Business Analysis with Microsoft Excel, 3rd Edition

Description

• Copyright 2007
• Edition: 3rd

• Book
• ISBN-10: 0-7897-3664-0
• ISBN-13: 978-0-7897-3664-2

Whether you own a small business or work for a large corporation–whether you are looking for help making financial and business decisions–this book is for you.  Business Analysis with Microsoft® Excel, Third Edition, provides in-depth information that will streamline your use of the tools within Excel. Professional advice and guidance from an experienced author provide the answers to your most pressing questions:

     •    What’s the relationship between my cost of goods sold and my inventory?

     •    How do I get Excel to keep these values up-to-date on my income statement and my balance sheet?

     •    I have to track service quality over time. How can I automate that using Excel charts?

     •    How can I forecast future demand for my products, based on prior sales results?

     •    What’s the difference between financial leverage and operating leverage? How do I calculate them using my financial records?

     •    I need to project my financials for next year. Does Excel have a tool for that? What do I need to know to use it effectively?

     •    How do I do all these things using the new Ribbon in Excel 2007?

     •    What are the best ways to automate a connection between Excel and an external database?

Category  Spreadsheets

Covers    Applicable for versions of Microsoft Excel 97 to 2007

User Level    Intermediate–Advanced

More great stuff… is just a click away!

     •    Sample journals and ledgers; examples of trial balances, income statements, and balance sheets

     •    Custom functions, such as FIFO and LIFO, for inventory management

     •    VBA routines that automate the creation of forecasts, quality control charts, and sales and marketing analysis

     •    Statistical process control charts: P charts, X-and-S charts, X-and-MR charts

     •    Forecasting tools: Seasonal smoothing and ARIMA model identification

quote from the front cover

“Conrad takes the time to give the readers an easy-to-follow step-by-step understanding of the material, accompanied by clear illustrations, making this an excellent book to learn the material. I recommend this book to anyone wanting to gain more expertise in using and manipulating business data from within Excel.”

–Bob Umlas, Excel MVP

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Working Capital and Cash Flow Analysis in Excel

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Table of Contents

Introduction............................................................................................... 1

    Taking It on Faith.............................................................................. 2

    About the Platform............................................................................ 3

    How This Book Is Organized............................................................. 4

    Two Special Skills: Named Ranges and Array Formulas..................... 4

        Assigning Names....................................................................... 5

        Using Array Formulas................................................................ 6

    Conventions Used in This Book......................................................... 6

     I  Analyzing Financial Statements

1  Working with Income Statements......................................................... 11

    Keeping Score................................................................................. 11

        Choosing the Right Perspective................................................. 12

        Defining Two Purposes for Accounting...................................... 12

    Using the Income Statement.............................................................. 13

        Choosing a Reporting Method.................................................. 13

        Measuring the Operating and Nonoperating Segments............... 17

    Moving from the General Journal to the Income Statement................. 18

        Getting the General Journal into Excel........................................ 18

        Understanding Absolute, Relative, and Mixed References.......... 19

        Getting the Journal Data to the Ledger...................................... 20

        Getting the Ledger Data to the Income Statement..................... 23

    Managing the Financial Analyses with Accrual Accounting................ 24

    Organizing with Traditional vs. Contribution Approaches.................. 29

    Summary......................................................................................... 30

2  Balance Sheet: Current Assets............................................................. 31

    Designing the Balance Sheet............................................................. 32

        Understanding Balance Sheet Accounts.................................... 32

        Understanding Debit and Credit Entries.................................... 33

    Getting a Current Asset Cash Balance.............................................. 34

        Using Sheet-Level Names........................................................ 35

        Getting a Cash Balance for Multiple Cash Accounts................. 37

        Handling Restricted Cash Accounts.......................................... 39

    Getting a Current Asset Accounts Receivable Balance....................... 40

        Allowing for Doubtful Accounts............................................... 41

        Using the Aging Approach to Estimating Uncollectibles............. 42

        Using the Percentage of Sales Approach to Estimating Uncollectibles 44

    Getting a Prepaid Expenses Balance................................................. 44

        Dealing with Insurance as a Prepaid Expense............................ 45

    Getting a Current Asset Balance....................................................... 47

        Understanding the Inventory Flow............................................ 48

        Closing the Inventory Account................................................. 48

        Closing the Revenue and Expense Accounts............................. 49

    Summary......................................................................................... 50

