E140A 2009Financial WorkshopE140 Accounting WorkshopCopyright ©2008 by the Board of Trustees of the Leland Stanford Junior University and Stanford Technology Ventures Program (STVP). This document may be reproduced for educational purposes only.Presented by Ann Miura-Ko(with thanks to Professor Tom Byers)Stanford UniversitySpecial Thanks to Eric Carr, Scott Bowie, Mike Rosenbluth, and Nathan FurrAnn Miura-Ko• Background:– BSEE, Yale – McKinsey and Company (NYC, 3 years)– Charles River Ventures (Boston, 2 years)– PhD Candidate, Stanford MS&E– Maples InvestmentsE140 Accounting WorkshopE140 Accounting WorkshopWorkshop Agenda• Basics of AccountingE140 Accounting Workshop• Venture FinanceHow will I use Accounting?• In this class (case analysis)– How much is a company worth? (corollary: what is my piece of the company worth?)– How is this company doing relative to its competitors?• From an investor’s perspective– What are the critical assumptions that drive the business?– How much cash does the company need to get to the next set of milestones?E140 Accounting WorkshopAccounting PrincipalsAssets = Liabilities + EquityWhat the company owns (used to generate income)• How the ownership of assets was financed (By third parties or by the owners)•Equity = book valueof companyE140 Accounting Workshop•Equity = book valueof company• Note: Market and book value of company are not the same. Market value takes into account the potential growth of the companyMarket Value = Share price x # shares issuedBalance Sheet• A snapshot of the investing and financing activities of a firm Current Assets(liquid in less than a year)Current Liabilities(payable in less than a year)CashAccounts ReceivableInventoriesAccounts PayableSalaries PayableAccrued ExpensesIncome Taxes PayableBalance Sheet of XYZ Corp. - 31 December of 2007 (in thousand $)Assets are economic resources• Liabilities are creditors’ claims on the assets of Shareholder’s equity is the owners’ claimE140 Accounting WorkshopFixed AssetsOther AssetsLong-Term Liabilities(bonds issued, bank loans)Shareholders’ EquityProperty, plant and equipment(less depreciation)Intangibles(less depreciation)Investment SecuritiesTotal Assets =Income Taxes PayableShort Term debtCommon StockAdditional Paid-in CapitalRetained EarningsTotal Liabilities + Shareholder’s Equityresources• An asset has the ability to provide future benefits to the companyclaims on the assets of a firm. The claims result from benefits the firm has previously received from the creditors• Contributed capital (Paid-in capital): the amount invetsed• Retained earnings: Increase in equity due to operationsBalance Sheets ComparisonAssetsCash . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts Receivable . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . Prepayments . . . . . . . . . . . . . . . . . . . . Other Current Assets . . . . . . . . . . . . . . Total Current Assets: . . . . . . . . . . . . . . . . . . Property, Plant and Equipment . . . . . . Intangible Assets . . . . . . . . . . . . . . . . .Other Long Term Assets . . . . . . . . . . . Total Assets: . . . . . . . . . . . . . . . . . . . . . . . . Wal-Mart($B)Cisco($B)Genentech($B)7.42.833.72.7046.688.413.82.4151.222.34.01.32.02.031.66.014.72.753.33.32.41.501.58.85.02.72.118.9E140 Accounting WorkshopLiabilities and Shareholders’ EquityAccounts Payable . . . . . . . . . . . . . . . . . Notes Payable . . . . . . . . . . . . . . . . . . . Accrued Expenses . . . . . . . . . . . . . . . . . Other Current Liabilities . . . . . . . . . . . . . Total Current Liabilities . . . . . . . . . . . . . . . . Long Term Debt . . . . . . . . . . . . . . . . . . . Other Noncurrent Liabilities . . . . . . . . . . Total Liabilities . . . . . . . . . . . . . . . . . . . . . . .Shareholders’ Equity . . . . . . . . . . . . . . . . . .Total Liabilities and Shareholders’ Equity . .28.12.614.76.551.730.77.189.661.6151.2 0.805.47.113.46.42.121.931.553.33.2000.73.92.40.37.011.918.9Balance Sheet Analysis• Working Capital: Part of current assets not financed by current liabilities. Also a measure of how much you have in quickly liquid assets= Current Assets - Current Liabilities• Liquidity ratios: measures of the ability to meet short term financial obligations–Current Ratio = Current Assets / Current LiabilitiesE140 Accounting Workshop–Current Ratio = Current Assets / Current Liabilities– Acid-test = (Cash + Accounts Receivable) / Current Liabilities• Operational Efficiency Measures– Inventory Turnover = Cost of Sales per year / Current Inventory– Accounts Receivable Collection Period = Accounts Receivable / Sales– Accounts Payable Collection Period = Accounts Payable / Cost of SalesBalance Sheet AnalysisAssetsCash . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts Receivable . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . Prepayments . . . . . . . . . . . . . . . . . . . . Other Current Assets . . . . . . . . . . . . . . Total Current Assets: . . . . . . . . . . . . . . . . . . Property, Plant and Equipment . . . . . . Intangible Assets . . . . . . . . . . . . . . . . .Other Long Term Assets . . . . . . . . . . . Total Assets: . . . . . . . . . . . . . . . . . . . . . . . . Wal-Mart($B)Cisco($B)7.42.833.72.7046.688.413.82.4151.222.34.01.32.02.031.66.014.72.753.3Working Capital:Walmart: -5.1BCisco: 18.2BCurrent Ratio:Walmart: 0.9Cisco: 2.4Inventory TurnoverWalmart: 7.8E140 Accounting WorkshopLiabilities and Shareholders’ EquityAccounts Payable . . . . . . . . . . . . . . . . . Notes Payable . . . . . . . . . . . . . . . . . . . Accrued Expenses . . . . . . . . . . . . . . . . . Other Current Liabilities . . . . . . . . . . . . . Total Current Liabilities . . . . . . . . . . . . . . . . Long Term Debt . . . . . . . . . . . . . . . . . . . Other Noncurrent Liabilities . . . . . . . . . . Total Liabilities . . . . . . . . . . . . . . . . . . . . . . .Shareholders’ Equity . . . . . …