Compound Annual Growth Rate (CAGR)
The future value (FV) of something that grows at an constant periodic rate of r for n periods is given by
the relationship between present value (PV) and future value:
FV, n = PV(1+r1)(1+r2)(1 + r3) … (1+rm) = PV(1 + r)”
(1)
CAGR calculates the average growth rate per year when we only have a start date and an end date of value.
For instance, if we have the FV and the PV (perhaps the FV is sales in year 5 and the PV is sales in year
0), we can calculate CAGR by solving Equation 1 for r (n. PV, and FV are known):
FV = PV (1+r)”
(1+r)” =
PV
FV
1+=
FV
PV
T =
– (*) *-1
Example:
Year 1 sales were $10,000,000. Year 5 sales were $15,000,000. PV = 10,000,000 and FV = 15,000,000.
There are 4 growth periods: 1 to 2, 2 to 3, 3 to 4, and 4 to 5. We are trying to find the r that makes the
following equation true:
10,000,000(1 + r)(1+r)(1+r)(1+r) = 15,000,000
10,000,000(1+r)* = 15,000,000
(1+r)* = 1.5
(1+r) = 11.5 = (1.5)4 = 1.1066819197
r = 0.1066819197
Proof/check:
PV (1 + r)” = FV
10,000,000 X (1+0.1066819197)* = 15,000,000
Balance Sheet Metrics
Just as ratios such as OpEx percentage of sales allow a reader to perform quick common-size analysis of the
income statement, balance sheet metrics provide a reader a quick way of evaluating the business’s investment
in working capital (or other elements of the balance sheet) in an easy to use metric that can be quickly
compared to similar businesses.
DSO, or Days Sales Outstanding (also known as Days A/R, or by other names) is a measure of how long it
take a business to turn sales into cash receipts.
DSO = 360 x
Average Accounts Receivable, net
Revenue
DIOH, or Days Inventory On Hand, is a measure of how many days of production inventory can support. It
is also a measure of how efficient a business uses its investment in inventory
DIOH = 360 x
Average Inventory, net
Cost of Sales
Days A/P is a measure of how well the business uses vendor financing to reduce its working capital investment.
Days AP = 360
Average Accounts Payable
Cost of Sales
Averages are usually calculated as (more granular averages may be used as applicable):
Beginning Balance + Ending Balance
2
Balance sheet metrics may be calculated for a particular period (eg, one month), or for a set of periods
(eg, one year). They may also be calculated using a moving average, or some other method of evaluating
“average” balance.
Reserve accounts
Inventory reserves: often, companies will book adjustments in inventory valuation to inventory reserves
rather than a direct adjustment to the inventory account (as you learned to do using lower of cost or market
adjustments in your accounting classes). Reserve accounts do the same thing as direct adjustments (lower
net inventory on the balance sheet), but they allow companies to keep track of the estimated difference versus
direct adjustments to the inventory account. For inventory, these reserves are reflected in account 01-30-101
on the trial balance.
Net values (net of reserves) of working capital accounts (A/R, Inventory, A/P, etc) are typically used to
calculate balance sheet metrics. To find the net value, simply add the two accounts together, making sure
to note that reserves are nearly always a reduction in balance (credit for debit accounts, debit for credit
accounts).
Supplemental information and tips:
Proper trend financial statement format
The primary components of a properly formatted trend financial statement are:
• Proper lines and subtotals (research it if you don’t remember what these are).
Years (periods) in columns.
• Growth figures as appropriate (CAGR is preferred).
• Ratios as appropriate research or ask instructor).
Example of a properly formatted trend income statement:
Year:
Year 2
Year
Yeard
Years
Year
Year 10
CARI
1,250
2.703
4
6,042
8,046
10,230
12,600
15,276
18,212
21,358
3.
Revenue
Cost of Salesi
Variable expenses
Flued expenses
Total Cost of Sales
2.173
1052
43.2
76.40
6014
76%
152.5
7.549
8112
7,92
9164
85.28
SOLO
728
47
10,
34
11,29LD
12.781
936
11, 2015
14730
97.75
15,195,3
11827
275.7
15001
65.2
Gross Profit
GPX
31273
12.1N
1,1433
18.
1,000
210N
2,340,8
2295
3,0012
245N
3,500
25.N
5,00
27.5N
4162.2
28
SAN
153N
Operating Expenses
Variable expenses
Furdexpenses
Total Oper. Expenses
Opbx
223.2
304
300
104
134.0
10
636
104
167.5
6
984
104
202.4
47
1368
104
240
40W
1788
104
2828
25
270.0
104
3740
ON
3216
104
405.6
20
3768
104
1808
26
3272
4344
104
538.4
2.5
16,7
1.23
11413
6.162.2
65.2
Operating Income
Opics
67.3
SAN
MO
15.3
1,035
21.09
2,340.
