CHAPTER NINE

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
The Analysis of the
Balance Sheet and
Income Statement
 What you will learn from this chapter

• Why reformulated income statements and balance sheets are desirable

• How knowledge of the business is incorporated in reformulated statements

• How operating and financing components of the two statements are identified

• Which assets and liabilities typically fall into operating and financing
categories

• Why income taxes are allocated to different parts of the income statement

• What balance sheet and income statement ratios reveal

• How one learns about the firm’s strategy through the financial statements

9-3
 Analysis of Balance Sheet and Income
Statement: the Steps

1. Reformulate to distinguish between operating and

financing activities
2. Carry out common size and trend analysis
3. Calculate balance sheet and income statement ratios

9-4
 The Standard Balance Sheet
Assets Liabilities and Stockholders’ Equity

Current assets: Current liabilities:

Cash Accounts payable

Cash equivalents Accrued expenses
Short-term investments Deferred (unearned) revenues
Deposits and advances Advances from customers
Accounts receivable (less allowances) Short-term notes payable
Short-term notes receivable Short-term borrowings
Other receivables Deferred taxes (current portion)
Inventories Current maturities of long-term debt
Prepaid expenses
Deferred income taxes (current portion)

Long-term assets: Long-term liabilities:

Long-term debt securities Bank loans

Equity investment at cost
Equity investments at market
Equity investments - equity method
Property plant and equipment
(less accumulated depreciation)
Land
Buildings
Equipment
Leased assets
Leasehold improvements
Construction in progress
Bonds payable
Long-term notes payable
Lease obligations
Commitments and contingencies
Deferred taxes
Pension liabilities
Post employment liabilities
Redeemable preferred stock

Intangible assets
Patents Minority interest
Copyrights
Goodwill
Shareholders’ equity
Deferred taxes (non-current) Preferred equity
Deferred charges Common equity

9-5
 Reformulating the Balance Sheet:
The Governing Accounting Relations

Net Operating Assets (NOA) = Operating Assets (OA) – Operating Liabilities (OL)

Net Financial Obligations (NFO) = Financial Obligations (FO) – Financial Assets (FA)

Common Shareholders’ Equity (CSE) = NOA – NFO

____Reformulated Balance Sheet___

OA FO
(OL) (FA)
NFO
CSE
NOA NFO + CSE
________________________________

9-6
The Typical Reformulated Balance Sheet

Assets Liabilities and Stockholders’ Equity

Financial assets: Financial liabilities:

- Cash equivalents - Short-term borrowings

- Short-term investments - Current maturities of long-term debt

- Short-term notes receivable (?) - Short-term notes payable (?)

- Long-term non-marketable - Long-term borrowing (bank loans,

debt investments bonds, payable, notes payable)

- Long-term marketable - Lease obligations

debt securities
- Preferred stock

Operating assets: Operating liabilities:

all other assets all other liabilities

Minority interest

Common equity
9-7
 Issues in Reformulating Balance Sheets

• Cash: working cash and excess cash

• Short term notes receivable: trade receivables or investment of cash?
• Finance receivables: an operating asset
• Debt investments: financial assets
• Short-term equity investments: excess cash or trading securities?
• Short-term notes payable: trade notes or borrowing?
• Lease assets: operating assets
• Lease liabilities: financial obligation
• Deferred tax assets and liabilities: operating
• Deferred revenues and accrued expenses: operating
• Minority interest: not a financial obligation
• For financial firms, many “financial items” are operating assets and liabilities

9-8
GAAP Balance Sheet: Nike Inc.

9-9
Reformulated Balance Sheet: Nike Inc.

