It is not possible to be able to read, understand, and analyze financial statements

without the necessary training (I know you are super excited for the latter – but it is
not easy, so we have to train a bit!). So therefore we have to practice!

The excel contains a sheet called “template” and you will see that it is composed of 2
years: 2005 and 2006. The first year is balanced, while the second year is not! I have
provided you with some information (to – it is in red) to be able to complete the
missing items (missing items are in light pink!).

Your job is to:

(1) fill in the pink items
(2) after this is done, construct the cash flow statement, and then plug the change
in cash into the “green” box!

The cash flow statement is really important. You will realize that when you work with
such statements, that CASH IS KING! So you have to understand that works! I have
also provided you with the solutions, so try to think a bit about each pink box, and get
hints from the solutions!

Some things for you to know up-front:

a- “Fair value adjustment”: this is an account name for items that are valued using
market values. For example: Some accounting regimes permit that land, and PP&E to
be valued at current market values, versus historic purchase costs. From this
perspective, any upward (or downward) revaluation is carried under the balance sheet
under this heading. However, downward revaluation is also an expense in the income
statement (but an upward revaluation is not – why? Because accounting is
CONSERVATIVE!).

b- Gain on sale: is carried in the income statement. Calculated as such:

Sale price – Value carried in the accounting books = Gain on sale
If of course the sale price is less than the value carried in the accounting books, it
would be a loss on sale

c- Retained earnings (new) = Retained earnings (old) + new income – new dividends

d- Goodwill: when a company buys another company, they usually pay a premium.
For example if a company has the following balance sheet
Assets = 1000 Liabilities = 700 Equity = 300

When you purchase the company, you probably have to pay about 300 euros for it (ie,
you are paying for all the assets, minus all the liabilities). If you buy it for 500
(because, lets say, purchasing this company is very important for you from a strategic
perspective), then the 200 is accounted for under “goodwill” (I hope this is enough at
this point, more on this in the coming chapters).
When you purchase the company, you probably have to pay about 300 euros for it (ie,
you are paying for all the assets, minus all the liabilities). If you buy it for 500
(because, lets say, purchasing this company is very important for you from a strategic
perspective), then the 200 is accounted for under “goodwill” (I hope this is enough at
this point, more on this in the coming chapters).
In Thousands 2,005 2,006
Sales 1,200 1,320
Other Income: Gain on Sale of Land 0 400
Total Revenues 1,200 1,720
COGS 600 660
Operating, general, and administrative 130 140
Rent 50 50
Depreciation 100 160
Inventory write-down 20 40
Goodwill Impairment 30 60
Interest Expense 90 110
Total 1,020 1,220
Net Earnings 180 500

Assets
Cash and Temporary Investments 640 1
Goodwill 300 2
Receivables 2,000 2,100
Inventories 1,500 3
Prepaid and other current assets 100 105
Land 180 580
Buildings and Equipment (net) 500 340
Total Assets 5,220 4

Liabilities
Accounts payable 500 525
Deferred Revenue 200 350
Accrued payables 130 220
Long-term Debt 1,800 2,000
Shareowners' Equity
Common Stock 2,000 5
Fair Value adjustment -200 300
Retained Earnings 790 6
Total Liabilities and Shareowner's equity 5,220 7

Other Information to Solve:

Cash received from sale of Land 600
Cash received for bldgs (net) sold (on Jan.1) 150
Long term debt paid of during the year 400
Revaluation of Land 500
Dividends paid during the year 300
Common stock issued 300
Before the end of the year writedown, inventory increased by 5% over prior end of year values
All interest expense is paid in cash during the year
In Thousands 2,005 2,006
Sales 1,200 1,320
Other Income: Gain on Sale of Land 0 400
Total Revenues 1,200 1,720

COGS 600 660

Operating, general, and administrative 130 140
Rent 50 50
Depreciation 100 160
Inventory write-down 20 40
Goodwill Impairment 30 60
Interest Expense 90 110
Total 1,020 1,220

Net Earnings 180 500

Assets
Cash and Temporary Investments 640 1,785
Goodwill 300 240
Receivables 2,000 2,100
Inventories 1,500 1,535
Prepaid and other current assets 100 105
Land 180 580
Buildings and Equipment (net) 500 340
Total Assets 5,220 6,685

