Über die Autorin bzw. den Autor

Francis J. Clauss, Ph.D., teaches in theMBA program at Golden Gate University'sSchool of Business. He earned his Ph.D.from the University of Michigan and hasboth technical and management experiencein the steel, chemical, and aerospace industries.He lives in Palo Alto, California.

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Executive guidance forenhancing business managementthrough spreadsheets

Learning from spreadsheet models is cheaper, faster, and less hazardous than learning in the realworld. Corporate Financial Analysis with Microsoft® Excel® contains numerous examples demonstratinghow to use spreadsheet models to help you manage more effectively under a wide range ofconditions and assumptions. You’ll learn how to use Excel’s powerful tools to:

• Perform sensitivity analysis and alert managers to the financialimpact of unexpected conditions that might occur
• Identify the best strategies to maximize profits,minimize costs, and achieve other goals
• Use Monte Carlo simulation to provide a complete picture of the risksand probabilities of doing business in an uncertain environment

Corporate Financial Analysis with Microsoft® Excel® provides practical, real-life examples to help yourelate to both the quantitative and qualitative sides of business management. In addition to usingspreadsheets for analysis, you will learn how to apply them in management presentations that areconvincing, and be able to justify your recommendations.

Corporate Financial Analysis with Microsoft® Excel® helps you become a better manager and decisionmaker—not just a skilled spreadsheet programmer. In today’s evolving markets, it is a must-havetoolbox of skills for every manager.

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CORPORATE FINANCIAL ANALYSIS with MICROSOFT EXCEL

The McGraw-Hill Companies, Inc.

Contents

Chapter One

Management Skills

• Identify the three key financial statements of corporations (i.e., the income statement, balance sheet, and statement of cash flows) and describe their contents and purposes.

• Follow the standard formats for organizing items on financial statements.

• Interpret the items on financial statements and recognize how they're related.

• Recognize when errors have been made in financial statements.

Spreadsheet Skills

• Create spreadsheets for financial statements.

• Organize the content of spreadsheets in logical formats.

• Label rows and columns to communicate clearly as well as to calculate correctly.

• Enter data values to show the basis for calculated values.

• Formulate and enter expressions to calculate values.

• Wrap text in rows or columns.

• Use cell references in expressions for calculated values that link the cells to other cells with data or other calculated values.

• Format values.

• Hide rows or columns of financial statements so that only selected ones are displayed.

• Link worksheets so that entries or values on one worksheet can be used for calculating values on another worksheet in the same workbook.

• Use Excel's Formula Auditing tool to examine cell linkages.

• Where possible, include tests that automatically detect errors or validate results.

Overview

A firm's financial health is summarized in three key financial reports: (1) the income statement, (2) the balance sheet, and (3) the cash flow statement. These reports summarize detailed information on a firm's financial actions during the preceding fiscal year and its financial position at the end. The Securities and Exchange Commission (SEC) requires every corporation to include these reports in its annual stockholders' report for at least the two most recent years.

Annual statements cover one-year periods ending at a specified date. For most firms, the ending date is the end of the calendar year. Many large corporations, however, operate on 12-month cycles (or fiscal years) that end at times other than December 31. In addition to annual reports to stockholders, corporations usually prepare monthly statements to guide a corporation's executives, as well as quarterly statements that must be made available to stockholders of publicly held corporations.

Financial statements are based on values from a firm's cost accounting system. The statements follow the generally accepted accounting principles (GAAP) recommended by the Financial Accounting Standards Board (FASB), which is the accounting profession's rule-setting body. In addition to the financial statements, annual stockholders' reports usually contain the president's letter and historical summaries of key operating statistics and ratios for the past five or ten years.

The information in financial statements is used in several ways. Regulators, such as federal and state security commissions, use it to enforce compliance by providing proper and accurate disclosures to stockholders and investors. Lenders or creditors use the reports to evaluate the credit rating of firms and their ability to meet scheduled payments on existing or contemplated loans. Investors base their decisions to buy, sell, or hold the corporation's stock on the information in the reports. Corporate financial managers use the information to ensure compliance with regulatory requirements, to satisfy creditors and shareholders, and to monitor the firm's performance. They also use the information to determine the value of other firms they are thinking of buying, or the value of their own firms as a basis for negotiating a selling price. Employees peruse financial statements to assess how well their firm is doing and to compare its current performance with earlier periods. Corporate executives and boards of directors often view their annual stockholders' reports as tools for marketing the company and its products and for building or improving their image.

This chapter shows how to use Excel to prepare financial statements. It defines the meanings of the financial entries and identifies the formulae for using data values of some to calculate values for others. The printouts in this chapter include column headings, row numbers, and grid lines to help identify the cells where the formulas are entered. These can be eliminated when printing the spreadsheets in reports. (Use the Sheet tab on File/Page Setup to show or hide them.)

The three financial statements have interlocking relationships to one another. Excel makes it possible to link cell entries in one worksheet to cell entries in another so that changing data values on either worksheet changes related entries on the other.

Preparing a spreadsheet begins with understanding its purpose: who will read it, what items it will contain, and how the items are related. Values for the items will be either data values or calculated values.

The Income Statement

Income statements provide a financial summary of a firm's operation for a specified period, such as one year ending at the date specified in the statement's title. They show the total revenues and expenses during that time. An income statement is sometimes called a "profit and loss statement," an "operating statement," or a "statement of operations." Essentially, it tells whether or not the firm is making money.

Note that the income statement does not show cash flows or reflect the company's cash position. (The cash flow statement does that.) Certain items, such as depreciation, are an expense although they do not involve a cash outlay. Some items, such as the sale of goods or services, are recognized as income even though buyers have not yet paid for them. Other items, such as purchased materials, are recognized as expenses even though the firm has not yet paid for them. Such income and expense items are recorded when they are accrued (e.g., when sold goods are shipped), not when cash actually flows.

General Format

Figure 1-1 shows the basic elements of an annual income statement. It indicates the essential information that must be provided and the standard format. Annual income statements for large corporations are organized in the same format as Figure 1-1. However, they often have a number of subdivisions with additional detail for selected items.

The income statement is organized into several sections. The upper section (Rows 4 to 15 of Figure 1-1) reports the firm's revenues and expenses from its principal operations. Below that (Rows 16 to 24) are nonoperating items, such as financing costs (e.g., interest expense) and taxes.

The so-called "bottom line" (Row 25) reports the firm's net income, or the net earnings that are available to the firm's stockholders. Holders of preferred stock are first in line to be paid from the firm's net income. They receive dividends in an amount that is fixed by the terms of the preferred stock. What is left is the "net earnings available for common stockholders" (Row 27). The last item is also expressed as the earnings per share (Row 28).

Firms generally divide the net earnings available for common stockholders between retained earnings and dividends paid to common stockholders...