9-10
 Nike Inc.: Notes on the Reformulation

1. Cash and cash equivalents have been split between operating

cash and interest-bearing cash investments
2. Interest-bearing accounts receivable are classified as financing
items
3. Accrued liabilities exclude dividends payable (now added to
shareholders’ equity) and include stock-based compensation
liability (transferred from shareholders’ equity)
4. Notes payable are interest bearing and classified as financing
liabilities

9-11
 Strategic Balance Sheets

Reformulated balance sheets inform about the firm’s

strategy for running the business:
• How the firm invests in operations
• How the firm relies on operating liabilities
• How the firm conducts its financing of the operations

See examples for Microsoft, Dell, and General Mills

9-12
Strategic Balance Sheet: Microsoft Corporation
Year ending June 30 2002 2001

Net Operating Assets

Operating assets:
Working cash1 $ 50 $ 50
Account receivable, net 5,129 3,671
Inventories 673 83
Deferred income taxes 2,112 1,522
Property and equipment, net 2,268 2,309
Equity investments 9,151 8,780
Convertible preferred debt2 3,036 3,925
Goodwill 1,426 1,511
Intangible assets, net 243 401
Other assets 2,952 3,372
27,040 25,624
Operating liabilities
Accounts payable 1,208 $ 1,188
Accrued compensation 1,145 742
Income taxes payable 2,022 1,468
Unearned revenue 7,743 5,614
Preferred income taxes 398 409
Other liabilities 2,950 15,466 2,120 11,541
11,574 14,083
Net financial assets
Cash equivalents 2,966 3,872
Short-term investments 35,636 27,678
Long-term debt investments 2,004 40,606 1,656 33,206

Common Stockholders’ Equity 52,180 47,289

1
Cash and cash equivalents split between working cash and financial assets.
2
Convertible debt of AT&T Corp. in connection with investment in broadband.

9-13
Strategic Balance Sheet: Dell Inc.

9-14
Strategic Balance Sheet: General Mills Inc.

9-15
The Standard Income Statement
Net sales (sales minus sales allowances)
+ Other revenue (royalties, rentals, license fees)
- Cost of sales
= Gross margin
- Marketing and advertising expenses
- General expenses
- Administrative expenses
- ± Special items and nonrecurring items
 Restructuring charges
 Merger expenses
 Gains and losses on asset sales
 Asset impairments
 Litigation settlements
 Environmental remediation
- Research and development expense

+ Interest revenue
- Interest (expense)
 Realized gains and losses on financial assets
± Unrealized gains and losses on trading securities
+ Share of income of subsidiary
- Income taxes
= Income before extraordinary items and discontinued operations
 Discontinued operations
 Extraordinary items
 Gains and losses on debt retirement
 Abnormal gains and losses

- Minority interest

= Net income or loss

9-16
 The Reformulated Income Statement
1. Operating items are separated from financing items.
2. Operating income from sales is separated from other operating income.
3. Tax is allocated to components of the statement, with no allocation to items reported on an after-tax
basis
Reformulated Comprehensive Income Statement

Net sales
– Expenses to generate sales
Operating income from sales (before tax)
– Tax on operating income from sales
+ Tax as reported
+ Tax benefit from net financial expenses
– Tax allocated to other operating income
Operating income from sales (after tax)
±Other operating income (expense) requiring tax allocation
Restructuring charges and asset impairments
Merger expenses
Gains and losses on asset sales
Gains and losses on security transactions
− Tax on other operating income
± After-tax operating items
Equity share in subsidiary income
Operating items in extraordinary income
Dirty-surplus operating items in Table 8.1
Hidden-dirty surplus operating items
Operating income (after tax)

9-17
The Reformulated Income Statement (cont.)

- Net financial expenses after tax

+ Interest expense
- Interest revenue
 Realized gains and losses on financial assets
= Net financial expense before tax
+ Tax benefit from net financial expenses
= Net financial expense after tax
 Gains and losses on debt retirement.
 Dirty surplus financial items in Table 8.1
 Hidden dirty surplus financial items
+ Preferred dividends
 Gains and losses on redemption of preferred stock
- Tax benefit from preferred dividends (if any)
- Minority Interest

= Comprehensive Income to Common

9-18
 The Allocation of Taxes

• In the income statement only one tax number is reported: It must be allocated to
the operating and financial components to put both on an after-tax basis

• First, calculate the tax benefit (tax shield) provided by deducting interest expense
Tax Benefit  Net Interest Expense  t
where t is the marginal (not effective) tax rate. The statutory rate is usually the
marginal rate.

