Engineering Economics

VWVhat the course is about

¢ Engineering economics deals with the methods that | |

enable one to take economic decisions with regards oa

to engineering activities towards minimizing costs

and/or maximizing benefits to business

organizations.

* As an Engineer in a firm/company or institution you may find yourself as

° The CEO

¢ The General Manager or Technical Manager

¢ Member of the Product design/R&D team (Perfect role for an Engineer)

* Member of the Production team (supervisor or engineer or technician)

* Member of the Quality assurance team

¢ Member of the Maintenance team

¢ Member of the Sales team (Sales engineer)

¢ Researcher or Academic*

23

* Engineers typically do four things

* Develop new products

* Improve existing products

* Develop new processes or technologies for

making existing products

* Improve existing processes or technologies

for making existing products

24

Introduction to Engineering Economic Decisions

Engineering Economic Decisions

Engineers are called upon to participate in a variety of

decisions, ranging from manufacturing, through

marketing, to financing decisions.

Lets focus on the various economic decisions related

to engineering projects which is referred to as

In manufacturing, engineering is involved in every

detail of a product’s production, from conceptual

design to shipping.

Engineering decisions account for the majority (up to

85%) of product costs.

Introduction to Engineering Economic Decisions

Engineering Economic Decisions

Engineers must consider the effective use of capital assets

such as buildings and machinery.

One of the engineer’s primary tasks is to

(capital expenditure) that will

enable the firm to design and produce products

economically.

With the purchase of any fixed asset—such as equipment—

we need to estimate the profits (more precisely, cash flows)

that the asset will generate during its period of service.

Therefore, we have to make capital expenditure decisions

based on predictions about the future.

* For example,

* You are considering the purchase of a milling

machine or a 3-D printer to meet the

anticipated demand for certain processes used

in the production.

¢ The expectation is that the machine should

lasts 10 years.

¢ This decision therefore involves an implicit

10-year sales forecast for the products.

¢ This means that a long waiting period will be

required before you will know whether the

purchase was justified.

27

An inaccurate estimate of the need for assets can have serious

consequences.

If you invest too much in assets, you incur unnecessarily

heavy expenses.

Spending too little on fixed assets, however, is also harmful,

since equipment may be too outdated or too small to produce

products competitively.

Without an adequate capacity, you may lose a portion of your

market share to rival firms.

Regaining lost customers involves heavy marketing expenses

and may even require price reductions or product 28

improvements, both of which are costly.

Introduction to Engineering Economic Decisions

Engineering Economic Decisions

Engineering Economic Decisions shares

strong similarities with Personal Economic

Decisions.

An engineer plays a role in the effective

utilization of corporate financial assets.

Likewise, each of us is responsible for if

managing our personal financial affairs.

29

Introduction to Engineering Economic Decisions

Engineering Economic Decisions

Let’s examine it carefully:

¢ After we have paid for essential needs, such as rent, food, clothing, and transportation,

any remaining money is available for discretionary expenditures on items such as

entertainment, travel, and investment.

¢ For money we choose to invest, we want to maximize the economic benefit at some

acceptable risk.

¢ The investment choices are unlimited and include savings accounts, guaranteed

investment certificates, stocks, bonds, mutual funds, rental properties, land, business

ownership, and more.

* How do you choose?

Side note: let’s briefly distinguish between shares, stocks

and bonds

Stocks represent part ownership of a company while a

Share is a single unit of stock

Bonds represents a loan offered to a company or

government

The fundamental difference between stocks and bonds 1s

that with stocks you own a small portion of a company,

whereas with bonds you loan a company or government.

The second difference is that in both cases money made;

stocks must grow in resale value while bonds are repaid as

a fixed interest over time.

31

Introduction to Engineering Economic Decisions

Engineering Economic Decisions

Bonds

Debt security

Represents a loan to issuer

Fixed income

Less volatile

Higher risk of default

Lower risk of loss of principal

Vs

Stocks

Equity security

Represents ownership

in a company

Dividends may fluctuate

More volatile

Lower risk of default

Higher risk of loss of principal

32

Introduction to Engineering Economic Decisions

Engineering Economic Decisions

Let’s examine it carefully:

¢ The analysis of one’s personal investment opportunities utilizes the same techniques

that are used for engineering economic decisions.

* Again, the challenge is predicting the performance of an investment into the future.

* Choosing wisely can be very rewarding, while choosing poorly can be disastrous.

* Awise investment strategy is a strategy that manages risk by diversifying investments.

33

Introduction to Engineering Economic Decisions

Engineering Economic Decisions

Let’s examine it carefully:

¢ With such an approach, you have a number of different investments ranging from very

low to very high risk and are in a number of business sectors.

¢ Since you do not have all your money in one place, the risk of losing everything is

significantly reduced.

34

* Many large companies have a specialized project analysis division that actively

searches for new ideas, projects, and ventures.

* Once project ideas are identified, they are typically classified as

(1) equipment or process selection,

(2) equipment replacement,

(3) new product or product expansion,

(4) cost reduction

(5) improvement in service or quality.

35

¢ This classification scheme allows management (i.e. those who run the company on a

day-to-day basis) to address key questions:

* Can the existing plant, for example, be used to attain the new production levels?

° Does the firm have the knowledge and skill to undertake the new investment?

* Does the new proposal warrant the recruitment of new technical personnel?

* The answers to these questions help firms screen out proposals that are not feasible,

given a company’s resources.

36

Introduction to Engineering Economic Decisions

The Five Engineering Project Decision Classifications

¢ This class of engineering decision problems involves selecting the

best course of action out of several that meet a project’s

requirements.

Introduction to Engineering Economic Decisions

The Five Engineering Project Decision Classifications

Equipment or Process Selection

* It answers the question,

¢ Which of several proposed items of equipment shall

we purchase for a given purpose?

¢ The choice often hinges on which item is expected to

generate the largest savings (or the largest return on the

investment).

* Many factors will affect the ultimate choice of the

material or equipment, and engineers consider all major

cost elements, such as the cost of machinery and

equipment, tooling, labor, and material.

Introduction to Engineering Economic Decisions

The Five Engineering Project Decision Classifications

¢ This category of investment decisions involves considering the expenditure necessary

to replace worn-out or obsolete equipment.

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Introduction to Engineering Economic Decisions

The Five Engineering Project Decision Classifications

For example, a company may purchase 10 large

presses, expecting them to produce stamped metal

parts for 10 years.

After 5 years, however, it may become necessary to

produce the parts in plastic, which would require

retiring the presses early and purchasing plastic

molding machines.

