Average common equity
'
Common equity=Total shareholder s equity−Preferred stock
Difference of RNOA with ROCE: ROCE captures both RNOA and the effect of financial leverage

DISAGGREGATE ROCE (further in slides)

ROCE=RNOA + ( LEV ∗Spread )
DISAGGREGATING RNOA
NOPAT
∗Sales
NOPAT Sales
RNOA= =
Average NOA Average NOA
  NOPAT margin: measures a company’s operating profitability relative to sales
o Low: focus on restoring profitability
 NOA turnover: measures a company’s effectiveness in generating sales from net operating assets

Increase RNOA by increasing profit margin while holding turnover constant, or vice versa  Not simple
Profit margin is a function of sales (selling price* units sold) and operating expenses. Turnover is also a
function of sales (sales/assets).
 Increasing profit margin by increasing selling prices impacts units sold.
 Reductions of marketing-related operating expenses in an effort to increase profitability usually impacts
product demand.
 Selling prices, marketing, R&D, production, and a host of other business areas must all be managed
effectively to maximize RNOA.

Gross profit:
Gross profit =Revenue−COGS
Gross profit
Gross profit percent =
Sales
Changes in gross profit often derive from one or a combination of the following:
 Increase (decrease) in sales volume.
 Increase (decrease) in unit selling price.
 Increase (decrease) in cost per unit.

Sales
ARturnover =
Average AR
COGS
Inventory turnover=
Average Inventory
 Inventory
Average inventory days outstanding=
Average daily COGS
Sales
Longterm operating asset turnover=
Average operating asset
Net sales
Net operating working capital turnover=
Average net operating WC

PROSPECTIVE ANALYSIS
 Project Income Statement

1. Sales = Prior-year sales * Sale

growth
2. Gross profit = Prior-year gross profit* Gross profit margin
3. COGS = Projected Gross profit – Projected Sales
4. SG&A Expense = Projected Sales* (3) ratio
5. Depreciation Beginning-period PP&E gross (previous year)* (4) ratio
6. Interest expenses = Beginning-period interest-bearing debt (previous yr long-term debt)* (5) ratio
7. Income before tax = Prj. Sales – Prj. COGS – Prj. SG&A expenses – Prj. Dep – Prj. Interest expenses
8. Income taxes expense = Prj. Income before taxes* (6) ratio
9. None
10. Net income = Prj. Income before tax – Prj. Taxes expense
  Project Balance Sheet

RATIOS FOR PROJECTING PURPOSE:

Sales Projected Sales
ARturnover rate= =
Ending AR Project AR
COGS
Inventory turnover rate=
Ending inventory
COGS
APturnover rate=
Ending AP
Sales
Accrued expenses turnover rate=
Accrual expenses
ℜ=Prior year ℜ+ Prj∋−(¿∗¿ share outstanding)
CAPEX
CAPEX=Prj Sales∗prior yr ( )
Sales

*Note: Outstanding share and DIV taken from the previous yr

CAPEX/ Sales fixed, adjust CAPEX
1. Receivables = Prj. Sales/ AR turnover
2. Inventories = Prj. COGS/ Inventory turnover
3. Other current asset: unchange
4. PP&E = Prior year PP&E + Prj. Sales * (8) ratio
5. Accu. Dep = Prior year Accu. Dep + Prj. Dep
6. Net PP&E = Prj. PP&E – Prj. Accu. Dep
7. Other long-term assets: no change.
8. AP = Prj. COGS* AP turnover
9. Current portion of long-term debt: in foot note
10. Accrued expenses = Prj. Sales/ Accrual expenses turnover
11. Tax payable = Prj. Tax expenses* (5) ratio
12. Deferred income taxes and other liabilities: no change
13. Long-term debt = Prior year long-term debt – Prj. Current portion of long-term debt
14. Common stock: no change
15. Additional paid-in capital: no change
16. RE = Prior year RE + Prj. NI – (Prior year DIV per share* Prior year outstanding shares)
17. Cash = Total equity and net worth – Total asset (not including Cash)
o If the estimated cash balance is much higher or lower, further adjustments can be made to:
 Invest excess cash in marketable securities (projected income will need to be adjusted for
the additional nonoperating investment income)
 Reduce long-term debt and/or equity proportionately so as to keep the degree of financial
leverage consistent with prior years.
o If the level of cash is too low, additional long-term debt and/or common stock can be increased
as required, keeping the level of financial leverage constant