FALL 2008

BUSINESS DECISION MAKINGADMN2167

Professor: Bob Carpenter

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Today’s Agenda

• Financial Statement Exercises

• Group Assignments.

• Group Exercise

• Introduction to thinking process

• Individual case preparation

• Orangewerks

• Proforma Financial Statements (Forecasting)

• Assignments

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Exercise #1 p40

Income Statement

RevenueGross Sales 8510Less: Sales Returns and Allowances Net Sales 8510

Cost of Goods SoldCost o fgoods 6670Less: Ending Inventory Cost of Goods Sold 6670

Gross Profit (Loss) 1840

ExpensesSelling expenses 1104Administrative expenses 253 Total Expenses 1357

Net Operating Income 483

Other income 46Other expense (69) Total Other Income (23)

Net Income (Loss) 460

BUCKNERYEAR ENDINGJAN 31 2004

Other Income

Financial Statements in U.S. Dollars

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Young’s textiles cost of goods

Young Textile

Goods in process Jan 2003 390Raw Materials Used:Raw materials inventory 2003 498Materials purchased 2,958Material available 3,456Less materials on hand 2004 489Raw material used 2,967Direct labour 753Factory overheadIndirect labour 99manufacturing overhead 579Total operations overhead 678Total manufacturing costs in period 4,398Total goods available in 2004 4,788Goods in process Jan 2004 384Cost of goods manufactured 4,404

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Young’s textiles income

Income Statement

RevenueGross Sales 5490Less: Sales Returns and Allowances 60 Net Sales 5430

Cost of Goods SoldBeginning Inventory 222Add: Purchases 4404

Freight-inDirect LaborIndirect Expenses

Inventory Available 4626Less: Ending Inventory 219 Cost of Goods Sold 4407

Gross Profit (Loss) 1023

ExpensesSelling 147Admin 294General 255 Total Expenses 696

Net Operating Income 327

Other Income 75Other Expense (102) Total Other Income (27)

Net Income (Loss) 300

Young Textile37,987

Other Income

Financial Statements in U.S. Dollars

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Paul Webster exercise #1ASSETS LIABILITIES

Current Assets Current Liabilities

Cash $11,100 Accounts payable $12,300

Accounts receivable 12,600 Short-term notes 6,600

(less doubtful accounts) Current portion of long-term notes

Inventory 7,500 Expense payable 900

Temporary investment Taxes payable

Prepaid expenses Accrued payroll

Total Current Assets $31,200 Total Current Liabilities $19,800

Fixed Assets Long-term Liabilities

Long-term investments Mortgage

Goodwill 6,000 Other long-term liabilities

Buildings Total Long-Term Liabilities

(less accumulated depreciation)

Plant and equipment

(less accumulated depreciation) Shareholders' Equity

Furniture and fixtures 22,500 Capital stock $27,900

(less accumulated depreciation) (12,000) Retained earnings 0

Total Net Fixed Assets $16,500 Total Shareholders' Equity $27,900

TOTAL ASSETS $47,700 TOTAL LIABILITIES & EQUITY $47,700

FALL 2008

Income Statement

RevenueGross Sales 3398Less: Sales Returns and Allowances Net Sales 3398

Cost of Goods SoldBeginning Inventory 684Add: Purchases

goods manufactured = COGS less net inventory change 2615Inventory Available 3299Less: Ending Inventory 758 Cost of Goods Sold = sales less gross profit 2541

Gross Profit (Loss) 857

ExpensesSelling 341G & A 432Depreciation 36 Total Expenses 809

Net Operating Income 48

Tax at 12 (12)Interest Income Total Other Income (12)

Net Income (Loss) 36

Bargain StoreYear

Other Income

Financial Statements in U.S. Dollars

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Retained Earnings

Bargain Store - Retained Earnings

Retained Earnings 2002 540Net earning 2003 36Less Dividends 12Retained Earnings 2003 564

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Balance Sheet Bargain stores

ASSETS LIABILITIESCurrent Assets Current LiabilitiesCash 48 Accounts payable 288Accounts receivable 324 Short-term notes 252

(less doubtful accounts) Current portion of long-term notesInventory 758 Interest payable 96Temporary investment Taxes payable 7Prepaid expenses Accrued payroll

Total Current Assets 1,130 Total Current Liabilities 643Fixed Assets Long-term LiabilitiesLong-term investments MortgageLand Other long-term liabilities 31Buildings Total Long-Term Liabilities 31

(less accumulated depreciation)Plant and equipment 180

(less accumulated depreciation) (36) Shareholders' EquityFurniture and fixtures Capital stock 36