3  Valuing Inventories for the Balance Sheet............................................. 51

    Valuing Inventories.......................................................................... 51

        Using Specific Identification..................................................... 52

        Using Average Cost................................................................. 58

        Using FIFO............................................................................. 62

        Using LIFO............................................................................. 69

    Comparing the Four Valuation Methods........................................... 70

    Handling Purchase Discounts........................................................... 72

    Using Perpetual and Periodic Inventory Systems............................... 73

    Calculating Turns Ratios................................................................... 75

    Summary......................................................................................... 77

4  Summarizing Transactions: From the Journals to the Balance Sheet....... 79

    Understanding Journals.................................................................... 80

        Understanding Special Journals................................................ 81

        Structuring the Special Sales Journal......................................... 81

        Structuring the Special Purchases Journal................................. 83

        Building Dynamic Range Names............................................... 83

        Using Dynamic Range Names in the Journals............................ 85

        Structuring the Cash Receipts Journal....................................... 86

        Structuring the Cash Payments Journal..................................... 88

    Understanding Ledgers.................................................................... 89

        Creating the General Ledger.................................................... 90

        Creating Subsidiary Ledgers.................................................... 92

        Automating the Posting Process............................................... 93

        Opening the Workbooks....................................................... 100

    Getting a Current Liabilities Balance............................................... 102

    Summary....................................................................................... 103

5  Working Capital and Cash Flow Analysis........................................... 105

    Matching Costs and Revenues....................................................... 105

    Broadening the Definition: Cash vs. Working Capital...................... 107

        Determining the Amount of Working Capital........................... 108

        Determining Changes in Working Capital................................ 113

    Analyzing Cash Flow..................................................................... 116

        Developing the Basic Information........................................... 118

        Summarizing the Sources and Uses of Working Capital.......... 120

        Identifying Cash Flows Due to Operating Activities................. 121

        Combining Cash from Operations with Cash from Nonoperating Transactions            122

    Summary....................................................................................... 123

6  Statement Analysis............................................................................. 125

    Understanding a Report by Means of Common-Sizing.................... 126

        Using Common-Sized Income Statements.............................. 126

        Using Common-Sized Balance Sheets.................................... 128

        Using Comparative Financial Statements................................ 129

    Using Dollar and Percent Changes in Statement Analysis................ 131

        Assessing the Financial Statements......................................... 132

        Handling Error Values............................................................ 133

        Evaluating Percentage Changes.............................................. 134

    Common-Sizing for Variance Analysis............................................ 135

    Common-Sizing by Headcount....................................................... 139

    Summary....................................................................................... 141

7  Ratio Analysis.................................................................................... 143

    Interpreting Industry Averages and Trends..................................... 144

        Comparing Ratios Within Industries........................................ 145

        Analyzing Ratios Vertically and Horizontally........................... 146

        Getting a Basis for Ratios....................................................... 147

    Analyzing Profitability Ratios.......................................................... 150

        Finding and Evaluating Earnings Per Share.............................. 150

        Determining Gross Profit Margin............................................ 151

        Determining Net Profit Margin............................................... 153

        Determining the Return on Assets (ROA)............................... 154

        Determining the Return on Equity (ROE)................................ 155

    Analyzing Leverage Ratios............................................................. 156

        Determining the Debt Ratio.................................................... 157

        Determining the Equity Ratio.................................................. 157

        Determining the Times Interest Earned Ratio........................... 158

    Analyzing Liquidity Ratios.............................................................. 159

        Determining the Current Ratio................................................ 159

        Determining the Quick Ratio.................................................. 160

    Analyzing Activity Ratios................................................................ 161

        Determining the Average Collection Period............................. 161

        Determining Inventory Turnover............................................. 162

    Summary....................................................................................... 163

    II  Financial Planning and Control

8  Budgeting and Planning Cycle............................................................ 167

    Creating Pro Forma Financial Statements....................................... 167

        Forecasting by Percentage of Sales........................................ 169

        Performing Sensitivity Analysis............................................... 175

    Moving from the Pro Forma to the Budget..................................... 176

        Projecting Quarterly Sales...................................................... 176

        Estimating Inventory Levels.................................................... 177

        Fitting the Budget to the Business Plan.................................... 180

    Summary....................................................................................... 181

9  Forecasting and Projections............................................................... 183

    Making Sure You Have a Useful Baseline...................................... 184

    Moving Average Forecasts............................................................ 185

