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Consolidated Financial
Statements

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Consolidated Financial Statements

Goals

• Understanding of financial statements

– Purpose / uses (conceptual)
– Individual line items (application detail)
– Flow between the statements (technical)
• Ability to build a balancing financial model (excel)

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Consolidated Financial Statements

Income Statement

• A measure of profit over a period of time

– Revenues – Expenses = Profit
• Key line items
– Sales = Price x Volume
– Expenses (COGS, G&A, D&A, R&D, marketing, interest)
– EBIT/EBITDA
– Taxes
– Dividends
– Basic & diluted shares outstanding
– Net income / EPS (basic & diluted)
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Consolidated Financial Statements

Expenses

• Costs of goods sold (COGS)

– Costs directly related to sale of products
• General and Administrative (G&A)
– Salary
– Rent
– Utilities
• Marketing Expenses
– Expenses related to marketing and advertising
• Research and Development (R&D)
– Expenses related to the research and development of new or existing
products
• Depreciation and Amortization (D&A)
– Accounting for the aging of tangible and intangible assets
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Consolidated Financial Statements

Income Statement - Example

• John owns a small delivery company. In its first month of operation,

John reports $10,000 in revenues. However, he had to pay his
employees ($1,500), $2,500 for the cost of delivered goods, $1,000
for fuel, $1,500 for vehicle depreciation, and taxes of $1,400.
• John reported $2,100 in Net Income for the first month of operation
– $10,000 - $1,500 - $2,500 - $1,000 - $1,500 -$1,400 = $2,100

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Consolidated Financial Statements

Income Statement - Example

John's Delivery Business

Income
for GAAP
Total Revenue 10,000.0

Cost of Goods Sold 2,500.0

Gross Profit 7,500.0

% Margin 75.0%

Expenses
General & Administrative 1,500.0
Fuel 1,000.0
Total Operating Expenses 2,500.0

EBITDA 5,000.0
% Margin 50.0%

Depreciation 1,500.0

EBIT 3,500.0
% Margin 35.0%

Income Tax Expense 1,400.0

% Income Tax 40%

Net Income 2,100.0

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Consolidated Financial Statements

Cash Flow Statement - Example

• John’s delivery company consists of one truck. John needs to make

some extensive repairs to his truck this month of $1,000. Knowing
his company made a profit of $2,100 this month, John went to the
bank to take out the $1,000 needed. However, to his
disappointment, there was only $100 in the bank account!

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Consolidated Financial Statements

Cash Flow Statement

• A measure of cash over a period of time

– Profit less non-cash items
• Important line items
– Cash from operations
• Day to day business operations
• D&A
• Deferred taxes
• Changes in working capital (accounts payable / receivable,
inventory)
– Cash from investing
• CAPEX
• Investing in assets, proceeds from sale of business, equipment or
other long-term assets
– Cash from financing
• Cash paid or received from issuing and borrowing funds

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Consolidated Financial Statements

Cash Flow Statement – Example (cont’d)

• John has confused Net Income with Cash Available. He forgot that
35% of his customers paid for his delivery services on credit. So,
even though he reported revenues of $10,000 he only received 65%
of that in cash ($6,500). John should have taken his profit of $2,100
and added back non-cash items such as credits receivable and
depreciation to estimate how much cash he actually has in his bank
account! $6,500 less his expenses of $6,400 leaves him with not
enough cash to repair the truck.

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Consolidated Financial Statements

Cash Flow Statement – Example (cont’d)

•John forgot he John's Dilemma
Income
has not yet for GAAP
Revenue from Cash 6,500.0
received all of Revenue on Credit 3,500.0
his revenue Total Revenue 10,000.0

Cost of Goods Sold 2,500.0

Gross Profit 7,500.0

% Margin 75.0%

Expenses
General & Administrative 1,500.0
Fuel 1,000.0
Total Operating Expenses 2,500.0

EBITDA 5,000.0
% Margin 50.0%

Depreciation 1,500.0

EBIT 3,500.0
% Margin 35.0%

Income Tax Expense 1,400.0

% Income Tax 40%

Net Income 2,100.0

Adjust for Non-Cash Items

Deduct Revenue from Credit Cards (3,500.0)
Not enough cash Add Back Depreciation 1,500.0
Cash Flow 100.0
on hand for
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Consolidated Financial Statements

