The Magic of Financial Statements

1. The Magic of Financial Statements Presented by: Robert E. Mark Chief Financial Officer Rowe Incorporated

2. “I’ve worked myself up from nothing to a state of extreme poverty.” -Groucho Marx

3. OVERVIEW • Balance Sheet • Profit and Loss (Income) Statement • Statement of Cash Flows

5. The Balance Sheet LIABILITIES (Amounts owed to outside creditors) + EQUITY (Or net worth) _________________ = ASSETS (Resources of the business)

6. If your sets in your

7. Liabilities Assets

10. BASIC MATH 101 1,000 40 1,000 30 1,000 20 1,000 10 -------- 4,100

11. The Income Statement Sales - Pass thru billing = Net Sales - Direct Expenses = Gross Profit - Admin & Depreciation Expenses = Income from Operations +/- Other Income or Expenses = Income before Taxes - Taxes_______________ = Net Income

13. The Statement of Cash Flows Cash from operations +/- Cash provided by or applied to investing activities +/- Cash provided by or applied to financing activities = Net increase or decrease in cash

16. FINANCIAL RATIOS • Bank most interested in • Come from the Balance Sheet • Owners most interested in • Come from the Income Statement

17. CURRENT RATIO Test of short term solvency

19. RULE OF THUMB Current Ratio should be 2.0 : 1 or greater PSMJ 2001 Median: 1.92

20. THE ACID TEST RATIO Quick Ratio

22. RULE OF THUMB Acid Test Ratio should be 1.0 : 1 or greater PSMJ does not calculate this ratio

23. DEBT TO EQUITY RATIO Total liabilities Stockholder Equity

25. RULE OF THUMB Debt to Equity Ratio should be less than 1.0 PSMJ 2001 Median: 107.21%

26. QUICK REVIEW SAFETY & LIQUIDITY Balance Sheet • Current Ratio – 2 : 1 or greater • Acid Test Ratio – 1 : 1 or greater • Debt to Equity Ratio – less than 1

27. RETURN ON SALES RATIO Net Income Before Taxes Net Sales Revenue PSMJ does not calculate this ratio

29. RETURN ON EQUITY Return on Investment PSMJ 2001 Median: 16.51%

30. RETURN ON EQUITY Net Income (Income Statement) Stockholders’ Equity (Balance Sheet)

31. RETURN ON EQUITY $794,132 = 33.9% $2,342,431

32. RETURN ON ASSETS RATIO Net Income (Income Statement) Total Assets (Balance Sheet) PSMJ 2001 Median: 6.46%

33. RETURN ON ASSETS RATIO $794,132 = 15.8% $5,022,194

34. AVERAGE COLLECTION DAYS Avg Accounts Receivable (Bal Sht) Avg Daily Sales (Income Statement) PSMJ 2001 Median: 66.64 days

35. AVG ACCOUNTS RECEIVABLE Prior yr Accts Rec + Current yr Accts Rec 2

36. AVERAGE DAILY SALES Annual Gross Sales 365

37. AVERAGE COLLECTION DAYS (1,608,934 + 1,098,234) / 2 9,765,492 / 365 = 50.6 DYS PSMJ 2001 Median: 66.64 days

38. ZETA FACTOR 1. Working Capital (Current Assets – Current Liabilities) / Total Assets ___ X 1.2 = ___ • Retained Earnings / Total Assets ___ X 1.4 = ___ • Net Income before Tax & Interest / Total Assets ___ X 3.3 = ___ • Owner’s Equity / Total Debt ___ X 0.6 = ___ • Sales / Total Assets ___ X 1.0 = ___ Total ____

39. ZETA FACTOR 1. Working Capital (Current Assets – Current Liabilities) / Total Assets 0.26 X 1.2 = 0.31 • Retained Earnings / Total Assets 0.45 X 1.4 = 0.62 • Net Income before Tax & Interest / Total Assets 0.18 X 3.3 = 0.60 • Owner’s Equity / Total Debt 0.75 X 0.6 = 0.45 • Sales / Total Assets 1.94 X 1.0 = 1.94 Total 3.92

40. Go Bulldogs!!!!

41. The End