Firm Reports : Financial Statements

Income Statement

Unexpected variations in sales expense are due to variations in commissions. If you pick up the sales lost of other firms, you do not pay a commission on the sale. If your sales expense falls far short of what it should be, beware. You could be living off of your competitors inability to supply demand. When they finally do match supply with demand, you will find a dramatic slip in your market share.

Administrative Expense

Administrative Expense is composed of the following elements:

* Plant size measuring first shift only in both Stage 1 & 2; the program uses plant size at the start of the quarter (or last quarter's ending plant size)

Inventory and Shipping Charges

Inventory and Shipping Charges are composed of the following elements:

(Note: For Specific Rates in Your Industry see the Scent Industry Section)
 

TOTAL = $0

Maintenance
Maintenance is an absolute budget and NOT a per hour nor a per unit entry. An initial budget of $5,000 was set for the firm above, with $2,000 maintenance for Stage 1 and $3,000 for Stage 2. Inadequate maintenance accelerates the number of plant capacity hours worn out each quarter.

You should increase maintenance proportionally if a second shift is used.

Remember, some maintenance is required even if zero production is scheduled. If you don't budget enough for maintenance then you risk loosing plant hours at an ever increasing rate. A VERY expensive proposition.

Depreciation
Depreciation is straight line, using 10 years which is 10% annually or 2.5% quarterly. Assume this firm's total cost to build was $670000 plus an additional $80,000 site fee. The plant just finished construction last quarter (construction takes two quarters to build). This is their first quarter of operation. Thus the calculation for depreciation is (.025 X $750000 = $18,750).

Depreciation begins as soon as plant hours exist. Thus, depreciation for our sample firm began in the previous quarter on half the plant value + the $80000 site fee.

Interest
The interest expense on your income statement is composed of the following interest charges:   

1. Interest on Short Term Loan. Short term funds are borrowed for use in the quarter and paid back the first day of the next quarter with interest.  At the start of the simulation the interest rate is 9.2% annually or 2.3% quarterly.

Assume the firm ended last quarter with a $100,000 short term loan at 9.2% interest which is 2.3% quarterly. The resulting interest is $2,300. This was collected in current quarter, at which time the loan was also paid back automatically. Handy Tools requested another short term loan in the current quarter to replace the previous quarter loan that was paid back. However, the rate has gone up to 13.363 or 3.34% quarterly. If you continue the calculation, the short term interest charge on the next quarter's report would be $3,340.

The decision to borrow short term must be repeated each quarter that such funds are needed.

2. Amortized Bond Discounts. Amortized bond discounts are included in the interest charge. As discussed in Chapter 5, a firm does not always receive the full value of the Bonds it sells.

In the example above assume the firm sold $100,000 worth of bonds in its first quarter (they are now in their third quarter). However, they only received $88,000 of the $100,000. This reflects a loss (discount) of $12,000 which must be charged off the Income Statement.

Bonds mature in five years (20 quarters) so the quarterly amortization rate is 5% per quarter. The bond discount of $12,000, in this case, needs to be charged off to the Income Statement over 20 quarters: (.05 X $12,000 = $600 in Q1) (.05 X $11400 = $570 in Q2) (.05 X 10830 = 542 in Q3). The ending unamortized discount in Q3, therefore, is 10288.

3. Interest on Bonds. The bonds pay 10% (2.5% per quarter) on the $1,000 face value. There are $100,000 in bonds, so the quarterly charge is .025 X $100,000 = $2,500.

4. Interest on Long Term Loan. Interest on Long Term loans is also included in the interest charges found on your Income Statement. The charge for long term borrowing is a set rate for all firms (at the start of the game this rate is 12% annually). Unlike short term, long term interest is paid when you receive the funds, not when you repay them. So, if you borrow in Q1, interest will be collected in Q1. The loan itself is not repaid until your firm orders repayment in their decisions.

5. A Special Loan. A Special Loan is the Mother Rate of all loans. This loan is provided automatically by the program whenever you are short on funds. The Special Loan has an interest rate of 36% annually or 9% quarterly.As with a short term loan, a special loan is automatically collected the next quarter along with interest.

Note: Contracts often generate a special loan. Because Contracts are put through before the quarter run occurs, many firms find themselves short on funds, and are given a special loan. Be careful when making contracts for finished goods that you understand the effects of a special loan on your income statement.

Loan Review: Short term loans (requested) and special loans (automatic) are received in the quarter requested and paid back automatically with interest in the following quarter. If you see a short term or special loan on your balance sheet, they will be automatically paid back along with the interest. Therefore, prepare for that cash outflow in the coming quarter.

