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.