Business Analysis: Microsoft Excel 2010 / Edition 4

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Overview

ANSWER KEY BUSINESS QUESTIONS

CONTROL COMPANY FINANCES

FORECAST SALES

PREPARE BUSINESS CASES

MAKE BETTER INVESTMENT DECISIONS

IMPROVE QUALITY

USE EXCEL 2010 TO GAIN DEEPER INSIGHTS, MAKE SMARTER DECISIONS, AND EARN MORE PROFITS

Using real-world examples, Carlberg helps you put Excel’s features and functions to work and get the power of quantitative analysis behind your management decisions.

Excel expert Conrad Carlberg shows how to use Excel 2010 to perform the core financial tasks every manager and entrepreneur must master: analyzing statements, planning and controlling company finances, making investment decisions, and managing sales and marketing. Using real-world examples, Carlberg helps you get the absolute most out of Excel 2010’s newest features and functions. Along the way, you’ll discover the fastest, best ways to handle essential tasks ranging from importing business data to analyzing profitability ratios.

Becoming an Excel expert has never been easier! You’ll find crystal-clear instructions, insider insights, complete step-by-step projects, and more. It’s all complemented by an extraordinary set of web-based resources, from sample journals and ledgers to business forecasting tools.

• Use Excel analysis tools to solve problems throughout the business

• Build and work with income statements and balance sheets

• Value inventories and current assets, and summarize transactions

• Calculate working capital and analyze cash flows

• Move from pro formas to operating budgets that help guide your management decisions

• Prepare business cases incorporating everything from discount rates to margin and contribution analysis

About MrExcel Library: Every book in the MrExcel Library pinpoints a specific set of crucial Excel skills, and presents focused tasks and examples for performing them rapidly and effectively. Selected by Bill Jelen, Microsoft Excel MVP and mastermind behind the leading Excel solutions
website MrExcel.com, these books will:

• Dramatically increase your productivity–saving you 50 hours a year, or more

• Present proven, creative strategies for solving real-world problems

• Show you how to get great results, no matter how much data you have

• Help you avoid critical mistakes that even experienced users make

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Product Details

  • ISBN-13: 9780789743176
  • Publisher: Que
  • Publication date: 6/28/2010
  • Series: MrExcel Library Series
  • Edition number: 4
  • Pages: 515
  • Sales rank: 365,566
  • Product dimensions: 6.90 (w) x 9.00 (h) x 1.20 (d)

Meet the Author

Conrad Carlberg is president of Network Control Systems, Inc., a software-development and consulting firm that specializes in statistical and database applications, and Beyond the Ledgers, a joint venture that develops and markets software coupling Excel to QuickBooks™. He holds a Ph.D. in statistics and is a many-time recipient of Microsoft’s Most Valuable Professional Award. He lives near San Diego.

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Table of Contents

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

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

Renamed and Improved Functions in Excel 2010 ........................................................................... 3

Compatibility ............................................................................................................................ 4

Consistency ............................................................................................................................... 4

How This Book Is Organized ............................................................................................................ 6

Two Special Skills: Named Ranges and Array Formulas .................................................................. 6

Assigning Names ...................................................................................................................... 7

Using Array Formulas ............................................................................................................... 8

Conventions Used in This Book ....................................................................................................... 9

PART 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 ................................................................................................ 14

Cells in Excel ........................................................................................................................... 15

Measuring the Operating and Nonoperating Segments ......................................................... 19

Moving from the General Journal to the Income Statement ......................................................... 20

Getting the General Journal into Excel .................................................................................... 20

Understanding Absolute, Relative, and Mixed References ...................................................... 22

Getting the Journal Data to the Ledger .................................................................................. 23

Getting the Ledger Data to the Income Statement ................................................................. 27

Managing the Financial Analyses with Accrual Accounting .......................................................... 28

Using Straight-Line Depreciation............................................................................................ 32

Preparing the Trial Balance .................................................................................................... 33

Moving Information into an Income Statement ..................................................................... 33

Organizing with Traditional Versus Contribution Approaches ...................................................... 34

2 Balance Sheet: Current Assets .....................................................................37

Designing the Balance Sheet ........................................................................................................ 38

Understanding Balance Sheet Accounts ................................................................................. 38

