writing task
MSA 643
Sport Finance and Budgeting Belhaven University
Unit 5
Financial Statements, Forecasts, Planning,
and Spending Earnings
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This unit will discuss the nuts and bolts of
financial statements, and show how cash flow is
derived from these basic financial documents
Additionally, the steps involved in financial forecasting
and planning will be introduced.
It will also describe the basic accounting statements that
businesses use for reporting purposes.
Lastly, the unit will conclude discussing retained
earnings, dividends, and legal concerns with mergers
and acquisitions.
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Introduction
Types of Financial Statements
Types of Financial Ratios
Spending Earnings
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Topics
Identify the elements of the balance sheet.
Identify the elements of the income statement.
Discuss the cash flow statement and relate it to the income statement and
the balance sheet.
Define common financial ratios used to assess an organization’s liquidity,
activity, financial leverage, profitability, and inventory as well as the firm’s
collection cycle.
Describe various types of dividend policies and how they are used.
Describe various types of dividend policies and how they are used.
Outline the dividend payment process.
Describe how a business utilizes retained earnings.
Understand how mergers and acquisitions are a way for a sport business
to expand.
Describe the legal concerns associated with mergers and acquisitions.
Calculate the value of a consolidated business after a merger.
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Objectives
Financial Statements, Forecasts,
and Planning
Current Versus Fixed Assets
Current Assets (Most Liquid)
Assets that can be converted to cash in one year or less
Examples
cash
short-term financial assets
accounts receivable (money not yet collected from
customers for goods sold to them)
inventory (raw materials used in manufacturing, in work in
progress, or in finishing goods)
deferred income taxes and prepaid expenses
Current Versus Fixed Assets, cont.
Fixed Assets (Least Liquid)
Assets on the balance sheet with the least
liquidity
Examples
real estate
plant
equipment
Current Versus Long-Term Liabilities
Current Liabilities
Must be paid in one year or less
Accounts payable (bills to vendors, not yet paid)
Compensation due to players, coaches, and
management in one year or less
Interest and principal on long-term debt
Accrued liabilities (expenses recorded when
they are incurred but before they are paid)
Current Versus Long-Term Liabilities,
cont. Long-Term Liabilities
Will not be paid down completely for more than one year
Players’ compensation (e.g., five-year contract)
Shareholders’ equity (value of the stockholders’ investment in the company)
Deferred income taxes
Net Working Capital
Also called simply working capital.
Net working capital equals current assets minus current liabilities.
When this number is positive, the firm expects the cash paid out over the next year to be less than the cash that will become available.
An investment in working capital is an increase in net working capital between two points in time on a balance sheet.
Income Statement
The income statement describes how much profit or loss was earned by a business over a given length of time.
Income equals revenue minus expenses.
An income statement has three parts: 1. Revenues and expenses from the company’s
operations
2. A non-operating section including financing costs and any income earned by financial investments (also, all taxes)
3. Net income of the business
Statement of Cash Flow
The statement of cash flow provides information about how the cash position of a business has changed over a given period of time.
It measures cash flowing into and out of the business.
There are three primary sources: 1. Cash flows from (used in) operating activities
2. Cash flows from (used in) investing activities
3. Cash flows from (used in) financing activities
Types of Financial Ratios
Liquidity
Activity
Financial leverage
Profitability
Value of the firm
Liquidity Ratios
Liquidity ratios measure the ability of a business to meet short-term financial obligations.
Current ratio
Measures if the sale of current assets will cover liabilities
Above 1 (can sell assets to cover liabilities)
Below 1 (cannot cover liabilities with sale)
Acid test ratio
Also known as the quick ratio
Examines whether a firm can pay its current liabilities without relying on the sale of inventories
Activity Ratios
Activity ratios measure how effectively a firm
manages its assets.
Total asset turnover ratio: How effectively the
firm uses its assets to generate sales.
Inventory turnover ratio: How many times during
the year the inventory is purchased and sold.
Receivables turnover ratio
Average collection period
Financial Leverage Ratios
Financial leverage ratios measure the extent to
which a business relies on debts (loans) rather
than equity (stocks) for financing. High ratios
equal greater chance for distress and
bankruptcy.
Debt ratio: Analyzes a business’ leverage from
the standpoint of assets.
Debt–equity ratio: Analyzes a business’
leverage from the standpoint of owners’ equity.
Interest coverage ratio
Profitability Ratios
Profitability ratios measure the extent to which a business is profitable.
Return on assets (ROA)
Also known as return on investment
Reflects amount of profits earned on the investment in all assets of the firm
Measures profitability on investment by all providers of funds
ROA = net income / average total assets
Return on equity (ROE)
Measures profitability on investment by stockholders
ROA = net income / average stockholders’ equity
Profitability Ratios, cont.
Bottom line for companies is their ability to
generate sufficient earnings to continue growth
and reward shareholders Net profit margin: Net income divided by revenues.
Gross profit margin: Gross income divided by
revenues.
Return on investment capital (ROIV): Analyzes
performance via long-term investments that fund
growth.
Techniques to Determine an Investment’s
Value
Annual return per share: increase or decrease in
value + dividends
Annual rate of return: annual return / initial investment
Dividend payout ratio: dividends per share / earnings
per share
Earnings per share: net income / average number of
shares outstanding
Price–earnings ratio (PE ratio): price per share /
earnings per share
Spending Earnings
Earnings
For-profit organizations can use positive
earnings in three ways:
1. Pay dividends to shareholders.
2. Retain earnings for reinvestment in the
business.