(less accumulated depreciation) Retained earnings 564Total Net Fixed Assets 144 Total Shareholders' Equity

TOTAL ASSETS 1,274 TOTAL LIABILITIES & EQUITY 1,274

FALL 2008

Survival

   You have just survived the crash of a small plane.  Both the pilot and co-pilot were killed in the crash.  It is mid-January , and you are in Northern Canada.  The daily temperature is 25 below zero, and the night time temperature is 40 below zero.  There is snow on the ground, and the countryside is wooded with with several creeks criss-crossing the area.  The nearest town is 20 miles away.  You are all dressed in city clothes appropriate for a business meeting.  Your group of survivors managed to salvage the following items:

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Survival1) A ball of steel wool2) A small ax3) A  loaded  .45-caliber pistol4) Can of Crisco shortening5) Newspapers (one per person)6) Cigarette lighter (without fluid)7) Extra shirt and pants for each survivor8) 20 x 20 ft. piece of heavy-duty canvas9) A sectional air map made of plastic10) One quart of 100-proof whiskey11) A  compass12) Family-size chocolate bars (one per person)

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Survival

• Take a piece of paper

• Make 4 columns and enter in the first your priority to keep the items listed and note their uses.

• Take 5 minutes to do this

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Meet your Group

– Section 1 Wednesday

– Section 2 Friday

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Meet your Group

• Get together in your groups and take 5 to get to know each other.

• Your task as a group is to list the above 12 items in order of importance for your survival.  List the uses for each.  You  MUST come to agreement as a group.

• Enter the group score in the column next to yours

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Survival – Results for Scoring

1.  not available until after discussion

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Group Presentation Topic Assignments1 Financial ratios Class 3 Group 42 SWOT Analysis Class 4 Group 1 & 23 Competitor analysis Class 5 Group 54 Performance feedbackClass 6 Group 65 Feedback documentation Class 6 Group 106 BCG model Class 7 Group 37 Porter 5 Force model*Class 8 Group 88 Value Chain analysis* Class 9 Group 119 STEEP/PEST * Class 10 Group 910 Issue analysis Class 11 Group 7

* Two groups assigned?

FALL 2008

The Learning Tower of Pizza Exercise

This is a competition You are to build a tower

Towers will be judged based on:» Height» Beauty» Stability

You may use up to 20 index cards and 20 paper clips.

You must be able to carry your tower up to the front for judging

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The Learning Tower of Pizza Exercise

Form groups Agree objectives for your group Make a design for a tower and plan

how you will construct it. Plan decorations for your tower.

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The Learning Tower of Pizza Exercise

Get materials!

You have 15 minutes

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THINKING PROCESS

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Discussion of the thinking process

• Are good thinkers more intelligent?

• Quick thinkers or slow thinkers?

• Can thinking be learned?

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Discussion of the thinking process

• PISCO thinking process … De Bono

• To learn and practice a framework for thinking

• This is the thinking process rather than the discussion content

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CASE METHODOLOGYRevisited

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Case Method

• Define a problem• Sort relevant and irrelevant information

• Separate fact from opinion

• Interpret and analyze information

• Come to reasoned decision and course of action

• Communicate your thoughts clearly and persuasively to others during class discussions

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Suggested individual preparation

• Read quickly for an overview

• Skim exhibits and find out who is the decision taker, what the concerns, problems or issues are, why they have arisen and when the decision must be made.

• Read the case again more carefully. Highlight key information and make notes.

• Really get familiar with the information and do some additional research so that you are ready to analyze

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Individual preparation/analysis (1)

• Try to answer at least the following questions:– What business are they in, what are their

objectives, strengths and weaknesses, opportunities and threats, what must they do well to satisfy customers?

– What facts are relevant and key to the solution? What are the causes vs. symptoms? Make quantitative and qualitative evaluations of the organization.

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Individual preparation/analysis (2)

• Try to answer at least the following questions:

– What do the facts mean to the problem – here ask and answer a lot of questions.

– What are the decision criteria?

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Individual preparation/alternative evaluation (1)

• Try to answer at least the following questions:– What are the alternatives? Are they relevant

to the problem? Try and make sure you have several alternatives to consider.

– What is your evaluation of the alternatives in view of the decision criteria? What are the pros and cons of each alternative?

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Individual preparation/alternative evaluation (2)

• Try to answer at least the following questions:– Which alternative or combination of

alternatives do you choose and why?

– What is your plan of action? Who, what, where, when and how.

– What results do you expect?