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Similarly, a company may find that, for competitive

reasons, larger and more accurate parts are required,

making the purchased machines become obsolete

earlier than expected.

Introduction to Engineering Economic Decisions

The Five Engineering Project Decision Classifications

¢ This involves considering expenditures necessary to produce a new product or to expand

into anew geographic area.

* One common type of expansion decision includes decisions about expenditures aimed at

increasing the output of existing production or distribution facilities.

Introduction to Engineering Economic Decisions

The Five Engineering Project Decision Classifications

¢ It also answers the question,

¢ Shall we build or otherwise acquire a new facility?

¢ Investments in this category increase company revenues if output is increased.

Introduction to Engineering Economic Decisions

The Five Engineering Project Decision Classifications

¢* Acost-reduction project is a project that

attempts to lower a firm’s operating costs.

¢ Typically, we need to consider whether a

company should buy equipment to perform

an operation currently done manually or

spend money now in order to save more

money later.

¢ The expected future cash inflows on this

investment are savings resulting from lower

operating costs.

Improvement in Service or Quality

* In some cases, the decision would be to enhance the quality of an existing product.

¢ Alternatively it could be to enhance the quality of service delivery with regards to the

product such as marketing and distribution.

For any of these decisions to be made a

business must first exist!

45

Introduction to Engineering Economic Decisions

Types of Business Organization

Summary of a Business Journey (Pitch-to-Market)

Idea for a Product

Development of the Product Prototype

Preparation of Production Plan oe,

Business Plan Development LiL

Business Registration

Capital sourcing

Rental/Construction of Work space

Equipment and Material Sourcing

9. Commercial Production

10. Marketing

11. Distribution & Sales

12. Business Expansion

13. Sale of Business/Closure

PRODUCT

SCNIADMBWN >

Yahoo, Apple and Microsoft produce computer products

and have a market value of several billion dollars each.

These companies were all started by young college

students with technical backgrounds.

When they went into the computer business, these students

initially organized their companies as proprietorships.

As the businesses grew, they became partnerships and

were eventually converted to corporations.

a Microsoft

= Apple Inc.

Introduction to Engineering Economic Decisions

Types of Business Organization

A proprietorship is a business

owned by one individual.

This person is responsible for the

firm’s policies, owns all its assets,

and is personally liable for its

debts.

Introduction to Engineering Economic Decisions

Types of Business Organization

A proprietorship has two major advantages 1.e.

¢ The owner has full control over all managerial and

operational decisions.

¢ Itcan be formed easily and inexpensively with little

organizational requirements.

¢ The earnings of a proprietorship may be taxed at the

owner 8 personal tax rate, which may be lower than the

rate at which corporate income is taxed.

The major disadvantages are personal liability (all debts to the

owner) and the inability to raise additional capital for business

expansion through stocks and bonds.

Introduction to Engineering Economic Decisions

Types of Business Organization

* A partnership is similar to a proprietorship, except that it

has more than one owner.

* Most partnerships are established by a written contract

between the partners which normally specifies contributions

to capital, and the distribution of profits and losses.

* A partnership has many advantages, these include

¢ Lower costs per person and ease of formation.

¢ Typically has a larger amount of capital available for

business since more than one person makes

contributions.

¢ Easy to borrow money since the personal assets of all

the partners stand behind the business

Introduction to Engineering Economic Decisions

Types of Business Organization

The disadvantage is under partnership law,

meaning that the partners

must risk all their personal assets even those not invested

in the business.

Though each partner is responsible for his or her portion

of the debts in the event of bankruptcy, if any partners

cannot meet their pro rata claims, the remaining partners

must take over the unresolved claims.

Finally, a partnership has a limited life, insofar as it must

be dissolved and reorganized if one of the partners quits.

Introduction to Engineering Economic Decisions

Types of Business Organization

A corporation is a legal entity created

under law which is separate from its

owners and managers.

Introduction to Engineering Economic Decisions

Types of Business Organization

Corporations

¢ This separation gives the corporation four major

advantages:

¢ Itcan raise capital from a large number of

investors by issuing stocks and bonds;

¢ It permits easy transfer of ownership

interest by trading shares of stock;

¢ It allows limited liability—personal liability

is limited to the amount of the individual s

investment in the business;

¢ It is taxed differently than proprietorships

and partnerships, and under certain

conditions, the tax laws favour

corporations.

Introduction to Engineering Economic Decisions

Types of Business Organization

* On the negative side, it is

expensive to establish a

corporation since it 1s subject to

numerous governmental

requirements and regulations.

Introduction to Engineering Economic Decisions

Types of Business Organization

¢ Asa firm grows, it may need to change its legal form because the form of a business

affects the extent to which

° it has and its

¢ The legal form of an organization also affects the risk borne by its owners in case of

bankruptcy and the manner in which the firm is taxed.

Introduction to Engineering Economic Decisions

Types of Business Organization

Example

* Apple Computer started out as a two-man garage operation by Steve Jobs and Steve

Wozniak (there was third member who left the business early Ronald Wayne).

Introduction to Engineering Economic Decisions

Types of Business Organization

Example

¢ As the business grew, the owners felt constricted by

this form of organization because:

° Itwas difficult to raise capital for business

expansion;

° They felt that the risk of bankruptcy was too high to

bear; and as their business income grew, their tax

burden grew as well.

° Eventually, they found it necessary to convert the

partnership into a corporation.

Business ownership in Ghana

* In Ghana, the provisions for company or business registration is found in Act 992

(2019).

¢ The business registration is now done by the Office of the Registrar of Companies.

* They categorize registration into five groupings, namely

¢ Sole proprietorship

¢ External company

¢ Private/Public Companies limited by guarantee (respective contribution to assets).

¢ Private/Public Companies limited/unlimited by shares.

¢ The term Limited Liability Company (LLCO) refers to a private company whose

owners are legally responsible for its debts only to extent of the amount of capital

they invested. (private refers ownership of 1-50 people)

58

Business ownership in Ghana

¢ We can have hybrids of the business types with various conditions

SOLE PARTNERSHIP LIMITED CORPORATION

PROPRIETORSHIP PARTNERSHIP

59

In terms of total business volume (monetary value of sales), the quantity of business

transacted by proprietorships and partnerships is several times less than that of

corporations.

Therefore in our course we will address economic aspects of corporations and LLCs

but note that most of these principles and practices are applicable to all business

organizational types.

60

2. Financial management and

analysis

If you want to explore investing in Cargill stock, you will

need some information.