• From the operating income deduct both the total tax and the tax benefit, to capture
what the operating income would have been, after tax, had there been no financing
activities

• To the net financial expense add the tax benefit, because its net effect is
attributable to the financing activities

9-19
 Top-down and Bottom-up Methods for Tax Allocation:
Tax Rate = 35%
GAAP Top-down Bottom-up
Income Statement Tax Allocation Tax Allocation
Revenue $4,000
Operating expenses (3,400)
Interest expense (100)
Income before tax 500
Income tax expense (150)
Net income $ 350

Revenue $4000
Operating expenses (3,400)
Operating income before tax 600
Tax expense:
Tax reported $150
Tax benefit for interest 35 (185)
($100 x 0.35)
Operating income after tax $ 415

Net income $350

Interest expense $100
Tax benefit 35 65
Operating income after tax $415

9-20
 Additional Tax Allocation within Operations

• Allocate taxes between operating income from sales and other

operating income (not from sales) so that both are after tax.

• Remember: some other operating income items are after tax (if
they appear below the tax line on the GAAP statement)

• Remember: losses draw negative taxes

9-21
GAAP Income Statement: Nike Inc.

9-22
 Starting Point for Income Statement Reformulation:
Identify Comprehensive Income from Equity Statement

9-23
Reformulated Income Statement: Nike Inc.

9-24
 Nike Inc.: Notes on Reformulated Income Statement

1. Advertising expense is found in the 10-K footnotes

2. Other expenses in the income statement in 2008 include gains from
divestitures, classified as other operating income here
3. Statutory tax rate for tax allocation is 36.4%, including both federal
and state taxes
4. Dirty-surplus items come from the equity statement
5. Interest income is netted against interest expense in the GAAP
statement
6. Preferred dividends are less than $0.05 million

9-25
 Strategic Income Statements

Reformulated income statements show how the firm’s strategy generates

earnings:
• How the firm grows earnings through sales growth
• How sales are translated into operating income
• How the financing strategy affects shareholders

A useful metric: Residual Operating Income (ReOI)

ReOI t  OI t  (   1) NOA t-1

Value added in operations: How are operations adding value to the book
value of operations?

9-26
 GAAP Income Statement: Microsoft Corporation
Year Ended June 30 2002 2001
__________________________________________________________________________________
Revenue $ 28,365 $ 25,296

Operating expenses:
Cost of revenue 5,191 3,455
Research and development 4,307 4,379
Sales and marketing 5,407 4,885
General and administrative 1,550 857
----------------------------------------------------------------------------------
Total operating expenses 16,455 13,576
----------------------------------------------------------------------------------

Operating income 11,910 11,720

Losses on equity investees and other (92) (159)
Investment income(loss) (305) (36)

----------------------------------------------------------------------------------

Income before income taxes 11,513 11,525

Provision for income taxes 3,684 3,804
----------------------------------------------------------------------------------

Income before accounting change 7,829 7,721

Cumulative effect of accounting change (net of tax) (375)

----------------------------------------------------------------------------------

Net income $ 7,829 $ 7,346

__________________________________________________________________________________

9-27
 Strategic Income Statement: Microsoft Corporation
Year ended June 2002 2001

Revenue $ 28,365 $ 25,296

Operating expenses:
Cost of revenue 5,191 3,455
Research and development 4,307 4,379
Sales and marketing 5,407 4,885
General and administrative 1,550 857
16,455 13,576

Operating income from sales, before tax 11,910 11,720

Tax as reported $ 3,684 $ 3,804

Tax on other operating income 872 756
Tax on financing income (758) 3,798 (743) 3,817

Operating income from sales, after tax 8,112 7,903

Investment income in income statement:1
Dividends 357 377
Realized gains on sales of investments 2,121 3,003
Permanent impairment of investments (4,323) (4,804)
Unrealized losses on derivatives (480) (2,325) (592) (2,016)
Tax on investment income (at 37.5%)2 872 756
(1,453) (1,260)
Investment income in equity statement
(after tax):
Unrealized loss on convertible debt -- (829)
Gains (losses) on derivatives (91) 634
Unrealized losses on equity investments (281) (707)
Total investment income (1,825) (2,162)

