SCHOOL-BASED ENTERPRISE
SCHOOL-BASED
ENTERPRISE
INSTRUCTIONAL
UNITS
FINANCIAL ANALYSIS
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SCHOOL-BASED ENTERPRISE
INSTRUCTIONAL UNITS
TOPIC: FINANCIAL ANALYSIS
Financial analysis involves the production and examination of several different
financial statements. A successful start-up business will most likely follow a
detailed business plan, of which the personal financial statement is an integral
part. The personal financial statement documents the net worth of the individual
or group of individuals responsible for financing the business. Put simply, an
individual’s net worth is equal to their liabilities subtracted from their assets.
Liabilities refer to debts owed, while assets refer to cash and owned items of
monetary value. Potential lenders such as banks like to see this information
to determine their level of risk in lending money to people starting their own
businesses. For example, a bank would be very likely to lend money to an
individual who owned their own home, paid off their credit card balance every
month, and had cash stored in both savings and checking accounts. Lending to
such an individual would be a very low-risk situation for the bank. Conversely,
a bank would not be very likely to lend money to someone who rented an
apartment, had several credit cards with high balances, and had little money in
savings and checking accounts. Lending to this person would be a very high-risk
situation for the bank. The reasoning behind any lender’s likelihood of financing
an individual is the risk inherent in doing do—in other words, that individual’s
potential to pay back the loaned money. Someone with equity tied up in a house
or car would be able to sell those items for money to pay back a loan, whereas
someone with little equity would not be able to come up with the money as easily.
A personal financial statement summarizes an individual’s financial state at any
given time for potential lenders to review and consider.
A balance sheet is, in a way, a business’s own personal financial statement. The
balance sheet does not summarize the personal net worth of those individuals
responsible for financing it, but rather summarizes the net worth of the business
itself at any given time. As would be expected, the balance sheet is a bit more
complex than the personal financial statement. The former divides total assets into
current assets and fixed assets and liabilities into current liabilities and long-term
liabilities. Current assets refer to cash or those assets that can be converted into
cash in a period of one year or less. These are also known as liquid assets. Fixed
assets are those items such as buildings and fixtures that are used for the operation
of a business over a long period of time. These typically cannot be converted into
cash within twelve months. Current liabilities are debts to be paid by the business
within the fiscal year, while long-term liabilities are those with a due date beyond
a twelve-month time frame. A business’s total assets (current plus fixed) minus its
total liabilities (current plus long-term) equals its net worth, or equity.
While a balance sheet is useful for determining a business’s worth at a given point
in time, an income statement provides information about the business’s financial
performance over a certain amount of time. An income statement, also known as
a profit-and-loss statement, illustrates a business’s path from total sales to net
income through the following steps:
1) Determine total or gross sales. Keep in mind that this can be a historically
accurate number (as in total sales for the months of September, October,
and November) or a projection (as in estimated sales for the months of
December, January, and February).
WHY
FINANCIAL
ANALYSIS?
Finances are a business’s
very foundation. The
primary purpose of a
business is to make money.
It can only make money,
though, if its financial affairs
are in order. A business
needs to know the state
of its financial affairs at all
times—how much money
is owed to creditors, how
much money is coming in
from sales, and how much
money is tied up in routine
expenses such as the
purchasing of supplies and
payroll. Financial analysis
refers to the activities
a business conducts to
monitor its finances.
OBJECTIVES
• Explain the nature of
balance sheets.
• Describe the nature of
income statements.
• Maintain financial records.
• Prepare cash flow
statements.
2) Calculate net sales by subtracting total allowances, including those made
for returns, shrinkage, and discounts, from gross sales.
3) Determine cost of goods sold (COGS). This number comprises all costs
associated with buying a product from its point of origin (manufacturer)
and getting it to its final selling point (retailer) and can be calculated using
the following equation:
Value of inventory at beginning of set time period
+ Value of goods purchased during time period (cost of making and shipping product)
XXXXX
- Value of inventory at end of set time period
Cost of goods sold
4) Subtract COGS from net sales to determine gross profit.