You would certainly prefer that Cargill have a record of

accomplishment of profitable operations, earning a profit

(net income) year after year.

The company would need a steady stream of cash

coming in and a manageable level of debt.

Investors commonly use the financial statements often

found in the firm’s annual report as the starting point.

Cargill

62

Financial management and analysis

Overview

* Likewise, as an individual before making any

financial decision, it is good to understand an

elementary aspect of your financial situation

¢ You will first answer the question “How am I

doing?” The answer is called your net worth.

is the amount by which a

company’s or individual’s assets exceed the

company’s or individual’s liabilities.

¢ This is routinely required whenever you have

to borrow a large sum of money (loan) from

a financial institution.

Example

* When you are buying a home, you need to apply

for a mortgage (home loan).

* Customarily, the bank will ask you to submit

your net-worth statement as a part of loan

processing.

* Your net-worth statement is a snapshot of where

you stand financially at a given point in time.

¢ The bank will determine how creditworthy you

are by examining your net worth.

64

ABC Co. Balance Sheet

Assets

Current assets

¢ Ina similar way, a corporation prepares the ——- ooo EES

same kind of information for its financial —— os

120,000 116,850

planning or to report its financial health to

Fixed assets (net)

stockholders (or shareholders) or investors. i ey —*o0e

Equipment 50,000 51,837

. . ‘Balding 40,000 40,612

* The reporting document is known as the EeeE erase

Total assets 300,000 284,299

fi nancial statements. Liabilities and shareholders’ equity

Bank overdraft 25,000 15,000

Accounts payable 23,049 37,695

Accrued expenses 15,000 14,500

Taxes payable 3,201 3,204

Current portion of the long-term debt 3,750 3,750

70,000 74149

Long-term liabilities

130,000 182,000

(long-term portion of bank debt)

Shareholders’ equity

Common shares 100 100

Retained earnings 99,900 78,050

100,000 78,150 65

Financial management and analysis

Accounting - the language of business

* We need financial information when we are making business decisions.

* Virtually all businesses and most individuals keep to aid in making

decisions.

can be described as the information system that measures business

activities, processes the resulting information into reports, and communicates the

results to decision makers.

* For this reason, we call accounting “the

language of business.”

¢ The better you understand this language, the better you can manage your corporate or

individual financial well-being, and the better your financial decisions will be.

° The uses of accounting information are many and varied and may include

¢ Personal financial planning, education expenses, loans, car payments, income

taxes, and investments.

¢ The accounting information is also used by various categories of people which

includes

* Individuals, Business owners and managers, Investors and Creditors

67

Financial management and analysis

Accounting - the language of business

¢ Individuals use accounting information in their day-to-day affairs to manage bank

accounts, to evaluate job prospects, to make investments, and to decide whether to

rent an apartment or buy a house.

Use of Accounting Information by Businesses

¢ Business managers and owners use accounting information to

* set goals for their organizations,

* evaluate progress toward those goals,

* take corrective actions if necessary.

¢ Decisions based on accounting information may include which building or equipment

to purchase, how much merchandise to keep on hand as inventory, and how much cash

to borrow.

69

Financial management and analysis

Accounting - the language of business

* Investors and creditors often provide the money a business needs to begin operations.

, potential investors evaluate what

income they can expect on their investment by analyzing the financial statements of

the business.

* Before giving a loan, banks

determine the borrower’s ability to

meet scheduled repayments.

¢ This kind of evaluation includes a

projection of future operations and

revenue, based on accounting

information.

An essential product of an

accounting information system is

a series of financial statements

that allows people to make

informed decisions

ABC Co. Balance Sheet

Assets

Current assets

Cash 5,000 3,000

Accounts receivable 55,000 51,600

Inventory 50,000 53,500

Prepaid expenses 10,000 8,750

120,000 116,850

Fixed assets (net)

Land 75,000 75,000

Vehicles 15,000 +

Equipment 50,000 51,837

Building 40,000 40,612

180,000 167,449

Total assets 300,000 284,299

Liabilities and shareholders’ equity

Current liabilities

Bank overdraft 25,000 15,000

Accounts payable 23,049 37,695

Accrued expenses 15,000 14,500

Taxes payable ; 3,201. 3,204

Current portion of the long-term debt 3,750 3,750

70,000 74149

130,000

Shareholders’ equity

Common shares 100 100

Retained earnings 99,900 78,050

100,000 78,150

¢ For business use,

¢ Financial statements are the documents

that report financial information about a

business entity to decision makers.

¢ They tell us how a business 1s performing

and where it stands financially.

Note

¢ In this course, our purpose is not to present the bookkeeping details of accounting, but

to familiarize you with financial statements.

This is to give you the basic information you need to make sound engineering economic

decisions.

Financial management and analysis

Financial Statements — Overview

* For personal use,

¢ The financial statement or net-worth statement is

a snapshot of where you stand financially at a

given point in time.

* Net worth refers to the difference between your

assets (such as cash, investments, and pension

plans) and your liabilities (debts).

¢ In simple terms, your net worth is what you

would be left with if you sold everything and paid

off all you owe.

73

Corporations or Companies issue to their stockholders/shareholders an annual report

containing basic financial statements as well as management’s opinion of the past

year’s operations and the firm’s future prospects.

Managers and investors want to know about the condition of a company at the end

of the fiscal year usually by asking four basic questions?

What is the company’s financial position at the end of the fiscal period?

How well did the company operate during the fiscal period?

On what did the company decide to use its profits?

How much cash did the company generate and spend during the fiscal period?

74

The answer to each of these questions is provided by one of the [=====EE= =

Assets

Year 2

following financial statements: aes

Cash 5,000 3.000

Accounts receivable 55,000 51,600

¢ The balance sheet statement, — on

120,000 116,850

Fixed assets (net)

* The income statement, a a—_ mon

Equipment 50,000 51,837

Building "40,000 40,612

* The statement of retained earnings, and eta) _ «74a

Total assets 300,000 284,299

Liabilities and shareholders’ equity

Current liabilities

* The cash flow statement. Bank overeat 25000 15000

Accounts payable 23,049 37,695

Accrued expenses 15,000 ll 14,500

Note: The accounting period or fiscal year (or operating cycle) Saren vorkndietay ema WES a8

can be any 12-month period covered by the statement, but is —— canal

Heer pase bank debt) Heehelsis) $32,000

usually January | through December 31 of a calendar year. eT

Common shares 100 100

Retained earnings 99,200 78,050

100,000 78,150

For Example for Dell Inc., the accounting period begins on

February I and ends on January 31 of the following year.