Losses in equity subsidiaries (92) (159)

Currency translation and other 82 (39)
Cumulative effect of accounting change -- (450)
Total other income (1,835) (2,810)

Total operating income 6,277 5,093

1 Included in investment income is the GAAP
Net financing income
Interest income3 1,762 1,808 statement; details from footnotes.
Realized gains on short-term investments 258 172
2,020 1,980 2 Losses on investments draw a tax deduction.
Tax at 37.5%4 758 743
1,262 1,237 3 Interest income is included in investment income
Financing income in equity statement in the GAAP statement.
(after tax):
Unrealized gain on financial assets 286 76 4With net financing income, financing activities
Total financing income 1,548 1,313
draw further taxes rather than a tax benefit.

Comprehensive income 7,825 6,406

9-28
Strategic Income Statement: Dell Inc.

9-29
 Value Added to Strategic Balance Sheets: Dell Inc.

• Dell’s strategic balance reports $8.811 billion in net financial

assets: These add no value
• But value is added in the operating activities:

ReOI t  OI t  (   1) NOA t-1

For Dell,

ReOI 2008  $2,618  (0.10  7,209 )  $3,338 .9

Dell’s residual income from operations is greater than operating

income: Value from negative net operating assets!

9-30
Strategic Income Statement: General Mills Inc.

9-31
 Comparative Analysis

• Comparison to other firms is called cross-sectional analysis

• Comparison to a firm’s own history is called time-series analysis
• Common size analysis gives a ready comparison:

• The Balance Sheet

Operating items / Totals
Financing items / Totals
• The Income Statement
Each item / Total revenues

9-32
 Common Size Analysis:
Nike and General Mills Income Statements
Nike General Mills
$ % $ %

Revenue 18,627 100.0 13,652 100.0

Cost of sales 10,240 55.0 8,778 64.3
Gross margin 8,387 45.0 4,874 35.7

Operating expenses
Administrative 3,645 19.6 1,792 13.1
Advertising 2,308 12.4 628 4.6
Amortization and other 69 0.4 205 1.5
Operating income from sales 2,365 12.7 2,249 16.5
(before tax)

Tax on operating income from sales 569 3.1 800 5.9

Other operating income from sales 1,796 9.6 1,449 10.6

(after tax)
Other operating income 87 0.5 452 3.3
Operating income 1,883 10.1 1,901 13.9
Net financing expense (income) 49 0.3 (252) (1.8)

Comprehensive income to common 1,932 10.4 1,649 12.1

9-33
 Common Size Analysis:
Nike and General Mills Balance Sheets (Operating
Section)
Nike General Mills
$ % $ %

Operating assets
Cash 93 0.9 50 0.3
Accounts renewable 2,795 28.6 1,082 5.9
Inventories 2,438 25.0 1,367 7.4
Prepaid expenses 602 6.2 511 2.8
Property, plant and equipment 1,891 19.4 3,108 16.9
Goodwill 449 4.6 6,786 36.8
Identifiable intangibles 743 7.6 3,777 20.5
Deferred taxes and other assets 748 7.7 1,750 9.5
9,760 100.0 18,431 100.0

Operating liabilities
Accounts payable 1,222 30.9 937 16.8
Accrued liabilities 1,790 45.3 3,164 56.7
Income taxes payable 88 2.2 - -
Deferred taxes and other 854 21.6 1,483 26.6
3,954 100.0 5,584 100.0

Net operating assets 5,806 12,847

9-34
Trend Analysis: Nike Inc.

9-35
 Income Statement Ratios
Profit margin ratios
 Operating Profit Margin:

OI (after tax)
Sales

 Sales Profit Margin:

OI (after tax) from Sales

Sales
 Other Items Profit Margin:

OI (after tax) from Other Items

Sales

 Net Profit Margin

Comprehens ive Net Income

Sales

9-36
 Income Statement Ratios (cont.)

