Introduction to Financial

Statements &
Ratio Analysis

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY

Today`s Agenda

• Welcome
• Course Approach
• Modules 1 & 2 Review
• Questions
• Next Steps

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY

 A Little About Me

From the East Coast…

Worked @ Maple Leaf Foods, Wolseley Canada
Marketing Performance & Planning
Financial Analysis, Marketing, Strategy & Research
Controller @ Karl Storz Medical Devices
Teaching Experience: Marketing/Accounting/Strategy
University of Guelph (MCS/MBA/MA) – 12 Yrs.
Brock University (BBA/MBA) – 15 Yrs.
McMaster – 10 Yrs.
Baseball & Travelling, Harvard Business School, Speaker
Chartered Marketer, Chartered Professional Accountant
& Certified Forensic Accountant (California State)
Lead Instructor/ Curriculum Developer @ Canadian
Marketing Association
Married to Kate & Dad to Audrey & Olivia

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY

3
Course Approach

• The focus of this course will be an application-based

approach to Managerial and Financial Accounting.
• There will be an emphasis on material that is applicable in
the business world, specifically in the Golf Industry
• The modules will feature a combination of theory, practical
application, case analysis, live instruction and practice
problems.

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY

 Module 1

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY

Introduction to Financial Statements

Balance Sheet
Balance Sheet

Income Statement
Income Statement

Statement of
Statement of Cash
Cash Flows
Flows
Three primary
financial statements.

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 6

Introduction to Financial Statements

Balance Sheet
Balance Sheet Describes where
the enterprise
Income Statement
Income Statement stands at a specific
date.
Statement of
Statement of Cash
Cash Flows
Flows

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 7

Introduction to Financial Statements

Balance Sheet
Balance Sheet

Income Statement
Income Statement Depicts the
revenue and
Statement of
Statement of Cash
Cash Flows
Flows expenses for a
designated period
of time.

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 8

Introduction to Financial Statements

Balance Sheet
Balance Sheet

Income Statement
Income Statement

Statement of
Statement of Cash
Cash Flows
Flows Depicts the ways
cash has changed
during a
designated period
of time.

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A Starting Point: Statement of Financial Position

Golfing Parks Inc.

Balance Sheet
December 31, 2020

Assets Liabilities & Owners' Equity

Cash $22,500 Liabilities:
Notes receivable 10,000 Notes payable $41,000
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities $80,000
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earning 70,000
TOTAL $300,000 TOTAL $300,000

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Assets

Golfing Parks Inc.

Balance Sheet
December 31, 2020

Assets Liabilities & Owners' Equity

Cash $22,500 Liabilities:
Notes receivable 10,000
Assets
Notes payable
are economic
$41,000
Accounts receivable 60,500 resources
Accounts payablethat36,000
are
Supplies 2,000 Salaries payable 3,000
Land 100,000
owned
Total liabilities
by the$80,000
Building 90,000 business
Owners' Equity: and are
Office equipment 15,000 Capital stock 150,000
expected
Retained earningto benefit
70,000
TOTAL $300,000 future
TOTAL operations.
$300,000

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 11

Liabilities

Golfing Parks Inc.

Balance Sheet
December 31, 2020

Assets Liabilities & Owners' Equity

Cash $22,500 Liabilities:

Liabilities are debts

Notes receivable 10,000 Notes payable $41,000
Accounts receivable 60,500 Accounts payable 36,000
thatSupplies
represent 2,000 Salaries payable 3,000

negative
Land
Building
future cash
100,000
90,000
Total liabilities
Owners' Equity:
$80,000

flows for
Office the
equipment 15,000 Capital stock 150,000
Retained earning 70,000
enterprise.
TOTAL $300,000 TOTAL $300,000

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Owners’ Equity

Golfing Parks Inc.

Balance Sheet
December 31, 2020

Assets Liabilities & Owners' Equity

Cash $22,500 Liabilities:

Owners’ equity 10,000

Notes receivable Notes payable $41,000
Accounts receivable 60,500 Accounts payable 36,000
represents
Supplies the 2,000 Salaries payable 3,000

owners’
Land
Building
claims on100,000
90,000
Total liabilities
Owners' Equity:
$80,000

the assets of the 15,000

Office equipment Capital stock 150,000
Retained earning 70,000
business.
TOTAL $300,000 TOTAL $300,000

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The Accounting Equation

Golfing Parks Inc.