~-—--- Beginning of fiscal period (January 1, 2006)

How much profit did the

company make during the

fiscal period?

What did the company

decide to use their

profit for?

How much cash did the

company generate and

spend during the period?

What is the company’s

financial position at

the end of fiscal period?

¥

Income Statement

Statement of

Retained Earnings

Statement of

Cash Flows

Balance Sheet

~-—-—--— End of fiscal period (December 31, 2006)

76

¢ Remember we mentioned earlier that primary responsibilities of engineers in

business is to plan for the acquisition of equipment (capital expenditure) that will

enable the firm to design and produce products economically.

¢ This type of planning will require an estimation of the savings and costs associated

with the acquisition of equipment and the degree of risk associated with execution of

the project.

¢ Such an estimation will affect the business’ bottom line (profitability), which will

eventually affect the firm’s stock price (value) in the marketplace.

¢ Therefore it is important for engineers to understand the various financial statements

in order to communicate with upper management regarding the status of a project’s or

decisions profitability.

77

External constraints

Environmental

regulations

Antitrust laws

Product and workplace

safety rules

Strategic policy

decisions

by management

Operating decisions

Investment decisions

Financing decisions

Accounting information

The balance sheet statement

The income statement

The cash flow statement

Expected financial performance

Expected profitability

Timing of cash flows

Degree of financial risk

Role of engineers

Evaluation of capital

expenditure related to projects

Selection of production

methods used

Assessment of engineering safety

and environmental impact

Selection of types of products or

services produced

Firm’s market value

Stock price

Example

¢ Lets use some data from Dell Corporation to further understand this.

¢ Michael Dell also started his IBM computer in his room at the University of Texas

in 1984.

* The company’s revenue in 2005 was

$49,205 billion which kept them as

worlds number-one supplier of

personal computer systems at the

time.

¢ Dell's global market share of

personal computer sales reached

17.8%.

79

Example

¢ In the company’s 2005 annual report, management

painted an even more optimistic picture for the future,

stating that

¢ Dell will continue to invest in information systems,

research, development, and engineering activities

to support its growth and to provide for new

competitive products.

© We will examine what was in their balance sheet that

allowed to make such a bold statement.

80

* Remember: The Balance Sheet answers the question:

°* What is the company’s financial position at the

end of the reporting period?

* A company’s balance sheet is also called statement of

financial position.

* It reports three main categories of items:

* assets, liabilities, and stockholders’ equity

8|

Example of a Balance Sheet

This is the Balance Sheet from

Dell Inc. for 2005 which is found

in their Annual report for that

year.

January 28, January 30,

2005 2004

Assets

Current assets:

Cash and cash equivalents $ 4,747 $ 4,317

Short-term investments 5,060 835

Accounts receivable, net 4,414 3,635

Inventories 459 327

Other 2,217 1,519

Total current assets 16,897 10,633

Property, plant, and equipment, net 1,691 1,517

Investments 4,319 6,770

Other noncurrent assets 308 391

Total assets $ 23,215 $ 19,311

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable $ 8,895 $ 7,316

Accrued and other 5,241 3,580

Total current liabilities 14,136 10,896

Long-term debt 505 505

Other noncurrent liabilities 2,089 1,630

Total liabilities 16,730 13,031

Commitments and contingent liabilities (Note 8) — —

Stockholders’ equity:

Preferred stock and capital in excess of $.01 par value; shares

issued and outstanding: none — -

Common stock and capital in excess of $.01 par value; shares

authorized: 7,000; shares issued: 2,769 and 2,721, respectively 8,195 6,823

Treasury stock, at cost; 284 and 165 shares, respectively (10,758) (6,539)

Retained earnings 9,174 6,131

Other comprehensive loss (82) (83)

Other (44) (52)

Total stockholders’ equity 6,485 6,280

Total liabilities and stockholders’ equity 95923,215 $ 19,311

Source: Annual Report, Dell Corporation, 2005.

January 28, January 30,

2005 2004

Assets

Current assets:

$ 4,317

835

3,635

327

1,519

10,633

Property, plant, and equipment, net 1,691 1,517

6,770

391

$ 19,311

Cash and cash equivalents

Short-term investments

Accounts receivable, net

Inventories

Other

Total current assets

¢ Assets are arranged in order of

liquidity (convert to cash).

Investments

Other noncurrent assets

Total assets

. . Liabilities and Stockholders’ Equity

* The most liquid assets appear at | current tiabitities:

the top of the page, the least Accounts payable $ 8,895 $ 7,316

. . Accrued and other 5,241 3,580

liquid assets at the bottom of the Total current liabilities 14,136 10,896

p age . Long-term debt 505 505

Other noncurrent liabilities 2,089 1,630

Total liabilities 16,730 13,031

e Cash 1S the most liquid of all Commitments and contingent liabilities (Note 8) — —

oe . Stockholders’ equity:

assets therefore it 1S always listed Preferred stock and capital in excess of $.01 par value; shares

first. issued and outstanding: none — —

Common stock and capital in excess of $.01 par value; shares

authorized: 7,000; shares issued: 2,769 and 2,721, respectively 8,195 6,823

° Current assets are So critical that Treasury stock, at cost; 284 and 165 shares, respectively (10,758) (6,539)

Retained earnings 9,174 6,131

they are separately broken out Other comprehensive loss (82) (83)

and totaled (They are what will Other (44) (52)

. Total stockholders’ equity 6,485 6,280

hold the business afloat for the Total liabilities and stockholders’ equity S923 215 $ 19,311

next year)

Source: Annual Report, Dell Corporation, 2005.

Liabilities are arranged in order

of payment, the most pressing at

the top of the list, the least

pressing at the bottom.

Like current assets, current

liabilities are so critical that they

are separately broken out and

totaled.

They are what will be paid out

during the next year.