Liabilities
Accounts payable 500 525
Deferred Revenue 200 350
Accrued payables 130 220
Long-term Debt 1,800 2,000
Shareowners' Equity
Common Stock 2,000 2,300
Fair Value adjustment -200 300
Retained Earnings 790 990
Total Liabilities and Shareowner's equ 5,220 6,685

Cash Flow Statement

Operations
Net Income: 500
"+Depreciation" 160
Gain on sale of land -400
Inventory write-down 40
Goodwill impairment 60
Change in Accts Rec -100
Change in Inv. -75
Change in prepaid assets -5
Change in accts pay 25
Changes in deferred revenue 150
Changes in accrued payables 90
445
Investing:
Land 500
Bldgs and equipment 0
500
Financing:
Long Term Debt (aggregate) 200
Dividends paid -300
Common Stock 300
200

Total Change in Cash 1,145

Other Information
Land sold for cash 600
bldgs (net) sold for cash (on Jan.1 2006) 150
Long term debt paid of during the year 400
Revaluation of Land 500
Dividends paid during the year 300
Common stock issued 300
All interest is paid in cash during the year

not given information (you have to calculate)

Land bought 100
Bldgs bought 150
 5%
10%

This signifies that the land was sold (market value) for $400 more than it was on the book value

Again, whatever the new inventories are, they are lower by 40

this means that goodwill is lower by 60, as compared to last year's value on the BS, unless new comp

This goes to retained earnings (minus dividends if any), it is added to last year's value, to get the new

This is plugged in using last year's cash plus the cash from the cash flow statement, see the formula w
Remember, this difference of 60 comes from the income statement due to the write-down

Inventory increased by 5% before the writedown, hence, it should have been 1575. But it is only 1535

Remember, there was $300 of common stock issued

Do not forget, when we are getting the new retained earnings, we always have to subtract what from i
Do not forget, the gain on sale of land, increased income, but did not increase cash: the cash from the
This is the same logic as above, the write-down reduced income but did not reduce cash. The change
This, again, is the same logic as D44

The 2006 balance sheet amount for land is calculated as follows: "new land = old land + land bought -
Double
Old bldgs was 500, but it should have Click on those
depreciated by 160, hence, the balance of previously owned bld
to expand and to see
explanations
Since we paid of 400 of long term debt this year, then long term debt (without new borrowings) should
n the book value

e BS, unless new companies are acquired

s value, to get the new retained earnings

ment, see the formula within the cell

write-down

575. But it is only 1535, because 40 of it was written down (see the income statement)

to subtract what from income is not retained, ie, we have to subtract dividends
cash: the cash from the land sale, is different from the "gain on sale" of land, and it is in the cash flow statement, u
duce cash. The change in cash due to buying inventory, and selling them, is accounted in the cash flow statement

old land + land bought - land sold (its book value) + upward revaluation - downward revaluation. We know from ou
of previously owned bldgs is 340. Now, we know that bldgs sold for cash was 150 (and there is no gain or loss on

ew borrowings) should be 1400. Since now on the balance sheet the balance is 2000, then, we have borrowed 60
n the cash flow statement, under investing activities
d in the cash flow statement under "receivables and payables"

valuation. We know from our data, that new land is 580, and that the old land is 180. We know that land sold for ca
d there is no gain or loss on the income statement, hence, it was sold at book value), then the balance on prior bld

then, we have borrowed 600. If we have paid of 400 and borrowed 600, then the net effect on cash due to debt, i
We know that land sold for cash is 600, and since the gain is 400, then the book value of the land sold is 200. Ther
hen the balance on prior bldgs should be 190. BUT, since the balance on the balance sheet indicates 340, then, w

effect on cash due to debt, is +200

of the land sold is 200. Therefore, plugging in the numbers to get land bought, we will get 100. Finally, the change
sheet indicates 340, then, we must have purchased new bldgs by 150. SO, since we sold bldgs for 150 cash, and
get 100. Finally, the change in cash due to buying and selling land, is 600-100 = 500
old bldgs for 150 cash, and purchased bldgs for 150 cash, then, obviously on the statement of cash flows, the net
ement of cash flows, the net effect is zero! this is complicated my god....