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Suggested format• Title page• Table of Contents• Situational Analysis

– Environment– Industry– Organization– Strategy

• Issues / Problems– Statement of primary issue / problem

• Evidence of issue / problem• Effects of issue / problem

– Statement of secondary issues / problems• Evidence of issue / problem• Effects of issue / problem

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Suggested format• Strategic alternatives

– Description of alternative 1• Benefits of alternate 1• Costs of alternative 1

– Description of alternative 2• Benefits of alternate 2• Costs of alternative 2

– Description of alternative … n• Benefits of alternate n• Costs of alternative … etc

• Selection of strategy and implementation– Statement of selected strategy– Justification of seleted strategy– Description of implementation

• Appendices– E.g. Analyses and financials

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Suggested format

• Suggested case study format is at

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Orangewerks case

• Individual work as if at home

• Group work

• Class discussion

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Forecasting

I see that you willget an A this semester.

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FORECAST:

• A statement about the future

• Develop Master Planning Schedule

• Used to help managers– Plan the system

– Plan the use of the system

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Accounting Cost/profit estimates

Finance Cash flow and funding

Human Resources Hiring/recruiting/training

Marketing Pricing, promotion, strategy

MIS IT/IS systems, services

Operations Schedules, MRP, workloads

Product/service design New products and services

Uses of Forecasts

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• Assumes causal systempast ==> future

• Forecasts rarely perfect because of randomness

• Forecasts more accurate forgroups vs. individuals

• Forecast accuracy decreases as time horizon increases

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Elements of a Good Forecast

Timely

AccurateReliable

Mea

ningfu

l

Written

Easy

to u

se

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Types of Forecasts

• Judgmental - uses subjective inputs

• Time series - uses historical data assuming the future will be like the past

• Associative models - uses explanatory variables to predict the future

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Judgmental Forecasts

• Executive opinions

• Sales force composite

• Consumer surveys

• Outside opinion

• Opinions of managers and staff

–Delphi method

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Time Series Forecasts

• Trend - long-term movement in data• Seasonality - short-term regular variations in

data• Irregular variations - caused by unusual

circumstances• Random variations - caused by chance

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Forecast Variations

Trend

Irregularvariation

Cycles

Seasonal variations

908988

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• Simple to use

• Virtually no cost

• Data analysis is nonexistent

• Easily understandable

• Cannot provide high accuracy

• Can be a standard for accuracy

Naïve Forecasts

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• Stable time series data– F(t) = A(t-1)

• Seasonal variations– F(t) = A(t-n)

• Data with trends– F(t) = A(t-1) + (A(t-1) – A(t-2))

Uses for Naïve Forecasts

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Techniques for Averaging

• Moving average

• Weighted moving average

• Exponential smoothing

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Simple Moving Average

MAn = n

Aii = 1n

35

37

39

41

43

45

47

1 2 3 4 5 6 7 8 9 10 11 12

Actual

MA3

MA5

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Weighted Moving Average

• If more recent data is thought more indicative.

• Weight the historic actuals:– E.g. 0.4 x A1+0.3 x A3 +0.2 x A3 +0.1 x A4

Example:

1 42

2 40

3 43

4 40

5 41

What is forecast for next month?

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Exponential Smoothing

Premise--The most recent observations might have the highest predictive value.

– Therefore, we should give more weight to the more recent time periods when forecasting.

Ft = Ft-1 + (At-1 - Ft-1)

FALL 2008

Period Actual Alpha = 0.1 Error Alpha = 0.4 Error1 422 40 42 -2.00 42 -23 43 41.8 1.20 41.2 1.84 40 41.92 -1.92 41.92 -1.925 41 41.73 -0.73 41.15 -0.156 39 41.66 -2.66 41.09 -2.097 46 41.39 4.61 40.25 5.758 44 41.85 2.15 42.55 1.459 45 42.07 2.93 43.13 1.87

10 38 42.36 -4.36 43.88 -5.8811 40 41.92 -1.92 41.53 -1.5312 41.73 40.92

Example of Exponential Smoothing

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35

40

45

50

1 2 3 4 5 6 7 8 9 10 11 12

Period

Dem

and .1

.4

ActualPicking a Smoothing Constant

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Forecast Accuracy

• Error - difference between actual value and predicted value

• Mean absolute deviation (MAD)– Average absolute error

• Mean squared error (MSE)– Average of squared error

• Tracking signal– Ratio of cumulative error and MAD

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Pro-forma financial statements are only forecasts :

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Assignment

• Research whether good thinking is related to intelligence and/or whether it can be learned

• Read text p92-104,

• Read CP p54-67 "The Leadership Challenge“

• Prepare the Lawsons Case in text p154

• Forward university email to the one you monitor