Bonds and long term loans that show on your balance sheet, already have that quarter's interest paid. You have the option to pay them off without an additional interest charge.
 
See The Decision Variables section for more information on short term loans, long term loans, and bonds.

Factor Cost
Factor Cost is the discount taken when you elect to convert all your incoming accounts receivables instantly into cash. The service fee and interest charge is 4.25% of the receivables factored. If you factored all your incoming receivables, Accounts Receivable would be zero and cash would have increased accordingly.

Miscellaneous

The Miscellaneous charge on the Income Statement is composed of the following:
 

1. Hiring new sales reps $12000 each
2. Hiring Trainees $3,000 each
3. Assigning trainees $3,000 each
4. Transferring sales reps $3,000 each
5. Cost of changing second shift
6. Administrator's charges
7. Contract gains and losses on the sale of raw mtls and plant hours
8. Seller's contract fees
9. Consulting Contract

Administrative charges are those charges which the Global View Administrators assign to your firm for violating rules, law suits, and so forth, as well as charges for various reports being offered.

Income Taxes
Income Taxes are paid quarterly at the rate of 22% on the first $6,250 earned and 48% on the balance of earnings. Losses can offset taxes paid over the last three years. If you paid taxes and then have a loss, a tax rebate will be provided and shown as a negative tax (-). The 48% tax rate reflects federal, state and local income taxes, plus other miscellaneous taxes.

Net Income
The Net Income in the example above of -$48,119, means that assets of that amount have been lost. The offset on the balance sheet is a reduction in the stockholders Retained Earnings by the same amount. Thus, Total Assets decreased and the equity claims against those assets also had to decrease.

The Bottom Line
The Bottom Line on the Income Statement is important. You can see that an income loss is recognized immediately in the stockholder's net worth (retained earnings). However, it is important to consider the long run objectives. Perhaps, some short term loss can be tolerated to gain long run market position. Losses in some cases are unavoidable and may spread throughout the industries. The net income and the Balance Sheet must be compared to all firms in order to determine the relative value.

There is a common misconception that increases in assets means taking a loss on the income statement. Let's look at expanding plant capacity as an example. Most teams consider the building of a plant to be an expense. What you are doing is simply trading one asset (cash) for another (plant). That is not an expense. Only as it wears out is it an expense (depreciation).

Decision makers are reluctant to expand plants late in the simulation. When challenged regarding that decision, most say it is too late in the game to recover the cost of building. In this situation, however, you are trading an inferior asset (cash) for one you hope to be superior (plant). After two quarters of construction, if you were right, the plant will be on line and will generate impressive returns. Investors will recognize the new level of net income flow and stock prices will increase that quarter and in future quarters as the flow gains stability. In this situation, an argument could be made to begin a plant capacity expansion as late as the second quarter of the last year.

The Balance Sheet

Report for Firm 8 quarter 3, 2000
 

Cash
The cash figure shown on your balance sheet is the amount of cash your firm has on hand at the end of the quarter. Your firm must maintain a minimum cash balance of $10,000. If your cash threatens to drop below $10,000 the program will issue you a special loan to cover any further expenses. Interest on a special loan is 36% annually, 9% quarterly. Your cash flow statement gives you a detailed account of cash transactions for the quarter, so that you can see how the ending balance was derived.

Accounts Receivable
Accounts Receivable are those sales dollars which your firm has earned that have not yet come into cash. These would be credit sales as opposed to cash sales. Accounts Receivable are approximately 40% of sales revenue, this is true even of contract sales to other firms. These receivables can be factored, which turns them into cash during the same quarter. The cost to do this is 4.25%. The decision to factor receivables can be made on the financial decision menu.

Marketable Securities
Marketable Securities on the balance sheet is the record of your firm's subsidiary investment, if you have opened a subsidiary. This number would be 51% of the shares issued by the subsidiary at the issue price.

Inventories
Finished Goods inventory is shown here as a dollar amount. Be careful that the money you tie up in finished goods assets is not excessive.

Raw Materials inventory is also shown on the balance sheet as a dollar amount.

In this example, of course, Handy Tools has neither finished goods on hand at the end of the quarter, nor raw materials inventory.

Plant and Equipment
Plant and Equipment is the original dollar value of your firm's plant. In this example the firm ordered plant construction in Quarter 1, Year 1 worth $670,000. The number on the balance sheet, $750,000 also includes the $80,000 site fee which is charged to all firms constructing a factory. If this firm had ordered High-tech (see the Scent Industry Section), this would also be recorded in the worth of the plant and equipment.