Understanding Debit and Credit Entries ................................................................................. 39

Getting a Current Asset Cash Balance ........................................................................................... 41

Using Sheet-Level Names ....................................................................................................... 41

Getting a Cash Balance for Multiple Cash Accounts ................................................................ 44

Handling Restricted Cash Accounts ......................................................................................... 46

Getting a Current Asset Accounts Receivable Balance ................................................................... 46

Allowing for Doubtful Accounts .............................................................................................. 47

Using the Aging Approach to Estimating Uncollectibles ......................................................... 48

Using the Percentage of Sales Approach to Estimating Uncollectibles ................................... 51

Getting a Prepaid Expenses Balance ............................................................................................. 52

Dealing with Insurance as a Prepaid Expense ......................................................................... 53

Getting a Current Asset Balance.................................................................................................... 54

Understanding the Inventory Flow ......................................................................................... 55

Closing the Inventory Account ................................................................................................ 56

Closing the Revenue and Expense Accounts ........................................................................... 56

3 Valuing Inventories for the Balance Sheet ...................................................59

Understanding Perpetual and Periodic Inventory Systems ........................................................... 60

Perpetual Inventory Systems .................................................................................................. 61

Periodic Inventory Systems .................................................................................................... 62

Valuing Inventories ....................................................................................................................... 64

Valuation Methods Summarized ............................................................................................ 64

Using Specific Identification ................................................................................................... 66

Using Average Cost ................................................................................................................. 72

Using the Moving Average Method ........................................................................................ 77

Calculating the Moving Average and Weighted Average ....................................................... 79

Using FIFO .............................................................................................................................. 81

Using LIFO .............................................................................................................................. 87

Comparing the Four Valuation Methods ....................................................................................... 89

Specification Identification ..................................................................................................... 89

Average Cost ........................................................................................................................... 89

FIFO ....................................................................................................................................... 90

LIFO ....................................................................................................................................... 90

Handling Purchase Discounts ........................................................................................................ 91

Calculating Turns Ratios ................................................................................................................ 92

4 Summarizing Transactions: From the Journals to the Balance Sheet .............95

Understanding Journals ................................................................................................................ 97

Understanding Special Journals .............................................................................................. 98

Structuring the Special Sales Journal ...................................................................................... 98

Structuring the Special Purchases Journal ............................................................................ 100

Structuring the Cash Receipts Journal .................................................................................. 101

Structuring the Cash Payments Journal ................................................................................ 103

Excel Tables and Dynamic Range Names .................................................................................... 104

Building Dynamic Range Names ........................................................................................... 106

Using Dynamic Range Names in the Journals ....................................................................... 108

Choosing Between Tables and Dynamic Range Names ......................................................... 108

Understanding Ledgers............................................................................................................... 110

Creating the General Ledger ................................................................................................. 110

Creating Subsidiary Ledgers ................................................................................................. 112

Automating the Posting Process........................................................................................... 113

Getting a Current Liabilities Balance ........................................................................................... 121

5 Working Capital and Cash Flow Analysis ....................................................123

Matching Costs and Revenues .................................................................................................... 123

Broadening the Definition: Cash Versus Working Capital............................................................ 125

Determining the Amount of Working Capital ....................................................................... 126

Determining Changes in Working Capital ............................................................................. 133

Analyzing Cash Flow ................................................................................................................... 137

Developing the Basic Information ........................................................................................ 138

Summarizing the Sources and Uses of Working Capital ........................................................ 140

Identifying Cash Flows Due to Operating Activities .............................................................. 141

Combining Cash from Operations with Cash from Nonoperating Transactions ..................... 142

6 Statement Analysis ..................................................................................145

Understanding a Report by Means of Common-Sizing ............................................................... 146

Using Common-Sized Income Statements............................................................................ 146

Using Common-Sized Balance Sheets ................................................................................... 148

Using Comparative Financial Statements ............................................................................. 149

Using Dollar and Percent Changes in Statement Analysis ........................................................... 152

Assessing the Financial Statements ...................................................................................... 152

Handling Error Values ........................................................................................................... 154

Evaluating Percentage Changes ........................................................................................... 155

Common-Sizing and Comparative Analyses in Other Applications ............................................. 156

