Prentice Hall's one-day MBA in finance & accounting by Michael Muckian, Prentice-Hall, inc Page A
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may be able to drive a hard bargain with a major vendor by paying cash up front rather than asking for the normal credit terms. There are many such reasons for holding a cash balance over and above what’s really needed to meet payroll and to provide for a TEAMFLY
safety buffer for the normal lags and leads in the cash receipts and cash disbursements of the company. Frankly, if this were my business I would want at least a three weeks’
cash balance.
An executive of a leading company said he kept the com-
pany’s cash balance “lean and mean” to keep its managers on their toes. There’s probably a lot of truth in this. But if too much time and effort goes into managing day-to-day cash flow, then the more important strategic factors may not be managed well.
Figure 5.3 does not present a complete picture of the com-
pany’s financial condition. Cash is missing, as just discussed, and the sources of the company’s capital are not shown. It’s time to fill in the remaining pieces of the statement of finan-
cial condition of the business, otherwise known as the balance sheet.
74
Team-Fly®
B U I L D I N G A B A L A N C E S H E E T
BALANCE SHEET TETHERED WITH INCOME
STATEMENT
Figure 5.4 presents the income statement and balance sheet (statement of financial condition) for the business example.
The income statement includes interest expense, income tax expense, and net income (which are discussed earlier in the chapter). The balance sheet includes the sources of capital that the business has tapped to invest in its assets—interest-bearing debt and owners’ equity. The balance sheet is presented according to the discussion earlier in the chapter. In particular, note that the total amount of operating liabilities (the sum of accounts payable and accrued expenses payable) is deducted from total assets to determine the capital invested in assets.
Note: Amounts are in millions of dollars.
Income Statement
Balance Sheet
Assets
Cash
$ 3.0
Accounts receivable
$ 5.0
Inventories
$ 7.2
Prepaid expenses
$ 1.0
Property, plant, and
Sales revenue
$52.0
equipment
$17.5
Cost-of-goods-sold expense
$31.2
Accumulated depreciation ($ 7.7) $ 9.8
Gross margin
$20.8
Total assets
$26.0
Operating expenses
$16.9
Earnings before interest
Operating Liabilities
and income tax
$ 3.9
Interest expense
$ 0.6
Accounts payable
$ 3.4
Earnings before income tax $ 3.3
Accrued expenses payable $ 1.6
$ 5.0
Income tax expense
$ 1.1
Capital invested in assets
$21.0
Net income
$ 2.2
Sources of Capital
Interest-bearing debt
$ 7.5
Owners’ equity
$13.5
Total sources of capital
$21.0
FIGURE 5.4 Balance sheet and income statement.
75
A S S E T S A N D S O U R C E S O F C A P I T A L
Figure 5.4 displays lines of connection, or tether lines, from sales revenue and expenses in the income statement to their corresponding assets and operating liabilities in the balance sheet. These lines are not actually shown in financial reports, of course. I include them in Figure 5.4 to stress that the profit-making activities of a business drive a good part of its balance sheet. Also, you might note the line from net income to owners’ equity; net income increases the owners’ equity. All or part of annual net income may be distributed in cash to its shareowners, which is recorded as a decrease in the business’s owners’ equity.
s
END POINT
A business needs assets to make profit. Therefore a business must raise capital for the money to invest in its assets. The seed capital comes from shareowners; they may invest additional money in the business from time to time after the business gets off the ground. Most businesses borrow money on the basis of interest-bearing debt instruments such as notes payable. Profitable businesses retain part or all of their annual earnings to supplement the money invested in the business by their shareowners.
The balance sheet, or statement of financial condition,
safety buffer for the normal lags and leads in the cash receipts and cash disbursements of the company. Frankly, if this were my business I would want at least a three weeks’
cash balance.
An executive of a leading company said he kept the com-
pany’s cash balance “lean and mean” to keep its managers on their toes. There’s probably a lot of truth in this. But if too much time and effort goes into managing day-to-day cash flow, then the more important strategic factors may not be managed well.
Figure 5.3 does not present a complete picture of the com-
pany’s financial condition. Cash is missing, as just discussed, and the sources of the company’s capital are not shown. It’s time to fill in the remaining pieces of the statement of finan-
cial condition of the business, otherwise known as the balance sheet.
74
Team-Fly®
B U I L D I N G A B A L A N C E S H E E T
BALANCE SHEET TETHERED WITH INCOME
STATEMENT
Figure 5.4 presents the income statement and balance sheet (statement of financial condition) for the business example.
The income statement includes interest expense, income tax expense, and net income (which are discussed earlier in the chapter). The balance sheet includes the sources of capital that the business has tapped to invest in its assets—interest-bearing debt and owners’ equity. The balance sheet is presented according to the discussion earlier in the chapter. In particular, note that the total amount of operating liabilities (the sum of accounts payable and accrued expenses payable) is deducted from total assets to determine the capital invested in assets.
Note: Amounts are in millions of dollars.
Income Statement
Balance Sheet
Assets
Cash
$ 3.0
Accounts receivable
$ 5.0
Inventories
$ 7.2
Prepaid expenses
$ 1.0
Property, plant, and
Sales revenue
$52.0
equipment
$17.5
Cost-of-goods-sold expense
$31.2
Accumulated depreciation ($ 7.7) $ 9.8
Gross margin
$20.8
Total assets
$26.0
Operating expenses
$16.9
Earnings before interest
Operating Liabilities
and income tax
$ 3.9
Interest expense
$ 0.6
Accounts payable
$ 3.4
Earnings before income tax $ 3.3
Accrued expenses payable $ 1.6
$ 5.0
Income tax expense
$ 1.1
Capital invested in assets
$21.0
Net income
$ 2.2
Sources of Capital
Interest-bearing debt
$ 7.5
Owners’ equity
$13.5
Total sources of capital
$21.0
FIGURE 5.4 Balance sheet and income statement.
75
A S S E T S A N D S O U R C E S O F C A P I T A L
Figure 5.4 displays lines of connection, or tether lines, from sales revenue and expenses in the income statement to their corresponding assets and operating liabilities in the balance sheet. These lines are not actually shown in financial reports, of course. I include them in Figure 5.4 to stress that the profit-making activities of a business drive a good part of its balance sheet. Also, you might note the line from net income to owners’ equity; net income increases the owners’ equity. All or part of annual net income may be distributed in cash to its shareowners, which is recorded as a decrease in the business’s owners’ equity.
s
END POINT
A business needs assets to make profit. Therefore a business must raise capital for the money to invest in its assets. The seed capital comes from shareowners; they may invest additional money in the business from time to time after the business gets off the ground. Most businesses borrow money on the basis of interest-bearing debt instruments such as notes payable. Profitable businesses retain part or all of their annual earnings to supplement the money invested in the business by their shareowners.
The balance sheet, or statement of financial condition,
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