FS Exercise

8/12/2019 FS Exercise

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Income Statement

Constructing an Income Statement

Use the following information to construct an income statement for Gap, Inc. (GPS).

The Gap is a specialty retailing company that sells clothing, accessories, and personal

care products under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brand

names. Use the scrambled information below to calculate the firms gross profits,

operating income, and net income for the year ended January 31, 2009. Calculate thefirms earnings per share and dividends per share.


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Income Statement


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Income Statement


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Evaluating a Firms EPS

EPS = Net income Number of sharesoutstanding

Example 1: A firm reports a net income $90 million and has 35million shares outstanding, what will be the earnings pershare (EPS)?

EPS = Net income Number of shares= $90 million $35 million

= $2.57


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Income Statement: Check Yourself

Reconstruct the Gaps income statement assuming the firm is able to cut itscost of goods sold by 10% and where the firm pays taxes at 40% tax rate.

What is the firms net income and earnings per share?


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Picture the IS

Revenues

Less: Cost of goods sold

Equals Gross

profitLess: Operating expenses

Equals: net

Operating income

Less: Interest expense

Equals: earnings

Before taxes

Less: Income taxes

Equals:NET INCOME


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Finishing the Math

Revenues = $14,526,000,000

Less: Cost of goods sold

= $8,171,100,000

Equals: profit

=$6,354,900,000Less: Operating expenses

=$3,899,000,000Equals: net

Operating income

=$2,455,900,000

Less: Interest expense

=$1,000,000Equals: earnings

Before taxes

=$2,454,900,000Less: Income taxes (40%)

=$9,819,600,000

Equals:NET INCOME=$1,472,940,000


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Conclusion

The firm is profitable since it earned net

income of $1,472,940,000.

The shareholders were able to earn $2.06 per

share.New EPS:= net income #of shares

= $1,472,940,000 716,296,296= $2.06


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The

Balance

Sheet


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Balance Sheet

Constructing a Balance SheetConstruct a balance sheet for Gap, Inc. (GPS) using the following list of jumbled

accounts for January 31, 2009. Identify the firms total assets and net working capital:


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Balance Sheet


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The Balance Sheet

Speaking in Finance.


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Balance Sheet: Check Yourself

Reconstruct the Gaps balance sheet to reflect the repayment of $1 billion inshort-term debt using a like amount of the firms cash. What is the balance for

total assets and current liabilities?


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Our New Balance Sheet

CashInventoriesOther currentassets

756,000,0001,506,000,000

743,000,000

Current liabilities 1,158,000,000

Total current

assets

3,005,000,000 Total current

liabilities

1,158,000,000

Net Property,Plant andequipment

2,993,000,000 Long-termliabilities

1,019,000,000

Other long-term

assets

626,000,000 Common Equity 4,387,000,000

Total Assets $6,564,000,000 Total Liabilitiesand Equity

$6,564,000,000


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Conclusion

We can make the following observations from Gaps Balance

sheet:

The total assets of $6,564,000,000 is financed by

a combination of current liabilities, long-termliabilities and owners equity. Owners equity

accounts for $4,387,000,000 of the total.

The firm has a healthy net working capital of

$1,847,000,000 (3,005,000,000 minus1,158,000,000).


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Cash Flow Statement

Recall:

Source of cash is any activity that brings cash

into the firm. For example, sale of equipment.

Use of cash is any activity that causes cash to

leave the firm. For example, payment of taxes.


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Require Financial

Statement:Balance Sheet


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Cash Flow Analysis

Why did the cash balance decline by $4.5

million from 2009 to 2010?

1.Accounts receivable increased by $22.5 million

representing an increase in uncollected cash

from credit sales. Thus it represents $22.5m of

use of cash to invest in accounts receivable.


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Cash Flow Analysis (cont.)

2. Inventory increased by $148.50 million

indicating use of cash to procure inventory.

3. Equipment increased by $175.50 million

indicating use of cash to invest in equipment.

In general,

an increase in an asset account = use of cash


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4. Accounts Payable, credit extended to the firm,

increased by $4.5million. Thus source of cash

increased by $4.5million due to accounts

payable.

5. Long-term debt increased by $51.75 million

indicating a source of cash.

6. Short-term debt decreased by $9 million

indicating use of cash to pay off the debt.


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7. Retained earnings increased by $159.75

million representing a source of cash to the

firm from the firms operations.

In general,

An increase in a liability account = source of cash


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Change in cash balance = Sources of cash

Use of Cash = $216 - $220.50 = -$4.50

Sources of Cash Uses of Cash

Increase in Accounts Payable= $4.50

Increase in Accounts Receivable$22.50

Increase in long-term debt=$51.75

Increase in inventory =$148.50

Increase in retained earnings =

$159.75

Increase in net plant and

equipment = $40.50

Decrease in short-term notes =$9

Total Sources of cash =$216.00

Total Uses of cash = $220.50


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An analysis of H.J. Boswells operations reveals the following

for 2010:

The firm used more cash than it generated,

resulting in a deficit of $4.5 million The primary source of cash flow was retained

earnings ($159.75 million) followed by long-term

debt ($51.75 million)

The largest use of cash was for acquiring inventoryat $148.5 million.


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Cash Flow Analysis Summary

Sources of Cash Uses of Cash

Decrease in an asset

account

Increase in an asset

accountIncrease in a liabilityaccount

Decrease in a liabilityaccount

Increase in an owners

equity account

Decrease in an owners

equity account


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H.J. Boswell,

Inc.Statement of

Cash Flows


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Interpreting the SCF

You are in your second rotation in the management training program at a firm that finance new start up and

your supervisor calls you into her office on Monday morning to discuss your next training rotation. When you

enter her office you are surprised to learn that you will be responsible for compiling a financial analysis of new

venture. Thus, your boss askes you to practice with this Chesapeake Energy Inc. (CHK). Your boss suggests that

you begin your analysis by reviewing the firms cash flow statements for 2004 through 2007 (found below):


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Analysis


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Your Verdict

FS Exercise

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