Working in Excel with a Profit & Loss from QuickBooks ........................................................ 156

Working in Excel with a QuickBooks Balance Sheet .............................................................. 158

Common-Sizing for Variance Analysis ........................................................................................ 160

Ratio to Ratio Comparisons .................................................................................................. 163

Common-Sizing by Headcount ................................................................................................... 164

7 Ratio Analysis ..........................................................................................169

Interpreting Industry Averages and Trends ................................................................................ 170

Comparing Ratios Within Industries ........................................................................................... 171

Analyzing Ratios Vertically and Horizontally ........................................................................ 172

Getting a Basis for Ratios ...................................................................................................... 173

Analyzing Profitability Ratios ...................................................................................................... 176

Finding and Evaluating Earnings Per Share .......................................................................... 176

Determining Gross Profit Margin .......................................................................................... 177

Determining Net Profit Margin ............................................................................................. 179

Determining the Return on Assets ........................................................................................ 180

Determining the Return on Equity ........................................................................................ 182

Analyzing Leverage Ratios .......................................................................................................... 183

Determining the Debt Ratio.................................................................................................. 184

Determining the Equity Ratio ............................................................................................... 184

Determining the Times Interest Earned Ratio ....................................................................... 185

Analyzing Liquidity Ratios .......................................................................................................... 186

Determining the Current Ratio ............................................................................................. 186

Determining the Quick Ratio ................................................................................................ 187

Analyzing Activity Ratios ............................................................................................................ 188

Determining the Average Collection Period .......................................................................... 188

Determining Inventory Turnover .......................................................................................... 190

PART II FINANCIAL PLANNING AND CONTROL

8 Budgeting and Planning Cycle ..................................................................191

Creating Pro Forma Financial Statements ................................................................................... 191

Forecasting by Percentage of Sales....................................................................................... 193

Using Excel to Manage the Analysis ............................................................................................ 199

Performing Sensitivity Analysis ............................................................................................ 200

Moving from the Pro Forma to the Budget ................................................................................. 201

Projecting Quarterly Sales..................................................................................................... 201

Estimating Inventory Levels ................................................................................................. 202

Fitting the Budget to the Business Plan................................................................................ 205

9 Forecasting and Projections ......................................................................207

Making Sure You Have a Useful Baseline .................................................................................... 208

Moving Average Forecasts .......................................................................................................... 210

Creating Forecasts with the Moving Average Add-In ........................................................... 212

Dealing with the Layout of Excel’s Moving Averages ............................................................ 213

Creating Moving Average Forecasts with Excel’s Charts ....................................................... 215

Forecasting with Excel’s Regression Functions ........................................................................... 216

Making Linear Forecasts: The TREND Function ..................................................................... 217

Making Nonlinear Forecasts: The GROWTH Function ............................................................ 220

Creating Regression Forecasts with Excel’s Charts ................................................................ 223

Forecasting with Excel’s Smoothing Functions ........................................................................... 225

Projecting with Smoothing................................................................................................... 225

Using the Exponential Smoothing Add-In ............................................................................ 226

Choosing a Smoothing Constant........................................................................................... 228

Making Smoothed Forecasts Handle Seasonal Data ............................................................. 229

Using the Box-Jenkins ARIMA Approach: When Excel’s Built-In Functions Won’t Do ................. 234

Understanding ARIMA Basics ................................................................................................ 234

Charting the Correlograms ................................................................................................... 235

Starting with Correlograms to Identify a Model ................................................................... 236

Identifying Other Box-Jenkins Models .................................................................................. 237

10 Measuring Quality ....................................................................................241

Monitoring Quality Through Statistical Process Control .............................................................. 242

Using Averages from Samples .............................................................................................. 242

Using X-and-S Charts for Variables ....................................................................................... 243

Interpreting the Control Limits ............................................................................................. 247

Manufacturing ...................................................................................................................... 247

Using P-Charts for Dichotomies ............................................................................................ 251

Choosing the Sample Size ..................................................................................................... 253

Determining That a Process Is Out of Control ....................................................................... 255

Using X-and-MR Charts for Individual Observations ............................................................. 258

Creating SPC Charts Using Excel ............................................................................................ 259

Performing Acceptance Sampling ............................................................................................... 262