January 28, January 30,

2005 2004

Assets

Current assets:

Cash and cash equivalents $ 4,747 $ 4,317

Short-term investments 5,060 835

Accounts receivable, net 4414 3,635

Inventories 459 327

Other 2,217 1,519

Total current assets 16,897 10,633

Property, plant, and equipment, net 1,691 I SY

Investments 4,319 6,770

Other noncurrent assets 308 391

Total assets $ 23,215 $ 19,311

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable $ 8,895

Accrued and other 5,241

Total current liabilities 14,136

Long-term debt 505

Other noncurrent liabilities 2,089

Total liabilities 16,730

Commitments and contingent liabilities (Note 8) —

Stockholders’ equity:

Preferred stock and capital in excess of $.01 par value; shares

issued and outstanding: none

Common stock and capital in excess of $.01 par value; shares

authorized: 7,000; shares issued: 2,769 and 2,721, respectively 8,195 6,823

Treasury stock, at cost; 284 and 165 shares, respectively (10,758) (6,539)

Retained earnings 9,174 6,131

Other comprehensive loss (82) (83)

Other (44) (52)

Total stockholders’ equity 6,485 6,280

Total liabilities and stockholders’ equity S923 215 19,311

Source: Annual Report, Dell Corporation, 2005.

A company’s financial statements are based on

the most fundamental tool of accounting: the

accounting equation.

The accounting equation shows the relationship

among assets, liabilities, and owners’ equity:

Assets = Liabilities + Owners’ Equity

Every business transaction, no matter how

simple or complex, can be expressed in terms of

its effect on the accounting equation.

Regardless of whether a business grows or

shrinks, the equality between the assets and the

claims against the assets 1s always maintained.

January 28, January 30,

2005 2004

Assets

Current assets:

Cash and cash equivalents $ 4747 $ 4317

Short-term investments 5,060 835

Accounts receivable, net 4.414 3,635

Inventories 459 327

Other 2,217 1,519

Total current assets 16,897 10,633

Property, plant, and equipment, net 1,691 1,517

Investments 4319 6,770

Other noncurrent assets 308 391

Total assets $ 23,215 $ 19311

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable $ 8,895 $ 7,316

Accrued and other 5,241 3,580

Total current liabilities 14,136 10,896

Long-term debt 505 505

Other noncurrent liabilities 2,089 1,630

Total liabilities 16,730 13,031

Commitments and contingent liabilities (Note 8) _ —

Stockholders’ equity:

Preferred stock and capital in excess of $.01 par value; shares

issued and outstanding: none

Common stock and capital in excess of $.01 par value; shares

authorized: 7,000; shares issued: 2,769 and 2,721, respectively 8,195 6,823

Treasury stock, at cost; 284 and 165 shares, respectively (10,758) (6,539)

Retained earnings 9,174 6,131

Other comprehensive loss (82) (83)

Other (44) (52)

Total stockholders’ equity 6,485 6,280

Total liabilities and stockholders’ equity $ 23,215 $19,311

Source: Annual Report, Dell Corporation, 2005.

Assets on the Balance Sheet

¢ Current assets can be converted to cash or its equivalent in less than one year. They

generally include three major accounts:

¢ 1. Cash: A firm typically has a cash account at a bank to provide for the funds

needed to conduct day-to-day business. Although assets are always stated in terms

of dollars, only cash represents actual money.

¢ 2. Accounts receivable: This is money that is owed the firm, but has not yet been

received.

¢ For example, when Dell receives an order from a retail store, the company

will send an invoice along with the shipment to the retailer. Then the unpaid

bill immediately falls into the accounts receivable category. When the bill is

paid, it will be deducted from the accounts receivable account and placed

into the cash category.

86

¢ 3. Inventories: This shows the dollar amount that a firm has invested in raw

materials, work in process, and finished goods available for sale.

Case study

January 28, January 30,

2005 2004

Assets

Current assets:

Cash and cash equivalents

Short-term investments

Accounts receivable, net

Inventories

Other

Total current assets

Property, plant, and equipment, net 1,691 1,517

Investments 4,319 6,770

Other noncurrent assets 308 39]

Total assets $ 23,215 $ 19,311

87

Assets on the Balance Sheet

* Fixed assets

° They reflect the amount of money a firm paid for its plant and equipment when it

acquired those assets; these are relatively permanent and take time to convert into

cash.

¢ The most common fixed asset is the physical investment in the business, such as

land, buildings, factory machinery, office equipment, and vehicles.

¢ With the exception of land, most fixed assets have a limited useful life.

* For example, buildings and equipment are used up over a period of years and each

year, a portion of the usefulness of these assets expires (de-valued).

88

Assets on the Balance Sheet

° Fixed Assets:

¢ Therefore a portion of their total cost should be recognized as a depreciation

expense; depreciation denotes the accounting process for this gradual conversion

of fixed assets into expenses.

* Property, plant and equipment, net (in the balance sheet) represents the current

book value of these assets after deducting depreciation expenses.

89

Case study

January 28, January 30,

2005 2004

Assets

Current assets:

Cash and cash equivalents $ 4,747 $ 4,317

Short-term investments 5,060 835

Accounts receivable, net 4.414 3,035

Inventories 459 327

Other Pee AMG) 1,519

Total current assets 16,897 10,633

Property, plant, and equipment, net 1,517

Investments 4,319 6,770

Other noncurrent assets 308 39]

Total assets $ 23,215 $ 19,311

90

Assets on the Balance Sheet

* Other Noncurrent Assets

¢ They include investments made in other companies and intangible assets such as

goodwill, copyrights, franchises, and so forth.

* Goodwill indicates any additional amount paid for a business above the fair

market value of the business. (Here, the fair market value is defined as the price

that a buyer is willing to pay when the business is offered for sale.).

9\

Case study

January 28, January 30,

2005 2004

Assets

Current assets:

Cash and cash equivalents $ 4,747 $ 4,317

Short-term investments 5,060 835

Accounts receivable, net 4.414 3,035

Inventories 459 327

Other Pee AMG) 1,519

Total current assets 16,897 10,633

Property, plant, and equipment, net 1,691 1,517

Investments 4,319 6,770

Other noncurrent assets 308 39]

Total assets $ 23,215 $ 19,311

92

Liabilities and Stockholders’ Equity

The claims against assets are of two types:

liabilities and stockholders’ equity.

The liabilities of a company indicate where the

company obtained the funds to acquire its

assets and to operate the business 1.e. liability

is money the company owes.

Stockholders’ equity is that portion of the

assets of a company which is provided by the

investors (owners) 1.e. stockholders’ equity is

the liability of a company to its owners.