5) Determine the business’s total overhead, or operating expenses, by
adding total variable expenses to total fixed expenses. Variable expenses
are those costs that vary from month to month depending on the sales
of the business. Variable expenses of a hamburger stand would include
hamburger patties and hamburger buns, which employees would order
in different amounts every month depending on the stand’s sales. Fixed
expenses refer to those costs that do not vary by month, such as rent.
6) Once you have calculated the business’s total operating expenses, subtract
this number from gross profit (the value calculated in Step 4) to determine
net income from operations.
7) Determine net profit/loss before taxes by adding or subtracting any
additional income or expenses to net income from operations.
8) Determine net profit/loss after taxes by subtracting total amount of
federal, state, and local taxes from net profit/loss before taxes.
Both the balance sheet and income statement are useful tools for potential
lenders, who use the documents’ information to quickly calculate various
financial ratios. These ratios, including liquidity, activity, and profitability ratios,
can distill and summarize the presented financial information in several ways for
the purpose of evaluating a business’s financial performance. Liquidity ratios
measure a business’s capacity to pay off its debts. Activity ratios measure the
rate at which a business’s assets can be converted into cash. Profitability ratios
measure a business’s profits.
KEY TERMS
Personal financial statement
Asset
• Current asset
• Fixed asset
Liability
• Current liability
• Long-term liability
Balance sheet
Equity/net worth
Income statement/profit-andloss statement
Total/gross sales
Net sales
Cost of goods sold (COGS)
Gross profit
Overhead/operating expenses
• Variable expenses
• Fixed expenses
• Net income from operations
• Net profit/loss before/after
taxes
Liquidity ratios
Activity ratios
Profitability ratios
Cash flow statement
Yet another important financial document is the cash flow statement, which
details the flow of cash in to and out of a business. Cash differs from other assets in
that it is immediately (or very quickly) available for covering expenses. A business
uses cash to pay bills, make small purchases, and pay its employees. While every
business wants a positive cash flow, it could occasionally see a negative cash flow
depending on how much cash is tied up in outstanding payments, etc. Because of this, it is imperative that a business use a
cash flow statement to know when its cash will be available.
A cash flow statement consists of the following three sections:
1) Cash Flows from Operating Activities
2) Cash Flows from Investing Activities
3) Cash Flows from Financing Activities
Put simply, each section is concerned with the inflow and outflow of cash as it relates to specific activities. Operating activities
refer to the routine operation of the business—the buying and selling of products, the payment of bills and employees, the
purchase of supplies, etc. Investing activities refer to loans issued by the business or to the business’s purchase/sale of assets.
Financing activities refer to payments on debts (both customers’ debts to the business and the business’s debts to lenders).
Each of these sections of the cash flow statement allows a business to see how much cash it has on-hand at a certain point in
time—and where that cash is.
REFERENCES
CNBC. “Staples Inc.” CNBC.com. http://data.cnbc.com/quotes/SPLS (accessed
September 12, 2012).
Farese, Lois Schneider, Grady Kimbrell, and Carl A. Woloszyk. “Entrepreneurship
and Finance.” Unit 11 in Marketing Essentials. Columbus, OH: The McGraw-Hill
Companies, Inc., 2012.
Ross, Kenton, Claudia Bienias Gilbertson, Robert Hanson, and Mark Lehman.
Accounting. 7th ed. Cincinnati, OH: South-Western Educational Publishing, 2000.
CLASSROOM ACTIVITY
Use the information in this pamphlet to prepare a balance sheet, income statement, and cash flow statement for your
school-based enterprise.
CASE STUDY
Staples, Inc. is a hugely popular office supply chain. With stores around the world, yearly profits for Staples number in the
hundreds of millions of dollars. The success of such a large operation depends on detailed and regular financial analysis.
Executives at Staples, Inc. are removed from the day-to-day transactions that fuel the company’s existence, so they rely on
accurate financial statements to see, in numbers, how their company is performing.
Refer to the portion of Staples’ annual balance sheet included in this pamphlet. Note that the statement includes information
for past years in addition to the current year’s information. Also note that the values included in the sheet are in millions of
U.S. dollars (except for per share items). The first part of the balance sheet itemizes the business’s current assets followed by
a total value. Below this are itemized long-term (fixed) assets and total long-term assets. The balance sheet then breaks down
Staples’ current and long-term liabilities. Next is the value of overall total liabilities, which is followed by total equity and
total liability and shreholders’ equity.