Charting the Operating Characteristic Curve ......................................................................... 263

Using Worksheet Functions for Quality Control .......................................................................... 268

Sampling Units from a Finite Population .............................................................................. 269

Using HYPGEOM.DIST in Excel 2010 .................................................................................. 270

Sampling Units from a Nonfinite Population .............................................................................. 271

Using NORMSDIST to Approximate BINOMDIST ............................................................... 271

Sampling Defects in Units ..................................................................................................... 277

Using the CRITBINOM Function.......................................................................................... 279

PART III INVESTMENT DECISIONS

11 Examining a Business Case: Investment ....................................................285

Developing a Business Case ........................................................................................................ 286

Getting Consensus for the Plan ............................................................................................. 286

Showing Your Work .............................................................................................................. 288

Developing the Excel Model ........................................................................................................ 289

Developing the Inputs .......................................................................................................... 290

Identifying the Costs ............................................................................................................. 292

Moving to the Pro Forma ...................................................................................................... 293

Preparing the Cash Flow Analysis ......................................................................................... 296

12 Examining Decision Criteria for a Business Case .........................................299

Understanding Payback Periods ................................................................................................. 300

Understanding Future Value, Present Value, and Net Present Value .......................................... 304

Calculating Future Value....................................................................................................... 305

Calculating Present Value ..................................................................................................... 305

Calculating Net Present Value .............................................................................................. 306

Optimizing Costs ................................................................................................................... 308

13 Creating a Sensitivity Analysis for a Business Case .....................................315

Reviewing the Business Case ...................................................................................................... 315

Managing Scenarios ................................................................................................................... 316

Saving a Scenario for the Base Case ...................................................................................... 318

Developing Alternative Scenarios ......................................................................................... 320

Developing Scenarios That Vary Expenses ............................................................................ 323

Summarizing the Scenarios .................................................................................................. 324

Measuring Profit ......................................................................................................................... 325

Calculating Internal Rate of Return....................................................................................... 325

Calculating Profitability Indexes ........................................................................................... 327

Estimating the Continuing Value .......................................................................................... 327

Varying the Discount Rate Input ................................................................................................. 330

Using the Goal Seek Tool ............................................................................................................ 332

14 Planning Profits .......................................................................................335

Understanding the Effects of Leverage ....................................................................................... 335

The Effect of Business Risk .................................................................................................... 336

Analyzing Operating Leverage .................................................................................................... 337

Evaluating the Financial Implications of an Operational Change .......................................... 338

Evaluating Fixed Expenses .................................................................................................... 339

Evaluating Effect of Increasing Fixed Costs ........................................................................... 345

Planning by Using the DOL ................................................................................................... 347

Analyzing Financial Leverage ..................................................................................................... 348

Distinguishing Business from Financial Risk ......................................................................... 348

Determining the Debt Ratio.................................................................................................. 349

Determining the Times Interest Earned Ratio ....................................................................... 350

15 Making Investment Decisions Under

Uncertain Conditions .............................................................................353

Using Standard Deviations .......................................................................................................... 354

Using Excel’s Standard Deviation Functions.......................................................................... 356

Understanding Confidence Intervals ........................................................................................... 357

Using Confidence Intervals in a Market Research Situation .................................................. 358

Calculating a Confidence Interval ......................................................................................... 359

Interpreting the Interval ....................................................................................................... 360

Refining Confidence Intervals ............................................................................................... 361

Using Regression Analysis in Decision Making ............................................................................ 362

Regressing One Variable onto Another ................................................................................. 362

Interpreting the Trendline .................................................................................................... 364

Avoiding Traps in Interpretation: Association Versus Causation ........................................... 367

Regressing One Variable onto Several Other Variables: Multiple Regression ........................ 368

Using Excel’s Regression Add-In ........................................................................................... 373

Interpreting Regression Output ............................................................................................ 375

Estimating with Multiple Regression .................................................................................... 377

Using Excel’s TREND Function ............................................................................................... 377

16 Fixed Assets .............................................................................................383

Determining Original Cost .......................................................................................................... 383

Determining Costs ................................................................................................................ 384

Choosing Between Actual Cost and Replacement Cost ......................................................... 385

Depreciating Assets .................................................................................................................... 386

