# Balance Sheet and Financing Afn Essays

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LESSON 1

FINANCIAL STATEMENT ANALYSIS
Basic Financial Statements

Balance Sheet: financial statement that provides a snapshot of a venture’s financial position as of a specific date

Income Statement: financial statement that reports the revenues generated & expenses incurred over an accounting period

Statement of Cash Flows: shows how cash, reflected in accrual accounting, flowed into & out of a firm during a specific period of operation

Operating Breakeven Analysis

Variable Expenses: costs or expenses that vary directly with revenues

Fixed Expenses: costs that are expected to remain constant over a range of revenues for a specific time period

EBITDA: earnings before interest, taxes, & depreciation & amortization

EBDAT: earnings before depreciation, amortization, & taxes

EBDAT Breakeven: amount of revenues (survival) needed to cover cash operating expenses

Cash Flow Breakeven: cash flow at zero for a specific period (EBDAT = 0)

Survival Breakeven Analysis

Basic Equation:

EBDAT = Revenues (R) - Variable Costs (VC) – Cash Fixed Costs (CFC)

Where: CFC includes both fixed operating (e.g., general & administrative, & possibly marketing expenses) & fixed financing (interest) costs

When EBDAT is Zero: R = VC + CFC
Breakeven Level of Survival Revenue

Starting Point:

Ratio of variable costs (VC) to revenues (R) is a constant (VC/R) & is called the Variable Cost Revenue Ratio (VCRR)

Survival Revenues (SR) = VC + CFC

Rewriting, CFC = SR – VC

By substitution, CFC = SR[1 – (VCRR)]

Solving for SR, SR = [CFC/(1 – VCRR)]
NOPAT Breakeven Analysis

Economic Value Added (EVA): measure of a firm’s economic profit over a specified time period

NOPAT: net operating profit after taxes or EBIT times one minus the firm’s tax rate

NOPAT Breakeven Revenues (NR): amount of revenues needed to cover a venture’s total operating costs

Basic Equation: NR = TOFC/(1 – VCRR)

Where: TOFC is the total operating fixed costs which consist of cash operating fixed costs (excluding interest expenses) plus noncash fixed costs (e.g., depreciation)

Breakeven Drivers

1. Contribution Profit Margin = 1 – VCRR

higher contribution profit margins mean lower levels of survival revenues are needed to break even (EBDAT = 0)

2. Amount of Cash Fixed Costs

lower cash fixed costs result in lower levels of survival revenues needed to breakeven (EBDAT = 0)

Financial Ratios and Analysis

Financial Ratios: show the relationship between two or more financial variables

Trend Analysis: used to examine a venture’s performance over time

Cross-sectional Analysis: used to compare a venture’s performance against another firm at the same point in time

Industry Comparable Analysis: used to compare a venture’s performance against the average performance in the same industry

Financial Forecasting Process

The Financial Forecasting Process contains the following steps:

Sales forecast

Identify spontaneous assets & liabilities

Project Balance Sheet

Reconcile Balance Sheet to Income Statement

Project Income Statement

Simulation