Balance Sheet
December 31, 2020

Assets Liabilities & Owners' Equity

Cash $22,500 Liabilities:
Notes receivable 10,000 Notes payable $41,000
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities $80,000
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earning 70,000
TOTAL $300,000 TOTAL $300,000

Assets = Liabilities + Owners’ Equity

$300,000 = $80,000 + $220,000

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Relationships Among Financial Statements

Date at beginning Date at end of

of period period

TIME
Balance Sheet Balance Sheet

Income Statement
Statement of Cash Flows

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Elevator Speech

“Please walk me through the three

financial statements”

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The Use of Financial Statements by External Parties

Two concerns: Liquidity, Profitability

Creditors Investors

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 Module 2

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY

Financial Statements are Designed for Analysis

Classified Comparative Consolidated

Financial Financial Financial
Statements Statements Statements

Items with certain Amounts from Information for the

characteristics are several years appear parent and subsidiary
grouped together. side by side. are presented.

Results in Helps identify Presented as if the

standardized, significant changes two companies are a
meaningful subtotals. and trends single business unit.

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 19

Tools of Analysis

Dollar &
Trend
Percentage
Percentages
Changes

Component
Percentages Ratios

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 20

Dollar and Percentage Changes

Dollar Change = Analysis Period Amount – Base Period Amount

Percent Change = Dollar Change ÷ Base Period Amount

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Dollar and Percentage Changes

Evaluating Percentage Changes in Sales and Earnings

Sales and earnings should

increase at more than the rate Percentages may be
of inflation. misleading when
the base amount is
small.
In measuring quarterly
changes, compare to the same
quarter in the previous year.

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 22

 Clover Golfing, Inc.
Comparative Balance Sheets
December 31

Percent
2011 2010 Dollar Change Change*
Assets
Current assets:
Cash and equivalents $ 12,000 $ 23,500 $ (11,500) ?
Accounts receivable, net 60,000 40,000
Inventory 80,000 100,000
Prepaid expenses 3,000 1,200
Total current assets $ 155,000 $ 164,700
Property and equipment: $12,000
$12,000 –– $23,500
$23,500 == $(11,500)
$(11,500)
Land 40,000 40,000
Buildings and equipment, net 120,000 85,000
Total property and equipment $ 160,000 $ 125,000
Total assets $ 315,000 $ 289,700
* Percent rounded to one decimal point.

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 23

 Clover Golfing, Inc.
Comparative Balance Sheets
December 31

Percent
2011 2010 Dollar Change Change*
Assets
Current assets:
Cash and equivalents $ 12,000 $ 23,500 $ (11,500) -48.9%
Accounts receivable, net 60,000 40,000
Inventory 80,000 100,000
Prepaid expenses 3,000 1,200
Total current assets $ 155,000 $ 164,700
Property and equipment: ($11,500
($11,500 ÷÷ $23,500)
$23,500) ×× 100%
100% == 48.94%
48.94%
Land 40,000 40,000
Buildings and equipment, net 120,000 85,000
Complete the analysis for the
Total property and equipment $ 160,000 $ 125,000
Total assets other assets
$ 315,000 $ 289,700
* Percent rounded to one decimal point.

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 24

 Clover Golfing, Inc.
Comparative Balance Sheets
December 31

Percent
2011 2010 Dollar Change Change*
Assets
Current assets:
Cash and equivalents $ 12,000 $ 23,500 $ (11,500) -48.9%
Accounts receivable, net 60,000 40,000 20,000 50.0%
Inventory 80,000 100,000 (20,000) -20.0%
Prepaid expenses 3,000 1,200 1,800 150.0%
Total current assets $ 155,000 $ 164,700 (9,700) -5.9%
Property and equipment:
Land 40,000 40,000 - 0.0%
Buildings and equipment, net 120,000 85,000 35,000 41.2%
Total property and equipment $ 160,000 $ 125,000 35,000 28.0%
Total assets $ 315,000 $ 289,700 $ 25,300 8.7%
* Percent rounded to one decimal point.

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 25

Trend Percentages

Trend analysis is used to reveal patterns in data covering

successive periods.

Trend Percentages = Analysis Period Amount

Trend Percentages = x 100%
Base Period Amount

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 26

Trend Percentages
Rockwood Golfing Products
Income Information
For the Years Ended December

Item 2011 2010 2009 2008 2007

Revenues 400,000 355,000 320,000 290,000 275,000
Cost of sales 285,000 250,000 225,000 198,000 190,000
Gross profit 115,000 105,000 95,000 92,000 85,000
Item 2011 2010 2009 2008 2007
Revenues 145% 129% 116% 105% 100%
Cost of sales 150% 132% 118% 104% 100%
Gross profit 135% 124% 112% 108% 100%

(290,000 ÷ 275,000) x 100% = 105%

(198,000 ÷ 190,000) x 100% = 104%
(92,000 ÷ 85,000) x 100% = 108%
WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 27
Component Percentages

Examine the relative size of each item in the financial

statements by computing component
(or common-sized) percentages.