The portion of Staples’ annual income statement included in this pamphlet is also in millions of U.S. dollars (except for per
share items) and features information for past years and the current year. The income statement is laid out a bit differently
than the format described above, but it still presents the necessary information. Here Staples has already calculated its
net sales, which is the starting value. “Cost of revenue” is another term for COGS and is subtracted from total revenue to
determine gross profit. The cost of revenue is also added to various other operating expenses to determine total operating
expenses. Total operating expenses subtracted from total revenue is equal to total operating income. To determine net
income, various values including interest, other expenses, and taxes are added to or subtracted from total operating income.
Staples’ annual cash flow statement itemizes cash on-hand from the three types of activities described in this pamphlet—
operating, investing, and financing. Notice that as of March 2, 2012, only operating activities demonstrated a positive cash
flow; cash flows from both investing and financing activities were negative.
STAPLES, INC.
*AS OF 8/15/12
ANNUAL BALANCE SHEET
1/28/12
1/29/11
1/30/10
1/31/09
2/2/08
Cash & Equivalents
1,264.15
1,461.26
1,415.82
633.77
1,245.45
Short Term Investments
--
--
--
--
27.02
Cash and Short Term Investments
1,264.15
1,461.26
1,415.82
633.77
1,272.46
Accounts Receivable - Trade, Net
2,033.68
1,970.48
1,811.37
1,841.23
822.25
Total Receivables, Net
2,033.68
1,970.48
1,811.37
1,841.23
822.25
Total Inventory
2,431.85
2,359.17
2,261.15
2,404.17
2,053.16
Prepaid Expenses
255.54
382.02
333.11
636.98
233.96
Deferred Income Tax - Current Asset
305.61
295.23
353.33
281.1
173.55
Other Current Assets, Total
305.61
295.23
353.33
281.1
173.55
Total Current Assets
6,290.82
6,468.17
6,174.77
5,797.26
4,555.38
Buildings - Gross
1,330.37
1,328.40
1,268.85
1,183.88
1,135.13
Land / Improvements - Gross
1,034.98
1,064.98
1,051.39
1,040.75
859.75
Machinery / Equipment - Gross
3,546.71
3,320.01
3,002.44
2,876.35
2,690.74
Property / Plant / Equipment, Total - Gross
5,912.07
5,713.39
5,322.68
5,100.98
4,685.63
Accumulated Depreciation, Total
-3,831.70
-3,565.61
-3,158.15
-2,810.36
-2,524.49
Property / Plant / Equipment, Total - Net
2,080.36
2,147.77
2,164.53
2,290.63
2,161.14
Goodwill, Net
3,982.13
4,073.16
4,084.12
3,780.17
1,764.93
Intangibles - Gross
927.32
941.63
933.36
--
--
Accumulated Intangible Amortization
-477.54
-418.9
-353.43
--
--
Intangibles, Net
449.78
522.72
579.92
701.92
231.31
Other Long Term Assets
627.53
699.85
713.99
503.08
323.59
Other Long Term Assets, Total
627.53
699.85
713.99
503.08
323.59
Total Assets
13,430.62
13,911.67
13,717.33
13,073.06
9,036.34
Accounts Payable
2,220.41
2,208.39
2,111.70
1,967.60
1,560.73
Accrued Expenses
1,093.86
1,239.33
1,603.35
1,404.71
791.82
Notes Payable / Short Term Debt
0
0
0
1,195.56
0
Current Portion of Long Term Debt / Capital Leases
439.14
587.36
67.27
277.69
23.81
Income Taxes Payable
320.86
258.52
--
--
233.54
Other Current liabilities, Total
320.86
258.52
--
--
233.54
Total Current Liabilities