• Expense Ratios

Expense Ratio

Expense for an Activity

Sales

1 - Sales PM = Sum of Expense Ratios

9-37
 Balance Sheet Leverage Ratios

• Financial Leverage Ratios

Capitalization Ratio:
NOA
CSE

Financial Leverage Ratio (FLEV)

NFO
CSE
It is always the case that
Capitalization Ratio - Leverage Ratio = 1.0

• Operating Liability Leverage Ratio

Operating Liability Leverage (OLLEV) =

Operating Liabilities
Net Operating Assets

9-38
 Growth Ratios
Change in Sales
Growth Rate in Sales =
Prior Period' s Sales

Change in Operating Income (after Tax)

Growth Rate in Operating Income =
Prior Period' s OI

Change in Net Operating Assets

Growth in NOA =
Beginning NOA

Change in CSE
Growth in CSE =
Beginning CSE

9-39
 Summary Profitability Measures

Operating Profitability:
OI t
RNOA t =
1
 NOA t +NOA t-1 
2

Financing Profitability:
NFE t
NBC t =
1
 NFO t +NFO t-1 
2
or
NFI t
RNFA t =
1
 NFA t +NFA t-1 
2

All measures are after tax.

9-40
 Financial Statement Analysis Procedures
1. Reformulate the statement of stockholders’ equity on clean surplus
basis (Chapter 8)
2. Calculate comprehensive rate of return on common equity, ROCE,
from reformulated statement of common stockholders’ equity
(Chapter 8)
3. Reformulate the balance sheet to distinguish operating and financial
assets and obligations
4. Reformulate the income statement on clean surplus basis and
distinguish operating and financing income
5. Compare reformulated balance sheets and income statements with
reformulated statements of comparison firms, and over time, with a
common size analysis and a trend analysis
6. Calculate balance sheet and income statement ratios
7. Carry out the analysis of ROCE: Chapter 11
8. Carry out the analysis of growth: Chapter 12

9-41
 Additional Examples of
Reformulated Statements
Follow

9-42
 January 2 January 2
VF Corporation 1999 1998
1998 Reported ASSETS
Current Assets
Balance Sheet Cash and equivalents S $ 63,208 $ 124,094
Accounts receivable, less allowances O 705,734 587,934
Inventories O 954,007 774,755
Deferred income taxes O 99,608 94,750
Other current assets O 25,595 19,933
Total current assets 1,848,152 1,601,466
Property, plant and equipment O 776,091 705,990
Intangible assets O 951,562 814,332
Other assets O 260,861 200,994
$3,836,666 $3,322,782
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Short-term borrowings F $ 244,910 $ 24,191
Current portion of long-term debt F 969 450
Accounts payable O 341,126 301,103
Accrued liabilities O 446,001 440,164
Total current liabilities 1,033,006 765,908
Long-term debt F 521,657 516,226
Other liabilities O 181,750 143,813
Redeemable preferred stock F 54,344 56,341
Deferred contribution to ESOP O (20,399) (26,275)
Total liabilities 1,770,358 1,456,013

Common Shareholders' Equity

Common stock 119,466 121,225
Additional paid-in capital 801,511 744,108
Accumulated other comprehensive income (25,639) (36,110)
Retained earnings 1,170,970 1,037,546
Total shareholders’ equity 2,066,308 1,866,769
$3,836,666 $3,322,782
========== ==========
9-43
 January 2 January 2
1999 1998
OPERATING ASSETS
Cash $ 15,000 $ 12,000
VF Corporation Accounts receivable, less allowances 705,734 587,934
1998 Inventories 954,007 774,755
Other current assets 25,595 19,933
Reformulated Property, plant and equipment 776,091 705,990
Balance Sheet Goodwill (intangible assets) 951,562 814,332
Deferred income tax asset 200,795 180,469
Pension asset 35,164 27,713
Other assets 124,510 87,562
Deferred ESOP contributions 20,399 26,275
Operating assets 3,808,857 3,236,963

OPERATING LIABILITIES
Accounts payable 341,126 301,103
Accrued liabilities 446,001 440,164
Other liabilities 181,750 143,813
Operating liabilities 968,877 885,080