Depreciation

• Depreciation accounts for the aging of assets

• Various methods
– Straight line – evenly spread out over time
– Accelerated – asset is more heavily depreciated in the early years
• MACRS (Modified Accelerated Cost Recovery System)
• Double-declining balance
• Example
– John’s truck cost $20,000. It’s expected to last 10 years. After 10
years, John expects to sell it for $5,000 scrap metal. Therefore, the
value of John’s truck depreciates by $1,500 each year
($20,000 - $5,000) / 10 = $1,500
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Consolidated Financial Statements

Deferred Taxes

• Deferred taxes are taxes payable at a later date

• The difference in depreciation for GAAP purposes and depreciation for tax
purposes can result in deferred taxes
• You are given the ability to adjust (more specifically, accelerate) your
depreciation for tax purposes
• Accelerating the depreciation in an asset’s early years increases the
depreciation expense, thus lowering the taxes paid
• Depreciation and, therefore, net income, can still be reported using a
straight line depreciation method for GAAP purposes
• The difference in taxes paid is reported as “Deferred Taxes” on the cash
sheet
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Consolidated Financial Statements

Depreciation & Deferred Taxes - Example

John's Dilemma
•John decides to Income Income
accelerate his for GAAP for Tax
depreciation by Revenue from Cash 6,500.0 6,500.0
Revenue on Credit 3,500.0 3,500.0
25% in year 1 and Total Revenue 10,000.0 10,000.0
5% in the following
Cost of Goods Sold 2,500.0 2,500.0
years for income
tax purposes Gross Profit 7,500.0 7,500.0

% Margin 75.0% 75.0%

•The increase in
depreciation led to Expenses
General & Administrative 1,500.0 1,500.0
a savings in taxes Fuel 1,000.0 1,000.0
Total Operating Expenses 2,500.0 2,500.0
•Note that John still
reports his net EBITDA 5,000.0 5,000.0
% Margin 50.0% 50.0%
income as is (using
straight-line Depreciation 1,500.0 3,750.0 = 2,250.0
depreciation), only xTax
EBIT 3,500.0 1,250.0 (40%)
his cash is affected % Margin 35.0% 12.5%
by the deferred =
Income Tax Expense 1,400.0 500.0 900.0
taxes account % Income Tax 40% 40%

•Voila! John Net Income 2,100.0 750.0

successfully Adjust for Non-Cash Items
deferred some Deduct Revenue from Credit Cards (3,500.0)
Add Back Depreciation 1,500.0
taxes and made
Deferred Taxes 900.0
available the Cash Flow 1,000.0
$1,000 he needs! © 2008 AnEx Modeling Services, LLC
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Consolidated Financial Statements

Workshop 1 - Modeling

• Important modeling uses

– Basic reporting purposes
– Estimate future projections
– Evaluate pro-forma scenarios
• Basic consolidated model layout
– Income Statement
– Cash Flow Statement
– Balance Sheet
– Depreciation Schedule
– Working Capital Schedule
– Debt Schedule

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Consolidated Financial Statements

Workshop 1 - Modeling

• Build first half of consolidated model

– Income statement
– Cash flow statement – drives balance sheet
– Depreciation / deferred taxes table
– Changes in working capital table
• Notes
– Refrain from hiding rows or cells
– Refrain from unnecessary blank rows or columns
– Formatting
• Black text = formulas
• Blue text = hard codes

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Consolidated Financial Statements

Workshop 1 – Modeling the Income Statement

Consolidated Income Statement
•There should be (in thousands)
Actual Projected
no hardcodes other Period Ending Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Total Revenue 10,000.0 11,000.0

than what is % Growth
already in blue Cost of Goods Sold 7,000.0 7,700.0
% of Revenue

•Start by calculating Gross Profit

% Margin
the formulas in the
Operating Expenses
“Actual” columns Research Development 1,000.0 1,000.0
Selling General and Administrative 1,000.0 1,000.0
Other 0.0 0.0
•Assumptions for Total Operating Expenses

projected years: Other Income

Equity in earnings of unconsolidated
affiliates 0.0 0.0
– Revenue growth EBITDA
increases 10% % Margin

Depreciation and Amortization

each year
EBIT
% Margin
–COGS should be
Interest Expense 25.0
the same %of Interest Income (15.0)

revenue as in the Income Before Tax

% Margin
actual years Income Tax Expense 156.4 234.4
% Income Tax
–Assume the same Minority Interest 0.0 0.0
income tax rate as Net Income From Continuing Ops

in 2007 Non-recurring Events

Discontinued Operations 0.0 0.0
Extraordinary Items 0.0 0.0
–Assume all other Effect Of Accounting Changes 0.0 0.0
Other Items 0.0 0.0
expenses and
Net Income
share count stays
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Consolidated Financial Statements