Component Percentages = Analysis Amount

Component Percentages = x 100%
Base Amount

Financial Statement Base Amount

Balance Sheet Total Assets
Income Statement Revenues

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 28

 Clover Golfing, Inc.
Comparative Balance Sheets
December 31
Common-size
Complete the common-size analysis for the other assets. Percents*
2011 2010 2011 2010
Assets
Current assets:
Cash and equivalents $ 12,000 $ 23,500 3.8% 8.1%
Accounts receivable, net 60,000 40,000
Inventory 80,000 100,000
Prepaid expenses 3,000 1,200
Total current assets $ 155,000 $ 164,700
Property and equipment:($12,000
($12,000 ÷÷ $315,000)
$315,000) ×× 100%
100% == 3.8%
3.8%
Land 40,000 40,000
Buildings and equipment, net 120,000 85,000
Total property and equipment ($23,500
($23,500 $ ÷ $289,700)
÷160,000
$289,700) ×× 100%
100% == 8.1%
$ 125,000 8.1%
Total assets $ 315,000 $ 289,700 100.0% 100.0%
* Percent rounded to first decimal point.

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 29

 Clover Golfing, Inc.
Comparative Balance Sheets
December 31
Common-size
Percents*
2011 2010 2011 2010
Assets
Current assets:
Cash and equivalents $ 12,000 $ 23,500 3.8% 8.1%
Accounts receivable, net 60,000 40,000 19.0% 13.8%
Inventory 80,000 100,000 25.4% 34.6%
Prepaid expenses 3,000 1,200 1.0% 0.4%
Total current assets $ 155,000 $ 164,700 49.2% 56.9%
Property and equipment:
Land 40,000 40,000 12.7% 13.8%
Buildings and equipment, net 120,000 85,000 38.1% 29.3%
Total property and equipment $ 160,000 $ 125,000 50.8% 43.1%
Total assets $ 315,000 $ 289,700 100.0% 100.0%
* Percent rounded to first decimal point.

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 30

 Clover Golfing, Inc.
Comparative Income Statements
For the Years Ended December 31

Common-size
Percents*
2011 2010 2011 2010
Revenues $ 520,000 $ 480,000 100.0% 100.0%
Costs and expenses:
Cost of sales 360,000 315,000 69.2% 65.6%
Selling and admin. 128,600 126,000 24.7% 26.3%
Interest expense 6,400 7,000 1.2% 1.5%
Income before taxes $ 25,000 $ 32,000 4.8% 6.7%
Income taxes (30%) 7,500 9,600 1.4% 2.0%
Net income $ 17,500 $ 22,400 3.4% 4.7%
Net income per share $ 0.79 $ 1.01
Avg. # common shares 22,200 22,200
* Rounded to first decimal point.

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 31

Ratios

A ratio is a simple mathematical expression of the

relationship between one item and another.

Along with dollar and percentage changes, trend percentages, and

component percentages, ratios can be used to compare:

Past performance to present

performance

Other companies to your

company

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 32

Uses and Limitations of Financial Ratios

Financial Ratios

Uses Limitations

Management may enter into

Ratios help users understand
transactions merely to improve
financial relationships.
the ratios.

Ratios do not help with analysis

Ratios provide for quick
of the company’s progress
comparison of companies.
toward nonfinancial goals.

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 33

Use this information to calculate the liquidity
ratios for Rockwood Golfing Products.

Rockwood Golfing Products

2011

Cash $ 30,000
Accounts receivable, net
Beginning of year 17,000
End of year 20,000
Inventory
Beginning of year 10,000
End of year 15,000
Total current assets 65,000
Total current liabilities 42,000
Total liabilities 103,917
Total assets
Beginning of year 300,000
End of year 346,390
Revenues 494,000
Cost of sales 140,000
WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 34
Working Capital

Working capital is the excess of current assets over

current liabilities.

12/31/11
Current assets $ 65,000
Current liabilities (42,000)
Working capital $ 23,000

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 35

Current Ratio

This ratio measures the short-term debt-paying ability of

the company.

Current Ratio = Current Assets

Current Ratio =
Current Liabilities

Current Ratio$65,000
Current Ratio = = 1.55 : 1
$42,000

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 36

Quick Ratio

Quick assets are cash, marketable securities,

and receivables.

Quick Ratio = Quick Assets

Quick Ratio =
Current Liabilities

This ratio is like the current

ratio but excludes current assets such as inventories that
may be difficult to quickly convert into cash.