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

Accrued and other

Total current liabilities

Long-term debt

Other noncurrent liabilities

Total liabilities

Commitments and contingent liabilities (Note 8)

Stockholders’ equity:

Preferred stock and capital in excess of $.01 par value; shares

issued and outstanding: none

Common stock and capital in excess of $.01 par value; shares

authorized: 7,000; shares issued: 2,769 and 2,721, respectively

Treasury stock, at cost; 284 and 165 shares, respectively

Retained earnings

Other comprehensive loss

Other

Total stockholders’ equity

Total liabilities and stockholders’ equity

$ 8895 $ 7,316

5,241 3,580

14,136 10,896

505 505

2,089 1,630

16,730 13,031

8,195 6,823

(10,758) (6,539)

9,174 6,131

(82) (83)

(44) (52)

6,485 6,280

$ 23,215 $ 19,311

93

Case study

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

Accrued and other

Total current liabilities

Long-term debt

Other noncurrent liabilities

Total liabilities

Commitments and contingent liabilities (Note 8)

Stockholders’ equity:

Preferred stock and capital in excess of $.01 par value; shares

issued and outstanding: none

Common stock and capital in excess of $.01 par value; shares

authorized: 7,000; shares issued: 2,769 and 2,721, respectively

Treasury stock, at cost; 284 and 165 shares, respectively

Retained earnings

Other comprehensive loss

Other

Total stockholders’ equity

Total liabilities and stockholders’ equity

a

$ 8,895 $ 7,316

5,241 3,580

14,136 10,896

505 505

2,089 1,630

16,730 13,031

8,195 6,823

(10,758) (6,539)

9,174 6,131

(82) (83)

(44) (52)

6,485 6,280 94

ne PPA la) $ 19,311

Liabilities and Stockholders’ Equity

* Current liabilities are those debts which must be paid 1n the near future (normally,

within one year).

¢ The major current liabilities include accounts and notes payable within a year.

Also included are accrued expenses (wages, salaries, interest, rent, taxes, etc.,

owed, but not yet due for payment), and advance payments and deposits from

customers.

¢ Other liabilities include long-term liabilities, such as bonds, mortgages, and

long-term notes, that are due and payable more than one year in the future.

95

Case study

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

Accrued and other

Total current liabilities

Long-term debt

Other noncurrent liabilities

Total liabilities

Commitments and contingent liabilities (Note 8) — —

Stockholders’ equity:

Preferred stock and capital in excess of $.01 par value; shares

issued and outstanding: none — —

Common stock and capital in excess of $.01 par value; shares

authorized: 7,000; shares issued: 2,769 and 2,721, respectively 8,195 6,823

Treasury stock, at cost; 284 and 165 shares, respectively (10,758) (6,539)

Retained earnings 9.174 6,131

Other comprehensive loss (82) (83)

Other (44) (52)

Total stockholders’ equity 6,485 6,280 96

Total liabilities and stockholders’ equity 1 DB SOA ls) $ 19,311

Liabilities and Stockholders’ Equity

¢ Stockholders’ equity represents the amount that is available to the owners after all

other debts have been paid.

* Generally, stockholders’ equity consists of preferred and common stock, treasury

stock, capital surplus, and retained earnings.

¢ Preferred stock is a hybrid between common stock and debt 1.e. in case the

company goes bankrupt, it must pay its preferred stockholders after its debtors,

but before its common stockholders.

¢ Preferred dividend is fixed, so preferred stockholders do not benefit if the

company’s earnings grow (In fact, many firms do not use preferred stock).

97

Liabilities and Stockholders’ Equity

¢ Stockholders’ equity

* Common stock is the aggregate par value (face or true value) of the company’s

stock issued.

¢ Note that companies rarely issue stocks at a discount (1.e., at an amount below

the stated par).

* Normally, corporations set the par value low enough so that, in practice, stock

is usually sold at a premium (price 1s significantly higher than normal).

98

Liabilities and Stockholders’ Equity

¢ Stockholders’ equity

¢ Paid-in capital (capital surplus) is the amount of money received from the sale

of stock that is over and above the par value of the stock.

* Outstanding stock is the number of shares issued that actually are held by the

public. If the corporation buys back part of its own issued stock, that stock is

listed as treasury stock on the balance sheet.

99

Liabilities and Stockholders’ Equity

¢ Stockholders’ equity

* Retained earnings represent the cumulative net income of the firm since its

inception, less the total dividends that have been paid to stockholders.

* In other words, retained earnings indicate the amount of assets that have been

financed by plowing profits back into the business.

¢ Therefore, retained earnings belong to the stockholders.

100

Case study

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable $ 8,895 $ 7,316

Accrued and other 5,241 3,580

Total current liabilities 14,136 10,896

Long-term debt 505 505

Other noncurrent liabilities 2,089 1,630

Total liabilities 16,730 13,031

Commitments and contingent liabilities (Note 8) —

Stockholders’ equity:

Preferred stock and capital in excess of $.01 par value; shares

issued and outstanding: none

Common stock and capital in excess of $.01 par value; shares

authorized: 7,000; shares issued: 2,769 and 2,721, respectively 8,195

Treasury stock, at cost; 284 and 165 shares, respectively (10,758)

Retained earnings 9.174

Other comprehensive loss (82)

Other (44)

6,823

(6,539)

6,131

(83)

(52)

Total stockholders’ equity 6,485

Total liabilities and stockholders’ equity 1 DB SOA ls)

6,280

$ 19,311

101

The second financial report is the income

statement, which indicates whether the company 1s

making or losing money during a stated period,

usually a year.

Most businesses prepare quarterly (every 3 months)

and monthly income statements as well.

The Basic Income Statement Equation:

Revenue — Expenses = Net Income (or Loss)

Fiscal Year Ended

January 28, January 30, January 31,

Net revenue

Cost of revenue

Gross margin

Operating expenses:

Selling. general, and administrative

Research, development, and engineering

Total operating expenses

Operating income

Investment and other income, net

Income before income taxes

Income tax provision

Net income

Earnings per common share:

Basic

Diluted

Weighted average shares outstanding:

Basic

Diluted

Source: Annual Report, Dell Corporation, 2005.

2005 2004 2003

$ 49.205 $ 41,444 $ 35,404

40,190 33,892 29,055

9,015 41552 6,349

4.298 3.544 3,050

463 464 455

4,761 4,008 3,505

4,254 3.544 2.844

191 180 183

4,445 3,724 3,027

1,402 1,079 905

$ 3,043 $2,645 $2,122

$ 121 $1.03 $ 0.82

$1.18 $1.01 $ 0.80

2,509 2,565 2,584

2,568 2.619 2,644

102

Typical components in the income statement

¢ Note: Revenue refers to the income from goods sold and services rendered during a

given accounting period.

* Net revenue represents gross sales (sales without any deduction), less any sales

return and allowances.

* Cost of revenue: The largest expense for a typical manufacturing firm 1s the

expense it incurs in making a product (such as labor, materials, and overhead),

called the cost of revenue (or cost of goods sold).