4,074.28
4,293.59
3,782.32
4,845.55
2,609.90
Long Term Debt
1,599.04
2,014.41
2,500.33
1,968.93
342.17
Total Long Term Debt
1,599.04
2,014.41
2,500.33
1,968.93
342.17
Total Debt
2,038.18
2,601.76
2,567.60
3,442.18
365.98
Minority Interest
7.06
7.47
83.05
58.22
10.23
Other Long Term Liabilities
735.09
652.49
579.75
636.14
356.04
Other Liabilities, Total
735.09
652.49
579.75
636.14
356.04
Total Liabilities
6,415.47
6,967.96
6,945.45
7,508.85
3,318.34
Common Stock
0.55
0.55
0.54
0.53
0.52
Common Stock, Total
0.55
0.55
0.54
0.53
0.52
Additional Paid-In Capital
4,551.30
4,334.74
4,379.94
4,048.40
3,720.32
Retained Earnings (Accumulated Deficit)
7,199.06
6,492.34
5,869.14
5,367.34
4,793.54
Treasury Stock - Common
-4,416.02
-3,786.98
-3,388.40
-3,357.73
-3,272.77
Translation Adjustment
-156.63
37.16
--
--
476.4
Minimum Pension Liability Adjustment
-157.4
-129.88
--
--
--
Other Comprehensive Income
-5.71
-4.21
-89.34
-494.33
--
Other Equity, Total
-319.74
-96.93
-89.34
-494.33
476.4
Total Equity
7,015.15
6,943.71
6,771.89
5,564.21
5,718.01
Total Liabilities & Shareholders' Equity
13,430.62
13,911.67
13,717.33
13,073.06
9,036.34
In millions of USD (except for per share items)
STAPLES, INC.
ANNUAL INCOME STATEMENT
Period Ended
1/28/12
1/29/11
1/30/10
1/31/09
2/2/08
Update
Update
Update
Update
Update
5/16/12
3/4/12
3/4/12
3/4/12
3/4/12
Net Sales
25,022.19
24,545.11
24,275.45
23,083.78
19,372.68
Revenue
25,022.19
24,545.11
24,275.45
23,083.78
19,372.68
Total Revenue
25,022.19
24,545.11
24,275.45
23,083.78
19,372.68
Cost of Revenue
18,280.36
17,938.96
17,801.55
16,836.84
13,822.01
Cost of Revenue, Total
18,280.36
17,938.96
17,801.55
16,836.84
13,822.01
Gross Profit
6,741.83
6,606.16
6,473.90
6,246.94
5,550.67
Selling / General / Administrative Expense
5,048.49
4,913.19
4,907.24
4,631.22
3,986.76
Selling / General / Administrative Expenses, Total
5,048.49
4,913.19
4,907.24
4,631.22
3,986.76
Amortization of Intangibles
64.9
61.69
100.08
70.27
15.66
Depreciation / Amortization
64.9
61.69
100.08
70.27
15.66
Other Unusual Expense (Income)
0
57.77
84.24
173.52
0
Unusual Expense (Income)
0
57.77
84.24
173.52
0
Total Operating Expense
23,393.76
22,971.60
22,893.11
21,711.85
17,824.43
Operating Income
1,628.43
1,573.51
1,382.35
1,371.93
1,548.25
Interest Expense - Non-Operating
-173.75
-214.82
-237.03
-149.77
-38.34
Interest Expense, Net Non-Operating
-173.75
-214.82
-237.03
-149.77
-38.34
Interest Income - Non-Operating
7.58
7.72
6.12
28.49
46.73
Interest / Investment Income, Non-Operating
7.58
7.72
6.12
28.49
46.73
Interest Income (Expense), Net-Non-Operating, Total
-166.17
-207.1
-230.91
-121.29
8.39
Other Non-Operating Income (Expense)
-3.12
-9.82
4.46
-7.56
-2.16
Other, Net
-3.12
-9.82
4.46
-7.56
-2.16
Net Income Before Taxes
1,459.14
1,356.60
1,155.89
1,243.08
1,554.48
Provision for Income Taxes
475.31
468.03
398.78
428.86
559.61
Net Income After Taxes
983.83
888.57
757.11
814.22
994.87
Minority Interest
0.82
-6.62
-18.44
-8.96
0.8
Net Income Before Extraordinary Items
984.66
881.95
738.67
805.26
995.67
Net Income
984.66
881.95
738.67
805.26
995.67
In millions of USD (except for per share items)
STAPLES, INC.