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 37

Quick Ratio

Quick Ratio = Quick Assets

Quick Ratio =
Current Liabilities

Quick Ratio $50,000

Quick Ratio = = 1.19 : 1
$42,000

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 38

Use this information to calculate the profitability ratios for
Babson Builders, Inc.
Babson Builders, Inc.
2011
Ending
Numbermarket price per
of common share
shares $ 15.25
outstanding all of 2007 27,400
Net income $ 53,690
Total shareholders' equity
Beginning of year 180,000
End of year 234,390
Revenues 494,000
Cost of sales 140,000
Total assets
Beginning of year 300,000
End of year 346,390
WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 39
Earning Per Share

Net Income
= EPS
Average Shares of Capital Stock Outstanding

$53,690
= $1.96
27,400

Look back at the information from Babson and get the

values we need to calculate earning per share.

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 40

Price-Earnings Ratio

Current Market Price of one Share of Stock

= P/E
Earnings Per Share

$15.25
= 7.78
$1.96

The measure shows us the relationship between earning

of the company and the market price of its stock.

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 41

Return On Investment (ROI)

This ratio is a good measure of the efficiency of utilization of

assets by the business.

ROI = Annual return (profit) from an investment

Average amount invested

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 42

Return On Assets (ROA)

This ratio is generally considered the best overall measure

of a company’s profitability.

ROA = Operating income ÷ Average total assets

= $53,690 ÷ ($300,000 + $346,390) ÷ 2
= 16.61%

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 43

Return On Equity (ROE)

This measure indicates how well the company employed the

owners’ investments to earn income.

ROA = Net income ÷ Average total equity

= $53,690 ÷ ($180,000 + $234,390) ÷ 2
= 25.91%

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 44

Dividend Yield

This ratio identifies the return, in terms of cash dividends,

on the current market price of the stock.

Dividends Per Share

Dividend Yield Ratio =
Market Price Per Share

Babson Builders pays an annual dividend of $1.50 per share

of capital stock. The market price of the company’s
capital stock was $15.25 at the end of 2011.

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 45

Dividend Yield

This ratio identifies the return, in terms of cash dividends,

on the current market price of the stock.

Dividends Per Share

Dividend Yield Ratio =
Market Price Per Share

$1.50
Dividend Yield Ratio = = 9.84%
$15.25

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 46

 Analysis by Long-Term Creditors

Use this information to calculate ratios to measure the

well-being of the long-term creditors for Babson Builders.
Babson Builders, Inc.
2011

Earnings before interest

expense and income taxes $ 84,000
This Interest expense 7,300
This is
is also
also referred
referred Total assets 346,390
to
to as
as net
net Total stockholders' equity 234,390
operating
operating income.
income. Total liabilities 112,000

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 47

Interest Coverage Ratio

This is the most common measure of the ability of a firm’s

operations to provide protection to the long-term creditor.

Operating income before Interest and

Income Taxes
Times Interest Earned =
Annual Interest Expense

$84,000
Times Interest Earned = = 11.5 times
7,300

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 48

Debt Ratio

A measure of creditor’s long-term risk.

The smaller the percentage of assets that are financed by
debt, the smaller the risk for creditors.

Debt Ratio = Total Liabilities ÷ Total Assets

= $112,000 ÷ $346,390
= 32.33%

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 49

Analysis by Short-Term Creditors

Use this information to calculate ratios to measure the

well-being of the short-term creditors for Babson Builders, Inc.
Babson Builders, Inc.
2011
Cash $ 30,000
Accounts receivable, net
Beginning of year 17,000
End of year 20,000
Inventory
Beginning of year 10,000
End of year 12,000
Total current assets 65,000
Total current liabilities 42,000
Sales on account 500,000
Cost of goods sold 140,000

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Accounts Receivable Turnover Rate

This ratio measures how many times a company converts

its receivables into cash each year.

Net Sales
Accounts Receivable Turnover = Average Accounts
Receivable
$500,000
Accounts Receivable Turnover = ($17,000 + $20,000)
÷2
Accounts Receivable Turnover = 27.03 times

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Inventory Turnover Rate

This ratio measures the number of times merchandise

inventory is sold and replaced during the year.

Cost of Goods Sold

Inventory Turnover =
Average Inventory

$140,000
Inventory Turnover = ($10,000 + $12,000) ÷
2
Inventory Turnover = 12.73 times

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 52

Questions

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 53

Next Steps

• Keep up on readings
• Practice, practice, practice
• Ask questions if things get confusing
• Quiz on Module 1 & 2 due January 31, 2021
• First assignment due February 14, 2021
• Discussion 2 due February 21, 2021
• Practice, practice, practice
• Ask questions if things get confusing
• Email me if you have any questions or concerns!

WEBINAR #1: FINANCE FOR NON-FINANCE MANAGERS IN THE GOLF INDUSTRY 54