Asme

John B. Kitto, Jr., PE Fellow, ASME The Babcock & Wilcox Company

(Portions of this material have been adapted from ASME Management Skills Seminar) (Part 2B is copyrighted by John B. Kitto, Jr., 2002) Copyright 2002 by ASME International All Rights Reserved

TABLE OF CONTENTS
PART 1: PARTICIPANT NOTES Workbook Section …………………………………………………………..3

PART 2: BACKGROUND TEXT A. B. Evaluating BusinessPerformance …………………………………..47 Engineering Project Financial Evaluation & Justification …………..62 Bibliography …………………………………………………………76 Appendix 1 – Glossary ………………………………………………77 Appendix 2 - Typical U.S. Tax Depreciation Schedules (1997) …….79 Appendix 3 – Financial Data for Exercises (GTR Company) ……….80

Part 1: Workbook

3

Economics of Doing Business Financial Evaluation for Engineers

1

4Doing Business
Part A Evaluating Your Business
–Balance sheet / income statement –Financial ratios –Other topics

Part B Engineering Project Financial Evaluation
–Definitions –Cash flow analysis –Financial indicators and results
2

•Major points the course will cover

5

Balance Sheet
• Financial position • End-of-year • Monthly, quarterly

3

•A balance sheet is an instantaneous picture of afirm’s financial position.

6

Balance Sheet
• Assets
– Cash & securities – Receivables – Inventories – Other current assets

• Claims
– – – – – Current liabilities Long-term debt Preferred stock Common stock Retained earnings

• TOTAL Current Assets
– Fixed assets – less depreciation

• TOTAL ASSETS

• TOTAL CLAIMS

4

•Definitions of Balance Sheet terms.

7

Income Statement
– – – – + –
5

Salesrevenue Cost of goods sold Gross profit Selling and administration Depreciation Operating profit Interest payment Extraordinary items Profit before tax Taxes Net Income (earnings)

Revenues

Earnings

•An Income Statement documents operations over time. •Definition of Income Statement terms.

8

Accounting Cycle – Balance Sheet and Income Statement
Balance Sheet
Liabilities

Income
SalesExpenses

Balance Sheet
Liabilities

Assets
Owner’s Equity

Assets
Owner’s Equity

Profits

1 Accounting Cycle

6

•The Accounting Cycle integrates the income statement with the balance sheets at the beginning and ending of a period.

9

The Cost Cycle
Direct Labor Allocated Costs

Raw Materials

Work in Process

Finished Goods

Sales

Purchases

Variable Overhead

7

•The Cost Cycle helps: §Determinebreakeven §Establish budget levels §Measure performance

10

Cash Flow
• Ultimately cash has to change hands • Barrier between solvency and bankruptcy • Balance sources and uses of cash

8

•The third financial statement – cash flow – is one of the most important statements.

11

Cash Flow
(or Sources and Uses of Funds)
From Operations & Investing Annual After Tax Profit Depreciation (non-cashexpense) Changes in Working Capital Receivables Payables Inventory Other Current Assets (example: Prepaid Expense) Reserves (tax, warrantee, etc.) Addition (sale) of Property, Plant & Equipment From Financing (& Investing) Short-Term Borrowing Long-Term Debt Sale (repurchase) of Equity Dividends Net Change in Cash Position
9

+ + –/+ +/– –/+ –/+ + / -– +/– +/– +/– – +/–

•Cash comes from and is usedin three areas: •Operations •Investing (new equipment) •Financing (loans and equity)

12

The Tool Kit — Ratios
• Profitability • Liquidity • Leverage or debt management • Asset utilization

10

•Key financial ratios are the tools for business evaluation.

13

Profitability $ $ $
Gross Profit Margin =
Rev – Cost of Goods Rev Net Profit After Tax Rev

Net Profit Margin =

11

•Profits are acompany’s lifeblood. •Gross Profit Margin measures total margin to pay expenses. •Net Profit Margin is the bottom line to the shareholders. •Can you relate these examples to your personal finances?

14

Assets â Profits $ $ $
Return on = Assets
Earnings Before Interest After Tax Total Assets

Return on Equity = Earnings After Interest, Tax, Pref. Div.
Equity

12

•ROI measures management’s ability...