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COMM 103 Exam Notes.docx

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Queen's University
COMM 103

COMM 103 Exam Notes Income Statement Gross Revenue/Sales (Quantity x Price) Less: Cost of Goods Sold (Quantity x Unit Cost) = GROSS PROFIT Less: General operating expenses such as wages, administration, rent, utilities, legal, R&D, marketing, etc. – fixed or step costs = Earning before interest and taxes (EBIT) Less: Interest Expense = Earning before taxes (EBT) Less: Corporate income tax (assuming not a loss) = Net income/profit Cash Flow Statement  Net cash results from income statement and operational activities + net cash impact form investing activities + net cash impact from financing activities = changes to cash position  Summarizes the sources and uses of cash  How a firm used its cash resources during a specific period of time  Provides insight into the current and projected liquidity position of a firm  Often one of the most important financial documents Cash from operating activities + Net Profit (- Net loss) – income statement + Depreciation – income statement + Deferred taxes – income statement + Increase in accounts payable – balance sheet - Increase in AR – balance sheet - Increase in inventory – balance sheet + Other non cash items = Net cash results from income statement and operating activities Cash from financing activities + Bond issuance/other debt instruments – balance sheet + Stock/equity issuance – balance sheet - Repayment of debt – balance sheet - Repurchase of stock – balance sheet - Dividends – balance sheet = Net cash results from financing activities Cash from investing activities + Sale of property, plant and/or equipment – I/S or B/S - Purchase of property, plant and/or equipment – I/S or B/S - Construction in progress – I/S or B/S = Net cash results from investing activities Finale + Net cash from income statement and operating activities + Net cash from financing activities + Net cash from investing activities + Cash, beginning of the year = Cash end of year Ratios Profitability Ratios – assessing the amount of income the organization has earned in comparison to the operating activity that has taken place and the assets that have been used to support its generation 1. Return on sales (ROS) – percentage of sales the company has generated that actually represent profit 2. Return on assets (ROA) – reflects how productive the development of assets was in producing income for the organization 3. Return on equity (ROE) – amount of net income that was earned on each dollar of invested capital provided by the business’s owners 4. Earnings per share (EPS) – return that individual investors would recognize for each share of stock that they owned Solvency and Liquidity Ratios – analyze the financial obligations that an organization has against its financial resources in order to determine whether the organization possesses sufficient capital to meet upcoming needs 1. Current ratio – shows the relationship between an organization’s current assets and its current liabilities 2. Quick Ratio – looks to remove from the current ratio calculation those assets that are not calculation those assets that are not so easily converted into cash immediately and therefore would take time to generate cash from in the event of a need for immediate cash resources 3. Solvency ratio – assess the ability of an organization to meet its long-term financial obligations Debt Ratios – focus on the amount of debt an organization has taken on, the relationship of this debt value against its total asset base, and the ability of the organization to meet its debt servicing (payments) obligations 1. Debt to asset ratio – value of the debt that has been taken on by an organization and the value of its total assets – how much of the asset base of the organization has been created via debt financing and identifies the amount of financial leverage the organization has assumed to build the business 2. Debt to equity ratio – amount of debt that has been taken on and the equity position of its investors – calculates the amount of money an organization has borrowed in order to fund the creation of its asset base, against the amount of money that investors have provided 3. Times interest earned ratio – organizations make interest payments out of their cash flow, and this obligation is typically budgeted to be taken out of revenues and the profit that is derived from the organization’s business operations – identifies if the organization is generating sufficient profit to meet its interest obligations Activity Ratios – assess the efficiency and effectiveness of key components of an organization’s operations – how effectively the organization is utilizing its asset base, where changes in cash flow could be negatively impacting cash operating cycle, how well capital is being utilized in support of the organization’s strategic and tactical decisions 1. Days receivable – number of days it takes to convert accounts receivable to cash 2. Inventory turnover – ability of a company to turn its inventory into cash – number of days products sit inventory and the number of times the inventory is turned over in a given period Leverage analysis – the amount of debt an organization uses in order to finance its asset base  A firm whose liabilities represent a significant portion of its assets is considered to be highly leveraged  Profitable: EBIT of a firm is sufficient to cover its interest expenses, investors can realize higher percentage returns by employing debt financing to assist in the profitability of growth  Loss: EBIT is not sufficient to cover the interest expense obligations of an organization, the loss that the organization incurs will be greater than if leverage were not employed  By using someone else’s money (creditors) investors can improve their returns for each dollar invested  Leverage can benefit investors assuming that sufficient net income is earned  If an organization chooses to use a significant level of debt financing, and the end result is an operating loss, the impact to investors would be greater than the loss that would have occurred had leverage not been utilized How to Assess a Case Situation 1. Identify strategy a. Purpose – mission of the organization and vision its managers/owners have for the business i. Mission – defines purpose or reason for existence/reflects on how it will achieve broad goals – combined with ethics policy, statement of behaviour, values ii. Vision – forward-thinking statement that defines what a company wants to become and where it is going b. Markets – market/market segments business sees itself competing in, marketing exit strategies, harvesting – reduced commitment to a particular market given its perceived weak future growth or profitability c. Products and services – which products and relative services are to remain part of business’s portfolio and which are to receive additional R&D support, and which are to be added and financing options reviewed – obsolescence, technological innovation, changing needs/tastes, substitutes d. Resources – allocation in support of strategic decisions – capacity/limitations – monetary, variety of tasks, acquire expertise or need to modify plans due to lack of competencies/technology e. Business system configuration – modifying infrastructure f. Responsibility and accountability – key objectives and who will be responsible for their attainment – SMART (specific, measurable, actionable, realistic, time-specific) – which customer segments will be attacked, how much money will be provided for promotional purposes, how staff will be rewarded for success 2. Stages of strategic planning process a. Revisiting your purpose b. I/E analysis – understanding external and internal environment c. View on the world – options/competitive advantage d. Strategic choices – opportunities that make sense given market position, resources, environmental dynamics, threats e. Strategy implementation – plan, performance indicators, execution 3. I/E analysis – company analysis, customer analysis, macroeconomic analysis and competitor analysis a. External i. PESTEL (political, economic, societal, technological, environmental, legal) – guides in developing an understanding of the macro- environment ii. Porters 5 Forces (rivalry, new entrants, substitutes, suppliers, buyers) – guides in understanding the dynamics of the industry iii. Competitor SWOT (strengths, weaknesses, opportunities, risks) – size up competition b. Internal i. Company SWOT ii. 3Cs (competencies, capabilities, capacity) – with respect to the resources possessed iii. Customer decision-making process and trends Strategy Strategy - Development of plans and decisions that will guide the direction of the firm and determine its long-term performance  How it intends to compete, what it will use as leverage in competing for market share and the marketing and operating plans needed to effectively and efficiently execute Tactics – Immediate term actions that a firm will executes in order to meet the short-term objectives set forth in the current planning cycle (3 key compo
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