All assets are either operating or non-operating. Operating assets are used to generate sales while non-operating assets

are typically excess monies that have not yet been invested in operating assets or excess cash that will be returned to the

bondholders and stockholders at some point in the future.

2.

Typical non-operating assets are excess cash or cash equivalents and investments. All other assets are typically

operating.

3.

Typical financing liabilities are current portion of long term debt, long term debt, and capitalized lease obligations. All

other liabilities including accounts payable, and accrued expenses are typically operating liabilities.

4.

Invested capital equals operating assets minus operating liabilities.

5.

Net non-operating assets or net liabilities equals non-operating assets minus non-operating liabilities.

Sample Balance Sheet:

Cash needed for operations

200

Accounts payable

300

Excess cash

600

Accrued expenses

250

Inventory

400

Current portion of Long term debt 150

Investment in marketable securities

300

Long term debt

1000

Plant property and Equipment

1100

Stockholders Equity

900

Total assets

2600

2600

What are the two financial assets?

What do they sum to?

What are the two financial liabilities?

What do they sum to?

What are the three operating assets?

What do they sum to?

What are the two operating liabilities?

What do they sum to?

Calculate the invested capital.

Calculate the net non-operating liability.

Please construct a balance sheet with invested capital on the left side and the sum of net non-operating liabilities and stockholders'

equity on the other, the balance sheet must balance.

Part 2 - The Income Statement

1.

As stated in part 1, all assets are either operating or non-operating -- so all revenues and expenses are also operating or

non-operating.

2.

Typical non-operating revenues are interest income earned on excess cash and on investments. Typical non-operating

expenses are interest paid on borrowed money (bonds issued by the corporation) and interest paid on leased assets.

3.

All other revenues and expense are typically operating.

4.

Net operating income less adjusted taxes (NOPLAT) equals operating revenues minus operating expenses and then minus

taxes.

Sample Income Statement:

Sales

+2500

Cost of goods sold

-1800

Selling and administrative

- 540

Interest received or earned

+ 20

Interest paid or expense

- 80

Pretax income

t

100

Taxes at 20%

20

Net income

80

Please take out the non-operating expenses and non-operating revenues and then calculate the pretax operating earnings?

Using a 20 percent tax rate, calculate the net operating profit less adjusted taxes or (NOPLAT)?

What is the pretax operating earnings?

Using a 20 percent tax rate, calculate the NOPLAT?

Part 3 - Merging the Balance Sheet and Income Statement to measure profitability

1.

Return on average invested capital (ROIC)

is what the company earned operating the business. It is computed by

taking the net operating profit less adjusted taxes (NOPLAT) and dividing by the average invested capital or (IC) (we do

not have beginning and ending number in this example so assume the number given is the average).

Using the invested capital from part 1 and the NOPLAT from part 2, please calculate the return on invested capital (ROIC)