        Creating Forecasts with the Moving Average Add-In............. 188

        Dealing with the Layout of Excel’s Moving Averages.............. 189

        Creating Moving Average Forecasts with Excel’s Charts........ 190

    Forecasting with Excel’s Regression Functions............................... 192

        Making Linear Forecasts: The TREND Function.................... 192

        Making Nonlinear Forecasts: The GROWTH Function........... 194

        Creating Regression Forecasts with Excel’s Charts................. 198

    Forecasting with Excel’s Smoothing Functions................................ 199

        Projecting with Smoothing...................................................... 199

        Using the Exponential Smoothing Add-In............................... 200

        Choosing a Smoothing Constant............................................. 202

        Making Smoothed Forecasts Handle Seasonal Data............... 204

    Using the Box-Jenkins ARIMA Approach: When Excel’s Built-In Functions Won’t Do     206

        Understanding ARIMA Basics............................................... 207

        Charting the Correlograms..................................................... 208

        Starting with Correlograms to Identify a Model....................... 208

        Identifying Other Box-Jenkins Models.................................... 210

    Summary....................................................................................... 212

10. Measuring Quality............................................................................ 215

    Monitoring Quality Through Statistical Process Control................... 215

        Using Averages from Samples................................................ 216

        Using X-and-S Charts for Variables....................................... 217

        Interpreting the Control Limits................................................ 220

        Using P-Charts for Dichotomies............................................. 224

        Choosing the Sample Size...................................................... 226

        Determining That a Process Is Out of Control......................... 227

        Using X-and-MR Charts for Individual Observations.............. 231

        Creating SPC Charts Using Excel.......................................... 231

    Performing Acceptance Sampling................................................... 234

        Charting the Operating Characteristic Curve........................... 235

    Using Worksheet Functions for Quality Control.............................. 240

        Sampling Units from a Finite Population.................................. 240

        Sampling Units from a Nonfinite Population............................ 242

        Sampling Defects in Units....................................................... 244

        Using the CRITBINOM Function.......................................... 246

    Summary....................................................................................... 250

  III  Investment Decisions

11. Examining a Business Case: Investment............................................ 253

    Developing a Business Case........................................................... 253

        Getting Consensus for the Plan............................................... 254

        Showing Your Work............................................................. 256

    Developing the Excel Model.......................................................... 257

    Summary....................................................................................... 264

12. Examining Decision Criteria for a Business Case............................... 265

    Understanding Payback Periods..................................................... 265

    Understanding Future Value, Present Value, and Net Present Value 270

        Calculating Future Value........................................................ 270

        Calculating Present Value....................................................... 270

        Calculating Net Present Value................................................ 271

    Shortening the Payback Period...................................................... 273

    Summary....................................................................................... 277

13. Creating a Sensitivity Analysis for a Business Case........................... 279

    Reviewing the Business Case......................................................... 279

    Managing Scenarios....................................................................... 280

        Saving a Scenario for the Base Case...................................... 282

        Developing Alternative Scenarios........................................... 284

        Developing Scenarios That Vary Expenses............................. 286

        Summarizing the Scenarios..................................................... 287

    Measuring Profit............................................................................ 288

        Calculating Internal Rate of Return......................................... 288

        Calculating Profitability Indexes.............................................. 290

        Estimating the Continuing Value.............................................. 291

    Varying the Discount Rate Input..................................................... 292

    Using the Goal Seek Tool.............................................................. 294

    Summary....................................................................................... 296

14. Planning Profits................................................................................ 297

    Understanding the Effects of Leverage............................................ 297

    Analyzing Operating Leverage........................................................ 298

        Planning by Using the DOL.................................................... 307

    Analyzing Financial Leverage......................................................... 308

        Determining the Debt Ratio.................................................... 309

        Determining the Times Interest Earned Ratio........................... 310

    Summary....................................................................................... 310

15. Making Investment Decisions Under Uncertain Conditions................ 311

    Using Standard Deviations............................................................. 311

    Understanding Confidence Intervals............................................... 315

        Using Confidence Intervals in a Market Research Situation..... 315

        Refining Confidence Intervals................................................. 318

    Using Regression Analysis in Decision Making................................ 319

        Regressing One Variable onto Another................................... 319

        Avoiding Traps in Interpretation: Association vs. Causation..... 325

        Regressing One Variable onto Several Other Variables: Multiple Regression  326

        Estimating with Multiple Regression........................................ 334

    Summary....................................................................................... 338