Accumulated Depreciation and Net Plant
Accumulated Depreciation is the accountant's record of plant depreciation. When Accumulated Depreciation equals Plant and Equipment, Net Plant will be zero. Depreciation is straight line, using 10 years which is 10% annually, or 2.5% quarterly. The program calculates depreciation using beginning plant and equipment for the quarter (or last quarter's ending plant and equipment). In our example, assume that in quarter 1 the value of plant and equipment was zero, since no plant existed at the start of the simulation. In their first set of decisions, the firm ordered $670,000 new construction. By the end of quarter one, half of this plant was built ($335,000). If we add the $80,000 site fee to this, then the value of the plant at the start of Q2 was $415,000. Depreciation in Q2, therefore, was $10,375. Add this amount to depreciation for Q3, $18,750, and you get the accumulated depreciation figure, $29,125.

Accounts Payable
At the end of each quarter you will have a number of unpaid bills or partially paid bills. These are your accounts payable. To find out where your accounts payable are coming from, you should order a cash flow report. Accounts payable are approximately 30% to 35% of payments made for raw materials and labor, including administrative expense.

Loans and Bonds
Loans and Bonds were discussed above on the Income Statement. In this example,the firm has a short term loan out for $100,000 and bonds of $100,000. These two figures, together with the firm's accounts payable of $31731, equals total liabilities of $231,731.Note: the bond market may close for a firm after a 1/1 debt to equity ratio is reached by that firm.

Common Stock
The Common Stock account on the balance sheet records $1.00 for every share issued. In this example, assume the firm issued 300,000 shares in Quarter 1, Year 1. They have not issued additional shares. Thus their Common Stock account shows $300,000.

Additional issuance of shares would add $1.00 per share. Likewise, a repurchase of shares would reduce this account by $1.00 per share.

Other Paid in
Of course, your firm probably sold stock for more than $1.00 per share. The Other Paid in account on your balance sheet is where the accountant records the dollar amount above $1.00 which your firm earned on the sale of its shares.

In this example, the firm issued 300,000 shares at $4.50 per share. If $1.00 went into the Common Stock account, then the remaining $3.50 went into Other Paid in. ($3.50 X 300,000 shares = $1,050,000)

A later issuance of shares would increase the Other Paid in account by the issuance amount over $1.00 per share.

A repurchase of stock is a more difficult accounting calculation. A repurchase would reduce cash, reduce the Common Stock Account by $1.00, reduce Other Paid in by an average of paid in capital per share, and reduce retained earnings by any excess paid to repurchase the stock.

Unamortized Discount
The unamortized bond discount is the portion of the bond discount not yet amortized.In this example, the firm started with a bond discount of $12,000. As discussed above in the Amortized Bond Discount section, the quarter 1 amortized discount was $600, Q2 was $570 and Q3 was $542. If we add these numbers and subtract from the original bond discount of $12,000 we end up with a current unamortized discount of $10,288.

Retained Earnings
Retained Earnings is the account where gains and losses to the stockholder are recorded. In this example, we are assuming that the retained earnings balance was zero at the start of the quarter. At the end of Q3 we can see the reflected loss of $48,119.

Losses may also occur from a repurchase of stock. If you are repurchasing your firm's stock at a price which is higher than its average issue price, you will see a loss to your Retained Earnings account.

Total Equity
Total Equity is an important number to keep track of. If your firm has a total equity of zero, it means that you have lost 100% of the stockholders investment in your firm. In other words, you are bankrupt.

Order of Events in the Simulation

Contracts are put through first, then main decisions are run. All cash is paid out for contracts, or comes in from contracts. If you are a firm purchasing finished goods, make sure that you have an ending cash balance from the previous quarter to purchase goods through contracts. If you have no cash on hand a special loan is generated. Special loans carry a 9% quarterly interest rate.

CONTRACT EXCEPTION: the seller of finished goods will deliver and receive payment for goods during the quarter. This allows the producer of goods to produce during the quarter to meet contract demand. It also allows contracts sales to be properly counted in income statement revenue. The same rules apply to contract cash inflow as to other other sales revenue inflow - 60% to cash and 40% to accounts receivable. Bad debts can occur and are influenced by your firms credit policy.

Simulation: All incoming cash for the quarter is compared against all outgoing cash to determine your ending cash figure on the balance sheet. If you do not have enough cash to cover outgoing then you will be given a special loan.