Lecture No2 c2 Recognize a decision problem Define the goals or objectives Collect all the relevant information Identify a set of feasible decision alternatives Select the decision criterion to use Select the best alternative

Contemporary Engineering Economics, 4
th

edition. 2007 1
Understanding the Financial
Statements
Lecture No.2
Chapter 2
Contemporary Engineering Economics
Copyright 2006

Contemporary Engineering Economics, 4th
edition. 2007 2
Understanding Financial Statements
Accounting: The
Basis of Decision-
Making
Financial Statements:
Financial Status for
Businesses
Financial Ratios:
Using Ratios to Make
Business Decisions

edition. 2007 3
Chapter Opening Story Dell Computer
Corporation
1983 Michael Dell starts business of preformatting IBM PC
HDs on weekends
1985 - $6 million sales, upgrading IBM compatibles for local
businesses
1986 - $70 million sales; focus on assembling own line of PCs
1990 - $500 million sales with an extensive line of products
1996 Dell goes online; $1 million per day in online sales; $5.3B
in annula sales
1997 Dell online sales at $3 million per day; 50% growth rate
for third consecutive year, 7.8B in total annual sales
2005 - $49.2 B in sales

How would you evaluate the financial performance of
Dell Corporation?

edition. 2007 4
A. Why Engineers need to understand the financial
statements?

edition. 2007 5
Accounting The Language of Business

edition. 2007 6
Financial Status for Business

edition. 2007 7
B. Understanding the Balance Sheet
1. The basic accounting equation and the
definition of capital
2. How to instantly determine liquidity and too
much debt
3. How the firm gets equity: only two ways

edition. 2007 8
The Basic Accounting Equation
For the Balance Sheet Presentation

For the Financial Analysis
Assets - Liabilities = Owners Equity
Assets = Liabilities + Owners Equity

edition. 2007 9
How Items Are Arranged on the Balance
Sheet
Assets
Liabilities
Owners
Equity

edition. 2007 10
Using the Four Quadrants of the Balance
Sheet and Why?
ASSETS LIABILITIES
Current Assets
Long-Term Assets
Current Liabilities
Long-Term Liabilities
Equity
=
1. Owner Contributions
2. Retained Earnings

edition. 2007 11
Current
Assets
Long-term
Assets
Current
Liabilities
Long-term Liabilities
Equity
The Balance Sheet Statement Dell Computer
Corporation

edition. 2007 12
How to Instantly Determine Liquidity and
Too Much Debt?
Liquidity

Too Much Debt?
Current Ratio (2:1)
Debt To Equity Ratio

edition. 2007 13
Liquidity Current Ratio
ASSETS LIABILITIES
Current Assets
Long-Term Assets
Current Liabilities
Equity

edition. 2007 14
Too Much Debt? Debt to Equity Ratio
ASSETS LIABILITIES
Current Assets
Long-Term Assets
Current Liabilities
Equity
D
e
b
t

E
q
u
i
t
y

edition. 2007 15
How the Firm Gets Equity: Only Two
Ways

Owners Contributions

By issuing stocks through financial markets

Retained Earnings
By retaining operating profits instead of paying

edition. 2007 16
1. How to Use profit check points
2. Why gross margin is the critical measure
for engineers?
3. How does inventory production impact
profit?
C. Using the Income Statement to Manage
a Business

edition. 2007 17
Basic Income Statement Equation
Revenue
Expenses
Net Income (Loss)
-

edition. 2007 18
Why Gross Margin is the Critical Measure
for Engineers?
Sales
Cost of Goods Sold
Gross Margin

edition. 2007 19
How Inventory Production Impacts Profit
Calculating the Cost of Goods Sold
Beginning Inventory

+ Additions to Inventory

- Ending Inventory

Cost of Goods Sold

edition. 2007 20
How to Use Profit Check Points
ABC Company, Inc.
Statement of Operations (Year Ended December 31, 200x)
Sales $5,000,000 100.0%
Less: Cost of Goods Sold 3,250,000 65.0%
Gross Profit 1,750,000 35.0%
Less: Selling, G&A Expenses 1,000,000 20.0%
Operating Profit 750,000 15.0%
Less: Interest 250,000 5.0%
Net Income Before Taxes (NIBT) 500,000 10.0%
Less: Taxes 175,000 3.5%
Net Income $325,000 6.5%
Bottom line

edition. 2007 21
The Income Statement Dell Computer
Corporation
1
8
.
3
2
%
8.65%
6.18%
18.32%
100.00%
Gross margin
Operating margin
Net margin
FY 2005

edition. 2007 22
1. The business operating cycle: How
a business earns its cash
2. Sources and Uses of Cash
3. The engineers focus on the
investing section: Capital Budgeting
D. Understanding the Statement of Cash
Flows

edition. 2007 23
Shareholders
Fixed Assets
Debt holders
Inventory
Government
Customers
CASH
From cash sales
To pay taxes
From credit
sales
To pay labor,
materials, and
overhead
To pay interest
and principal
From sale
of debt
To purchase
From sale
To pay dividend,
To purchase back
shares
From sale
of shares
Cash Flow Transactions within Business

edition. 2007 24
The Cash Flow Business Cycle
Inventory
Production
Cash
Accounts
receivable
Fixed assets
Cash
Sales
Credit
Sales
Collection of
receivable
Investment
Depreciation
Changes in equity
Changes in liabilities
Pay taxes
Pay interest
Pay dividends
Labor
Materials
Overhead

edition. 2007 25
The Cash Flow Statement Dell Computer Corporation

edition. 2007 26
Sources and Uses of Cash
Balance Sheet
Jan. 31, 2005
Financial
position
Balance Sheet
Feb. 02, 2004
Financial
position
Sources and
Uses of Funds
Statement of
Changes in
Financial Position
Increase in equity
Decrease in assets
Increase in liabilities
Decrease in equity
Increase in assets
Decrease in liabilities
Sources Uses

edition. 2007 27
The Engineers focus on the Investing Section: Capital
Budgeting
Section
Cash from Operations

Cash from
Investments

Cash from Financing
Information
Cash from operations
(profit)
Cash spent on
Property, Plant,
Equip.

Cash received from
bonds and stocks

Lecture No2 c2 Recognize a decision problem Define the goals or objectives Collect all the relevant information Identify a set of feasible decision alternatives Select the decision criterion to use Select the best alternative

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Lecture No2 c2 Recognize a decision problem Define the goals or objectives Collect all the relevant information Identify a set of feasible decision alternatives Select the decision criterion to use Select the best alternative

Uploaded by

Copyright:

Available Formats

Contemporary Engineering Economics, 4

You might also like