22.9%
3,0312
24.53
3920
IN
5,00LS
275N
12.15
18
interest
30,0
9.3
300
743
30.0
1662
300
278.3
30.0
415.9
30.0
577.7
30.0
765.3
30.0
988.0
30.0
1,2016
30.0
1,5331
4,599.2
763N
Net Income
Met loc
28.0
2.2
222.9
8.23
835.0
138
1,2476
15.5
1.733.1
16.9
2,295.9
18.2
2.964.0
19.45
3.7319
20.5
11.
Please note that the choice of sub-lines in Cost of Sales and Operating Expenses is a choice of the author.
Variants to the above example include: a single line for COS/OpEx, expense categories (such as wages,
depreciation, etc), or whatever other sub-categorization is relevant to what is desired to be communicated.
The key elements, as described above, of a properly formatted trend financial statement are: years/periods
in columns, correct statement sections, ratios/metrics (such as DSO) where appropriate, well-formatted
delineation of sections, and CAGR presentation as appropriate.
Figure 1: Trial Balance Report
Tasty Delights Brands, Inc
Trial Balance
For the years ended 1 and 2
Prep by: Debit McDebitface
Figures in 000
Ending Balance Debit (Credit)
Year 1 Year 2 Year 3
Ber Bal
5,000.00
2,856.63
833.33
(20.83)
682.50
(34.13)
9,000.00
(750.00
(682.50)
2,984.49
2,033.33
(20.83)
706.39
(35.32)
9,500.00
(800.000
(706.39)
5,197.40
1,000.00
(20.83)
731.11
(36.56)
10,300.00
(880.00)
(731.11)
Act
01-10-100
01-20-100
01-20-101
01-30-100
01-30-101
01-90-100
01-90-101
02-20-100
02-50-100
02-90-100
03-10-100
03-10-200
03-10-400
03-20-100
00-00-100
00-10-100
00-50-100
00-70-100
00-80-100
Account Name
Cash
Accounts Receivable
Allowance for Doubtful Accounts
Inventory
Allowance for excess/obsolete
Fixed assets at cost
Accumulated Depreciation
Accounts Payable
Short term Notes Payable
Long term debt
Common Equity
Contributed Capital
Treasury stock
Retained Earnings
Revenue
Cost of Goods Sold
Selling, General, and Administrative Expens
Interest Expense
Tax Expense
(1,000,00)
(4,000.00)
(6,000.00) (7,000.00)
(1,000.00) (1,000.00)
(4,000.00) (4,000.00)
1,000.00
(885.00) (2.661.68)
(10,000.00) (11,600.00)
5,400.00 5,651.10
3,000.00 3,160.00
360.00 420.00
295.00 592.23
(7,000.00)
(1,000.00)
(4,000.00)
1,000.00
(4,560.01)
(12,000.00)
5,848.89
3,200.00
420.00
632.78
Note: outstanding shares of common stock
1.000
950
950
Note that this trial balance presents income statement account balances BEFORE closing entries have been
made, and presents balance sheet account balances AFTER closing entries have been made. Closing en-
tries (usually performed once a year) zero out the income statement accounts, posting the net difference in
debits/credits (ie, net income) to retained earnings.
Case Description
Tasty Delights has provided you their
quickbooks trial balance. The bookkeeping was performed by a
temporary employee reporting to the CEO.
Requirements
Complete the requirements below, organizing your responses using a section for each requirement.
Submission requirements
This assignment should be prepared as a set of schedules with commentary.
Submit a pdf of your report to the appropriate dropbox on Moodle before the in-class due date/time.
Grading will be based upon:
Satisfaction of requirements listed below.
• Quality of analysis, discussion, and estimation methods.
Quality of report organization and layout.
• Proper grammar and spelling; style and flow; sentence construction, concise but complete.
• Editing – good writing is rewriting!
Graphics and other visualizations are not an absolute requirement (unless otherwise specified), but your
grade will be positively affected by the use of effective visualizations.
Tier 1 requirements (maximum grade of B):
1. Using the trial balance report provided, prepare a full set of financial statements for Years 1-3.
2. Prepare a schedule that presents DSO, DIOH, and days of A/P for Years 1-3.
Statements MUST be in proper format, including proper sections, subtotals, totals, etc. A full set of financial
statements means: income statement, balance sheet, and cash flow statement.
Tier 2 requirements (maximum grade of A):
1. Complete all items in the Tier 1 section.
2. Using only the balance sheet, what was net income in Year 3? Explain your reasoning.
3. Prepare common size income statements for Years 1-3.
4. Calculate CAGR for sales, gross profit, and net income (through Year 3 – be careful with periods). Is
Tasty Delights leveraging sales growth?

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