* Gross margin = Net revenue — Cost of revenue

103

Case study

Fiscal Year Ended

January 28, January 30, January 31,

2005 2004 2003

Net revenue $ 49,205

ost of revenue 40,190

Gross margin 9.015

Operating expenses:

Selling, general, and administrative 4,298 3,544 3,050

Research, development, and engineering 463 464 455

Total operating expenses 4,761 4,008 3,505

Operating income 4,254 3,544 2,844

Investment and other income, net 191 180 183

Income before income taxes 4,445 3,724 3,027

Income tax provision 1,402 1,079 905

Net income $ 3,043 $ 2,645 So 2,122

Earnings per common share:

Basic $ 1.21 $ 1.03 $ 0.82

Diluted $ 1.18 $ 1.01 $ 0.80

Weighted average shares outstanding:

Basic 2,509 2,565 2,584

Diluted 2,568 2,619 2,644 *

Source: Annual Report, Dell Corporation, 2005.

Typical components in the income statement

Operating expenses: These are expenses associated with paying interest (on any

loan), leasing machinery or equipment, selling, staff wages and administration.

Operating income = Gross margin — Operating expenses

Net income (net profit or loss) = Operating income — Income tax

* Note that the income taxes is only from the taxable income.

* Net income is also commonly known as accounting income.

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Case study

Fiscal Year Ended

January 28, January 30, January 31,

2005 2004 2003

Net revenue $ 49,205 $ 41,444 $ 35,404

Cost of revenue 40,190 33,892 29,055

Gross margin 9.015 Gina fs 6,349

Operating expenses:

Selling, general, and administrative

Research, development, and engineering

Total operating expenses

Operating income

Investment and other income, net

Income before income taxes

Income tax provision

Net income

Earnings per common share:

Basic

Diluted

Weighted average shares outstanding:

Basic

Diluted

Source: Annual Report, Dell Corporation, 2005.

$ 1.21 $ 1.03 $ 0.82

$ 1.18 $ 1.01 $ 0.80

2,509 2,565 2,584

2,568 2,619 2,644

106

Typical components in the income statement

* Earnings per Share (EPS)

¢ This is another important piece of financial information provided in the income

statement.

* In simple situations, we compute the EPS as

Net income (available earnings)

EPS =

Number of shares of common stock outstanding

¢ Stockholders and potential investors want to know what their share of profits is, not

just the total dollar amount.

¢ The presentation of profits on a per share basis allows the stockholders to relate

earnings to what they paid for a share of stock. 107

Case study

Fiscal Year Ended

January 28, January 30, January 31,

2005 2004 2003

Net revenue $ 49,205 $ 41,444 $ 35,404

Cost of revenue 40,190 33,892 29,055

Gross margin 9.015 Gina fs 6,349

Operating expenses:

Selling, general, and administrative 4,298 3,544 3,050

Research, development, and engineering 463 464 455

Total operating expenses 4,761 4,008 3,505

Operating income 4,254 3,544 2,844

Investment and other income, net 191 180 183

Income before income taxes 4,445 3,724 3,027

Income tax provision 1,402 1,079 905

Net income

Earnings per common share:

Basic

Diluted

Weighted average shares outstanding:

Basic

Diluted

Source: Annual Report, Dell Corporation, 2005.

3,043 2,645 fis

2,509 2,565

2,568 2,619

2,584

2,644

108

Typical components in the income statement

* Earnings per Share (EPS)

* Naturally, companies want to report a higher EPS to their investors as a means of

summarizing how well they managed their businesses for the benefits of the owners.

¢ Example: Dell earned $1.21 per share in 2005, up from $1.03 in 2004, but it paid no

dividends.

* EPS is generally considered to be the single most important variable in determining a

share’s price (value of a share).

¢ Diluted EPS accounts for any dilutive stock related actions such as employee stock

options

109

Typical components in the income statement

* Retained earnings

* As asupplement to the income statement, many corporations also report their

retained earnings during the accounting period.

* When a corporation makes some profits, it has to decide what to do with those

profits.

* The corporation may decide to pay out some of the profits as dividends to its

stockholders and retain the remaining profits in the business in order to finance

expansion or support other business activities.

¢ Therefore Retained earnings refers to earnings not paid out as dividends but

instead are reinvested in the core business or used to pay off debt. (Note: Retained

earnings are always presented in the Balance sheet) ‘0

Typical components in the income statement

* Retained earnings

¢ When the corporation declares dividends, preferred stock has priority over common

stock since preferred stock pays a stated dividend, much like the interest payment on

bonds.

¢ The dividend is not a legal liability until the board of directors has declared tt.

* However, many corporations view the dividend payments to preferred stockholders

as a liability.

* Therefore, “available for common stockholders” reflects the net earnings of the

corporation, less the preferred stock dividends.

Typical components in the income statement

* Retained earnings

* When preferred and common stock dividends are subtracted from net income, the

remainder is retained earnings (profits) for the year.

* As mentioned previously, these retained earnings are reinvested into the business.

112

Note that the income statement only indicates whether the company was making or losing

money during the reporting period.

Therefore, the emphasis was on determining the net income (profits) of the firm for

supporting its operating activities.

However, the income statement ignores two other important business activities for the

period: financing and investing activities.

Therefore, we need another financial statement - the cash flow statement, which details

* how the company generated the cash it received

* how the company used that cash during the reporting period

113

The difference between the sources (inflows) and uses (outflows) of cash represents the

net cash flow during the reporting period.

This is a very important piece of information, because investors determine the value of an

asset (or, indeed, of a whole firm) by the cash flows it generates.

A firm’s net income is important, but cash flows are even more important because the

company needs cash to pay dividends and to purchase the assets required to continue its

operations.

114

* Note: the goal of the firm should be to maximize the price of its stock.

¢ Therefore, investment decisions are made on the basis of cash flows rather than profits.

¢ For such investment decisions, it is necessary to convert profits (as determined in the

income statement) to cash flows.

115

Typical components in the Cash Flow

statement

Fiscal Year Ended

January 28, January 30, January 31,

2005 2004

Cash flows from operating activities:

Net income

Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation and amortization 334 263 211

Tax benefits of employee stock plans 249 181 260

Effects of exchange rate changes on monetary

assets and liabilities denominated in foreign

currencies

Other

Changes in:

Many companies prepare their cash flow

statements by identifying the sources and uses

of cash based on the types of business

activities.