16. Fixed Assets.................................................................................... 339

    Determining Original Cost.............................................................. 339

        Determining Costs................................................................. 340

        Choosing Between Actual Cost and Replacement Cost.......... 341

    Depreciating Assets....................................................................... 342

        Using Straight-Line Depreciation............................................ 344

        Using the DB Function........................................................... 345

        Using the DDB Function to Calculate Depreciation................. 348

        Using Variable Declining Balance Depreciation....................... 349

        Using Sum-of-Years’-Digits Depreciation.............................. 351

    Summary....................................................................................... 352

  IV  Sales and Marketing

17. Revenue Recognition and Income Determination............................... 355

    Revenue Recognition in Theory...................................................... 355

    The Earning Process...................................................................... 356

    Recognizing Revenue During Production......................................... 358

        Using the Percentage of Completion Method.......................... 358

        The Completed Contract Method.......................................... 360

    Recognizing Revenue at Completion of Production......................... 360

    Recognizing Revenue with the Point of Sale Method....................... 361

        Making Sales on Credit......................................................... 362

        Incurring Costs After the Point of Sale.................................... 363

        Allowing for Return Privileges................................................ 363

    Recognizing Revenue During the Cash-Collection Process.............. 364

        Using the Installment Method................................................. 364

        Using the Cost Recovery Method.......................................... 365

    Recognizing Revenue in Different Industries.................................... 366

        Recognizing Revenue in Service Industries.............................. 366

        Recognizing Revenue in Manufacturing Industries.................... 366

    Understanding the Impact of Revenue-Recognition Methods........... 366

    Summary....................................................................................... 367

18. Importing Business Data into Excel................................................... 369

    Creating and Using ODBC Queries................................................ 370

        Preparing to Import Data....................................................... 370

        Specifying Data Sources........................................................ 371

        Creating Queries with the Query Wizard................................ 374

        Creating Queries with Microsoft Query.................................. 377

        Creating Parameterized Queries in Microsoft Query............... 380

        Using Joins in Microsoft Query.............................................. 380

    Working with External Data Ranges............................................... 381

        Managing Security Information............................................... 382

        Arranging Automatic Refreshes.............................................. 384

        Setting Other Data Range Options......................................... 385

        Importing Data to Pivot Tables and Charts............................. 385

    Creating and Using Web Queries................................................... 389

    Using Parameterized Web Queries................................................. 391

    Using VBA to Update an External Database.................................. 393

        Structuring the Worksheet...................................................... 394

        Editing the Record’s Values................................................... 395

        Adding New Records to the Recordset.................................. 399

        Choosing to Use DAO.......................................................... 401

    Updating the Database Using ADO................................................ 402

        Choosing to Use ADO.......................................................... 402

        Using ADO to Update a Database......................................... 403

    Summary....................................................................................... 406

19. Analyzing Contributions and Margins................................................ 407

    Calculating the Contribution Margin................................................ 408

    Using Unit Contribution.................................................................. 411

        Increasing the Contribution Margin......................................... 412

        Creating an Operating Income Statement................................ 413

    Finding the Break-Even Point......................................................... 413

        Calculating Break-Even in Units............................................. 414

        Calculating Break-Even in Sales............................................. 415

        Calculating Break-Even in Sales Dollars with an Expected Level of Profit       416

        Charting the Break-Even Point............................................... 417

        Choosing the Chart Type....................................................... 419

    Making Assumptions in Contribution Analysis................................. 421

        Linear Relationships............................................................... 421

        Assignment of Costs.............................................................. 422

        Constant Sales Mix................................................................ 422

        Worker Productivity.............................................................. 422

    Determining Sales Mix................................................................... 423

    Analyzing Segment Margin............................................................. 424

    Summary....................................................................................... 425

20. Pricing and Costing.......................................................................... 427

    Using Absorption and Contribution Costing.................................... 428

        Understanding Absorption Costing......................................... 428

        Understanding Contribution Costing....................................... 433

        Applying the Contribution Approach to a Pricing Decision...... 436

    Using Contribution Analysis for New Products............................... 438

        Allocating Expenses to Product Lines..................................... 440

        Varying the Inputs.................................................................. 441

    Estimating the Effect of Cross-Elasticity.......................................... 442

    Summary....................................................................................... 444

Appendixes

A What’s on the Web Site?................................................................... 449

B  Glossary............................................................................................ 451

0789736640, TOC, 5/22/2007

Index

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Introduction

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