ANNUAL CASH FLOW STATEMENT
Period Ended
1/28/12
1/29/11
1/30/10
1/31/09
2/2/08
Update
Update
Update
Reclassified
Reclassified
3/2/12
3/2/12
2/29/12
8/24/11
8/24/11
Net Income / Starting Line
983.83
888.57
757.11
814.22
994.87
Depreciation
482.06
498.86
552.44
548.91
388.9
Depreciation / Depletion
482.06
498.86
552.44
548.91
388.9
Deferred Taxes
6.71
172.63
-89.75
33.37
-8.79
Unusual Items
--
0
0
150.08
0
Other Non-Cash Items
154.47
152.3
148.75
200.04
160.42
Non-Cash Items
154.47
152.3
148.75
350.12
160.42
Accounts Receivable
-73.67
-95.66
129.14
51.72
-64.29
Inventories
-82.34
-46.45
244.6
177.2
-30.18
Prepaid Expenses
123.66
-70.6
254.81
-2.68
-89.56
Accounts Payable
23.68
63.31
40.37
-127.05
0.3
Accrued Expenses
-117.39
-191.92
71.21
-195.3
-90.05
Other Liabilities
75.48
75.45
-24.46
35.32
99.41
Changes in Working Capital
-50.59
-265.87
715.66
-60.8
-174.38
Cash from Operating Activities
1,576.48
1,446.49
2,084.21
1,685.83
1,361.02
Purchase of Fixed Assets
-383.65
-408.89
-313.23
-378.33
-470.38
Capital Expenditures
-383.65
-408.89
-313.23
-378.33
-470.38
Acquisition of Business
0
-63.07
0
-4,381.81
-178.08
Sale / Maturity of Investment
--
0
0
27.02
4,579.46
Purchase of Investments
--
0
0
0
-4,148.72
Other Investing Cash Flow Items, Total
0
-63.07
0
-4,354.80
252.67
Cash from Investing Activities
-383.65
-471.96
-313.23
-4,733.12
-217.71
Other Financing Cash Flow
-8.2
-360.6
8.76
5.85
18.56
Financing Cash Flow Items
-8.2
-360.6
8.76
5.85
18.56
Cash Dividends Paid - Common
-277.94
-258.75
-236.87
-231.47
-207.55
Total Cash Dividends Paid
-277.94
-258.75
-236.87
-231.47
-207.55
Repurchase / Retirement of Common
-629.04
-398.58
-30.66
-84.96
-760.98
Common Stock, Net
-629.04
-398.58
-30.66
-84.96
-760.98
Options Exercised
73.87
85.43
150.96
148.33
178.5
Issuance (Retirement) of Stock, Net
-555.18
-313.15
120.3
63.37
-582.47
Short Term Debt Issued
--
--
--
1,195.56
0
Short Term Debt Reduction
0
0
-1,195.56
--
--
Short Term Debt, Net
0
0
-1,195.56
1,195.56
0
Long Term Debt Issued
301.84
201.57
1,211.42
3,679.05
11.8
Long Term Debt Reduction
-820.63
-207.48
-945.33
-2,206.31
-206.52
Long Term Debt, Net
-518.79
-5.91
266.09
1,472.73
-194.72
Issuance (Retirement) of Debt, Net
-518.79
-5.91
-929.47
2,668.29
-194.72
Cash from Financing Activities
-1,360.09
-938.41
-1,037.28
2,506.04
-966.19
Foreign Exchange Effects
-29.84
9.31
48.35
-70.42
50.66
Net Change in Cash
-197.11
45.44
782.05
-611.67
227.78
Net Cash - Beginning Balance
1,461.26
1,415.82
633.77
1,245.45
1,017.67
Net Cash - Ending Balance
1,264.15
1,461.26
1,415.82
633.77
1,245.45
Cash Interest Paid
184.5
210.9
217.5
113.5
42
Cash Taxes Paid
308.9
404.9
236.1
470.4
479.5
In millions of USD (except for per share items)