Operating working capital 755 872 1,210

Noncurrent assets and liabilities 453 273 212

Net cash provided by operating activities

Cash flows from investing activities:

Investments:

Purchases (12,261) (12,099) (8,736)

Maturities and sales 10,469 10,078 7,660

Capital expenditures (525) (329) (305)

Purchase of assets held in master lease facilities _ (636) —

The cash flow statements will have three cash

flow major components:

Cash assumed in consolidation of Dell Financial

Services, L.P. — 172 —

(2,317) (2,814) (1,381)

Net cash used in investing activities

Cash flows from financing activities:

Repurchase of common stock (4,219) (2,000) (2,290)

Issuance of common stock under employee plans

and other 1,091 617 265

(3,128) (2,025)

* Cash flows from Operating activities

* Cash flows from Investing activities

* Cash flows from Financing activities

Net cash used in financing activities

Effect of exchange rate changes on cash and cash

equivalents 565 612 459

Net increase in cash and cash equivalents 430 85 59]

Cash and cash equivalents at beginning of period 4,317 4,232 3,641

Cash and cash equivalents at end of period $4,747 $ 4,317 $4,232

Typical components in the Cash Flow statement

¢ Operating activities

* It begins with the net change in operating cash flows from the income statement.

* Operating cash flows represent those cash flows related to production and the sales

of goods or services.

¢ All non-cash expenses are simply added back to net income (or after-tax profits).

* For example, an expense such as depreciation is only an accounting expense (a

bookkeeping entry). Although we may charge depreciation against current income as

an expense, it does not involve an actual cash outflow. The actual cash flow may

have occurred when the asset was purchased.

117

Case study

Fiscal Year Ended

January 28, January 30, January 31,

2005 2004 2003

Cash flows from operating activities:

Net income $ 3,043 $ 2,645 $ 2,122

Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation and amortization 334 263 211

Tax benefits of employee stock plans 249 181 260

Effects of exchange rate changes on monetary

assets and liabilities denominated in foreign

currencies (602) (677) (537)

Other 78 113 60

Changes in:

Operating working capital 1,755 872 1,210

Noncurrent assets and liabilities 453 273 212

Net cash provided by operating activities 5,310 3,670 3,538

Typical components in the Cash Flow statement

* Investing activities

* Once we determine the operating cash flows, we consider any cash flow transactions

related to investment activities, which include

* purchasing new fixed assets (cash outflow),

* reselling old equipment (cash inflow), and

¢ buying and selling financial assets.

119

Case study

Cash flows from investing activities:

Investments:

Purchases

Maturities and sales

Capital expenditures

Purchase of assets held in master lease facilities

Cash assumed in consolidation of Dell Financial

Services, L.P.

Net cash used in investing activities

(12,261) (12,099) (8,736)

10,469 10,078 7,660

(525) (329) (305)

— (636) —

= 172 =

(2,317) (2,814) (1,381)

120

Typical components in the Cash Flow statement

Financing activities

¢ Finally, we detail cash transactions related to financing any capital used in business.

* For example, the company could sell more stock, resulting in cash inflows.

¢ Paying off existing debt is also accounted since it will result in cash outflows.

Case study

Cash flows from financing activities:

Repurchase of common stock (4,219)

Issuance of common stock under employee plans

and other 1,091

Net cash used in financing activities (3,128)

(2,000) (2,290)

617 265

(1,383) (2,025)

Typical components in the Cash Flow statement

¢ Asummary of cash inflows and outflows from three activities for a given accounting

period is also provided in order to obtain the net change in the cash flow position of the

company.

Case study

Effect of exchange rate changes on cash and cash

equivalents 565 612 459

Net increase in cash and cash equivalents 430 85 591

Cash and cash equivalents at beginning of period 4,317 4,232 3,641

Cash and cash equivalents at end of period $ 4,747 $ 4,317 $ 4,232

Case study:

A summary of Dell’s

Financial statements

for 2005

(all data is in “USD

million”)

January 28, January 30,

Balance Sheet 2005 2004

Cash and cash equivalent 4,747 4,317

Accounts receivables, net 4.414 3,635

Inventories 459 327

Total current assets 16,897 10,633

Total assets 23,215 19,311

Total current liabilities 14,136 10,896

Long-term debt 505 505

Total liabilities 16,730 13,031

Common stock 8,195 6,823

Retained earnings 9,174 6,131

Total stockholders’ equity 6,485 6,280

Income Statement

Net revenue 49,205 41,444

Gross income (margin) 9,015 7,522

Operating income (margin) 4,254 3,544

Net income (margin) 3,043 2,645

Statements of Retained Earnings

Beginning retained earnings 6,131 3,486

Net income 3,043 2,645

Ending retained earnings 9,174 6,131

Statement of Cash Flows

Net cash from operating activities 5,310 3,670

Net cash used in investing activities (2,317) (2,814)

Net cash used in financing activities (3,128) (1,383)

Effect of exchange rate changes 565 612

Beginning cash position 4,317 4,232

Ending cash position 4,747 4,317

January 28, January 30,

Balance Sheet 2005 2004

Cash and cash equivalent 4,747 4,317

Accounts receivables, net 4.414 3,635

Lo. . . Inventories 459 327

~——-—-— Beginning of fiscal period (January 1, 2006)

Total current assets 16,897 10,633

How much profit did the Total assets 232 | 5 19,31 1

company make during the J- = > | Income Statement

fiscal period? Total current liabilities 14,136 10,896

: Long-term debt 505 505

What did the company Statement of S oo

decide to use their =—— : , Total liabilities 16,730 13,031

; Retained Earnings

profit for?

Common stock 8,195 6,823

How much cash ae ihe _ Statement of Retained earnings 9,174 6,131

company generate an Cash Flows Total stockholders’ equity 6,485 6,280

spend during the period?

Income Statement

What is the company’s Net revenue 49,205 41,444

financial position at -> | Balance Sheet Gross income (margin) 9.015 7,522

/ |_ the end of fiscal period? Operating income (margin) 4,254 3,544

/

/ Net income (margin) 3,043 2,645

~«—-—--— End of fiscal period (December 31, 2006) Statements of Retained Earnings

Beginning retained earnings 6,131 3,486

Net income 3,043 2,645

Ending retained earnings 9,174 6,131

Statement of Cash Flows

Net cash from operating activities 5,310 3,670

Net cash used in investing activities (2,317) (2,814)

Net cash used in financing activities (3,128) (1,383)

Effect of exchange rate changes 565 612

Beginning cash position 4,317 4,232

Ending cash position 4,747 4,317