3. Reinvest in other firms by purchasing a
percentage or acquiring other firms outright.
The key to financial success is selecting the
option that will produce the greatest value to
the firm.
Dividends
Dividends: Payments to shareholders made
out of earnings, in the form of either cash or
stock. Example: Speedway Motorsports made a quarterly dividend
payment of $0.10 per share in 2011.
There are two types of dividend payments:
1. Cash dividend
2. Stock dividend
Reinvestment
Reinvestment: Retention of earnings to
reinvest in the business for it to grow and
thrive.
Forgoing dividend payments to reinvest the
earnings in the business must be approved by
the board of directors.
The level of retained earnings is closely tied to
the capital structure of the organization.
Mergers and Acquisitions
These are another way a business can use
its earnings.
Goal is to increase shareholder wealth.
In 2010 more than $822 billion in mergers
occurred in the United States.
Justifications for a Merger
Perhaps the best justification is economies of
scale, the idea that “bigger is better” and
more efficient.
Cost savings are not related to economies of
scale.
Merger leads to new revenue sources.
Example: IMG and ISP Sports Marketing merger
One party involved in merger is poorly
managed.
Types of Mergers
Horizontal Mergers
Two companies in the same line of business are joined
together. Examples: Nike and Converse; Adidas-Salomon and Reebok
Vertical Mergers
Buyer expands operations forward toward the final
consumer or backward in the direction of the source of the
raw materials. Example: Breeze and Max Snowboards
Conglomerate Mergers
Companies in unrelated lines of business come together. Example: Rossignol and Quicksilver
Mergers and Antitrust Law
Three primary statutes govern mergers:
1. Sherman Antitrust Act of 1890
2. Federal Trade Commission Act of 1914
3. Clayton Act of 1914
Overall, they forbid mergers that constrain trade, greatly
lessen market competition, or potentially constrain trade
or competition.
In the United States, the laws are enforced by the
Federal Trade Commission and the U.S. Department of
Justice.
Forms of Acquisition
There are three methods for legally acquiring
another business:
1. Merging two companies
2. Purchasing voting stock
3. Purchasing assets
Merging of Two Companies
Advantages:
Legally simple
Relatively inexpensive
No title transfer of property or assets
Disadvantage:
Must be approved by stockholder vote within each
entity
Purchasing Voting Stock
One company purchases the voting stock in
another company in exchange for cash, stock
in the existing company, or both.
Done through a tender offer
No shareholders’ meetings are needed, and
management may be bypassed.
Buyer goes directly to shareholders; if majority
agree to sell, the purchaser gains control of the
business.
Purchasing Assets
One company purchases the assets of
another company.
Least common of the three methods. Rarely done
in the sport industry.
Benefit
Acquiring company can increase its inventory or
capital assets without acquiring potential liability,
debt, or other concerns from the seller.
The legal process can be very costly.
Questions for Class Discussion
DQ1: How does the statement of cash flows
differ from the income statement? What do the
operating activities, investing activities and
financing activities tell us about cash events?
DQ2: What is depreciation and why is it
considered a noncash item?
Requirements: 250 words minimum initial post, 100 words minimum
reply
Balance sheet: A document displaying the financial condition of a
business at a single point in time. Basic definition: assets = liabilities +
owner’s equity.
Income statement: A document describing how much profit or loss was
earned by a business over a given length of time.
Statement of cash flows: A document providing information about how
the cash position of a business has changed over a given period of time
Depreciation: The cost of equipment and property used by the organization in the process of producing and distributing goods and services.
Intangible assets: Nonphysical assets of the business providing value (e.g., goodwill, patents, licenses, trademarks, copyrights).
Cost of goods sold: Those expenses that are directly related to the production and distribution of goods and services (may be referred to as cost of sales). This includes raw materials, direct labor, and manufacturing overhead. Selling costs and general and administrative costs have separate lines.
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Unit Recap: Key Terms
Unit Recap: Key Terms, cont.
Assets: Any resource or goods that might offer future benefits to a business and have value. Assets are listed according to the length of time it takes to convert them to cash.
Liquidity: The ease and quickness with which assets can be converted to cash.
Liability: Any legal or financial obligation (e.g., debt, retained earnings, shareholders’ equity, taxes owed). Listed on the balance sheet according to the length of time it takes to convert them to cash.
Revenue: Money coming into a business.
Expenses: Money going out of a business (payments;
reduction in value, or depreciation; new legal obligations).
Unit Recap: Key Terms, cont.
Market value of a firm: Based on what stock buyers
and sellers establish when they buy and sell shares in
the business (true “street value” of the business).
Book value (also called owners’ equity): Based on
the historic cost of assets minus accumulated
depreciation (does not necessarily represent true
replacement value of an asset).
Owners’ equity: Calculated by adding retained
earnings and the value of common stocks (this
calculation is also known as net worth).
Book value per share: The amount of the firm’s value
an individual stockholder has.
Unit Recap: Sample Balance Sheet, Income
Statement, and Statement of Cash Flows
Sample Balance Sheet: Turn to figure 6.1 found in
Chapter 6 of the text.
Sample Income Statement: Turn to figure 6.2 found in
Chapter 6 of the text.
Sample Statement of Cash Flows: Turn to figure 6.3
found in Chapter 6 of the text.
Additionally, review the Khan Academy videos, attached
to this unit, to better understand these three statements.
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References
Required Textbook:
Fried, G., DeSchriver, T. D., & Mondello, M. (2020). Sport finance (4th ed.). Champaign, IL: Human Kinetics.