Understanding the Concept of Depreciation ......................................................................... 387

Matching Revenues to Costs ................................................................................................. 387

Using Straight-Line Depreciation.......................................................................................... 389

Using the Declining Balance Method .................................................................................... 390

Using the Double Declining Balance Function to Calculate Depreciation .............................. 393

Using Variable Declining Balance Depreciation .................................................................... 395

Using Sum-of-Years’-Digits Depreciation ............................................................................. 397

PART IV SALES AND MARKETING

17 Importing Business Data into Excel ...........................................................399

Creating and Using ODBC Queries ............................................................................................... 400

Preparing to Import Data...................................................................................................... 401

Specifying Data Sources ........................................................................................................ 401

Creating Queries with the Query Wizard ............................................................................... 405

Creating Queries with Microsoft Query ................................................................................. 407

Creating Parameterized Queries in Microsoft Query ............................................................. 410

Using Joins in Microsoft Query .............................................................................................. 411

Working with External Data Ranges ........................................................................................... 412

Include Row Numbers .......................................................................................................... 412

Adjust Column Width ........................................................................................................... 412

Preserve Column Sort/Filter/Layout ..................................................................................... 413

Preserve Cell Formatting ...................................................................................................... 413

Insert Cells for New Data, Delete Unused Cells ..................................................................... 414

Insert Entire Rows for New Data. Clear Unused Cells ............................................................ 415

Overwrite Existing Cells with New Data, Clear Unused Cells ................................................. 416

Managing Security Information ............................................................................................ 416

Arranging Automatic Refreshes ............................................................................................ 418

Setting Other Data Range Options ........................................................................................ 419

Importing Data to Pivot Tables and Charts ........................................................................... 420

Creating and Using Web Queries ................................................................................................ 424

Using Parameterized Web Queries.............................................................................................. 426

18 Exporting Business Data from Excel ..........................................................429

Using VBA to Update an External Database ................................................................................ 429

Getting at VBA ...................................................................................................................... 430

Structuring the Worksheet ................................................................................................... 431

Establishing Command Buttons ............................................................................................ 432

Editing the Record’s Values......................................................................................................... 433

Using Database Objects ........................................................................................................ 435

Using With Blocks ....................................................................................................................... 436

Finding the Right Record ...................................................................................................... 437

Editing the Record ................................................................................................................ 438

Adding New Records to the Recordset ........................................................................................ 439

Choosing to Use ADO .................................................................................................................. 442

Back Ends Perform Data Management ................................................................................. 442

19 Analyzing Contributions and Margins ........................................................445

Calculating the Contribution Margin........................................................................................... 446

Classifying Costs ................................................................................................................... 447

Estimating Semivariable Costs .............................................................................................. 448

Using Unit Contribution .............................................................................................................. 449

Producing Digital Video Discs (Continued) ........................................................................... 449

Increasing the Contribution Margin ...................................................................................... 450

Creating an Operating Income Statement ............................................................................ 451

Finding the Break-Even Point ..................................................................................................... 452

Calculating Break-Even in Units ............................................................................................ 453

Calculating Break-Even in Sales ............................................................................................ 453

Calculating Break-Even in Sales Dollars with a Specified Level of Profit ............................... 454

Charting the Break-Even Point ............................................................................................. 455

Choosing the Chart Type ....................................................................................................... 457

Making Assumptions in Contribution Analysis ............................................................................ 459

Linear Relationships ............................................................................................................. 459

Assignment of Costs ............................................................................................................. 460

Constant Sales Mix ............................................................................................................... 460

Worker Productivity .............................................................................................................. 461

Determining Sales Mix ................................................................................................................ 461

20 Pricing and Costing ..................................................................................465

Using Absorption and Contribution Costing ................................................................................ 466

Understanding Absorption Costing ....................................................................................... 466

Understanding Contribution Costing .................................................................................... 472

Applying the Contribution Approach to a Pricing Decision ................................................... 475

Using Contribution Analysis for New Products ............................................................................ 477

Allocating Expenses to Product Lines ................................................................................... 479

Varying the Inputs ................................................................................................................ 480

Estimating the Effect of Cross-Elasticity ...................................................................................... 481

Glossary .......................................................................................................485

TOC, 9780789743176, 5/12/10

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