Workshop 1 – Modeling the Income Statement

•There should be Consolidated Income Statement
(in thousands)
no hardcodes other Actual Projected
Period Ending Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
than what is Dividends Paid
Dividends Paid (per share) $0.01 $0.01
already in blue Net Income After Dividends

Shares Outstanding
•Start by calculating Basic 1,000,000
Diluted 1,500,000
the formulas in the
EPS
“Actual” columns Basic
Diluted

•Assumptions for
projected years:
– Revenue growth
increases 10%
each year
–COGS should be
the same %of
revenue as in the
actual years
–Assume the same
income tax rate as
in actual years
–Assume all other
expenses and
share count stays
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Consolidated Financial Statements

Workshop 1 – Modeling the Depreciation

Depreciation
(in thousands)
Actual Projected
•Assume CAPEX Period Ending Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
Property, Plant & Equipment 5,000.0
holds constant Capital Expenditures 1,000.0 500.0 750.0 1,000.0 500.0 750.0 1,000.0 500.0 1,000.0

Straight Line Depreciation

•The depreciation Years 10 10 10 7 7 7 10 10 10
Existing PP&E 500.0 500.0
in the actual years Year 1 100.0 100.0
Year 2 50.0
has been started Year 3
Year 4
for you, but it must Year 5
Year 6
be carried out to Year 7
Year 8
the projected years Year 9
Year 10
Total Depreciation for GAAP
•Note the % Accelerated Depreciation (%)
Existing PP&E 25% 15% 10% 10% 10% 10% 5% 5% 5%
schedule that’s Year 1 25% 15% 10% 10% 10% 10% 5% 5% 5%
Year 2 25% 15% 10% 10% 10% 10% 5% 5%
provided. This is Year 3 25% 15% 10% 10% 10% 10% 5%
Year 4 30% 20% 15% 10% 10% 10%
not an actual Year 5 30% 20% 15% 10% 10%
Year 6 30% 20% 15% 10%
MACRS schedule Year 7 25% 15% 10%
Year 8 25% 15%
Year 9 25%
•Think about how Year 10

deferred taxes Accelerated Depreciation

Existing PP&E 1,250.0 750.0
should be Year 1 250.0 150.0
Year 2 125.0
calculated Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Total Depreciation for Tax

Difference in Depreciation
Tax Rate
Deferred Taxes

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Consolidated Financial Statements

Workshop 1 – Modeling the Working Capital

•“Days” Working Capital
(in thousands)
assumptions are Actual Projected
Period Ending Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13
hardcoded in
Current Assets
•(AR/Revenue)*360 Accounts Receivable 1500.0 1250.0
Days Receivable 45.0 45.0 45.0 45.0 45.0 45.0 45.0
= Days receivable Inventory 700.0 600.0
Inventory Turnover Days 30.0 30.0 30.0 30.0 30.0 30.0 30.0
•(AP/COGS)*360 = Current Liabilities
Days payable Accounts Payable 750.0 800.0
Days Payable 35.0 35.0 35.0 35.0 35.0 35.0 35.0
Other Current Liabilities 0.0 0.0
•Assume other
Working Capital
liabilities stays Change in Working Capital
constant Match? (Y/N) Y Y Y Y Y Y Y Y

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Consolidated Financial Statements

Workshop 1 – Modeling the Cash Flow

Statement of Cash Flow
(in thousands)
•Depreciation, Actual Projected
Period Ending Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
deferred taxes, and
Net Income
CAPEX come from
Cash Flow from Operating Activities
the depreciation
Depreciation
schedule Deferred Taxes
Changes in Working Capital
Changes In Accounts Receivable (10.0)
•Changes in WC Changes In Accounts Payable 10.0
Changes In Inventory (10.0)
come from the Changes In Other Current Liabilities 0.0
Total Changes in Working Capital
working capital Total Cash Flow from Operating Activities
schedule Cash Flow from Investing Activities
Capital Expenditures
•Short-term and Other Cashflows from Investing Activities 0.0
Total Cash Flow from Investing Activities
long-term Cash Flow from Financing Activities
borrowings can be Dividends Paid
Minority Interest
held at 0 for now, Sale of Perferreds 0.0
Sale of Common Stock 0.0
but will eventually Purchase of Stock (Treasury) 0.0
Short-Term Debt Borrowings (Retirements) 0.0
come from the debt Long-Term Debt Borrowings (Retirements) 500.0
Other Cash Flows from Financing Activities 0.0
schedule Total Cash Flows from Financing Activities

Change In Cash and Cash Equivalents

Cash Flow Before Debt Paydown

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