NET OPERATING ASSETS (NOA) 2,839,980 2,351,883

NET FINANCIAL OBLIGATIONS (NFO)

Short-term borrowings $ 244,910 $ 24,191
Current portion of long-term debt 969 450
Long-term debt 521,657 516,226
Preferred stock 54,344 56,341
Cash and equivalents (48,208) (112,094)
773,672 485,114

COMMON SHAREHOLDERS’ EQUITY $2,066,308 $1,866,769

========== ==========

9-44
 VF Corporation 1998
Reported Income
Statement
FISCAL YEAR ENDED JANUARY 2 JANUARY3
1999 1998
O NET SALES $5,478,807 $5,222,246
COSTS AND OPERATING EXPENSES
O Cost of products sold 3,586,686 3,440,611
O Marketing, administrative & general expenses 1,198,854 1,175,598
O Other operating expense 9,098 964
4,794,638 4,617,173
OPERATING INCOME 684,169 605,073
OTHER INCOME (EXPENSE)
F Interest income 6,411 23,818
F Interest expense (62,282) (49,695)
O Miscellaneous, net 3,300 6,684
(52,571) (19,193)
INCOME BEFORE INCOME TAXES 631,598 585,880
S INCOME TAXES 243,292 234,938
NET INCOME 388,306 350,942

OTHER COMPREHENSIVE INCOME

O Foreign currency translation 10,471 (42,538)
COMPREHENSIVE INCOME $ 398,777 $ 308,404
========== ==========

9-45
 VF Corporation 1998
Reformulated Income Statement
FISCAL YEAR ENDED JANUARY 2 JANUARY3
1999 1998
Net sales $5,478,807 $5,222,246
Cost of products sold (3,586,686) (3,440,611)
Gross margin 1,892,121 1,781,635
Miscellaneous income 3,300 6,684
1,895,421 1,788,319
Advertising expense 287,500 309,300
Administrative and general expense 911,354 866,298
Other expense 9,098 (1,207,952) 964 (1,176,562)
687,469 611,757
Tax benefit on preferred dividends to ESOP 568 700
Foreign currency translation adjustment 10,471 (42,538)
Operating income before tax 698,508 569,919
Tax reported 243,292 234,938
Tax benefit of debt 21,231 264,523 9,833 244,771
Operating income after tax 433,985 325,148
Net financial expense
Interest expense 62,282 49,695
Interest income (6,411) (23,818)
Net interest before tax 55,871 25,877
Tax benefit of debt (38%) (21,231) (9,833)
Net interest after tax 34,640 16,044
Preferred dividends 3,717 3,804
Preferred stock redemption loss 2,763 41,120 1,855 21,703
Comprehensive income (available to common) $ 392,862 $ 303,445
========== ==========

9-46
 Genentech, Inc. 1995
Reported Balance Sheet
1995 1994
ASSETS:
Current assets
Cash and cash equivalents $ 137,043 S $ 66,713
Short-term investments 603,296 F 652,461
Accounts receivable (less allowances) 172,160 O 146,267
Logo used with permission of Genetech, Inc.

Inventories 93,648 O 103,200

Prepaid expenses & other current assets 39,267 O 28,475
Total current assets 1,045,414 997,116
Long-term marketable securities 356,475 F 201,726
Property, plant and equipment, at cost:
Land 57,313 O 55,998
Buildings 258,717 O 245,871
Equipment 383,387 O 331,392
Leasehold improvements 12,508 O 11,988
Construction in progress 60,480 O 55,299
Less accumulated depreciation (268,751) O (215,255)
Net property, plant and equipment 503,654 485,293
Other assets 105,452 O 60,989
Total assets $2,010,995 $1,745,124
========== ==========

9-47
 Genentech, Inc. 1995
Reported Balance Sheet
1995 1994
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable $ 37,101 O $ 30,963
Accrued compensation 36,945 O 36,939
Accrued royalties 23,159 O 25,864
Accrued marketing and promotion costs 18,863 O 27,463
Accrued clinical and other studies 33,621 36,277
Logo used with permission of Genetech, Inc.

O
Income taxes payable 14,329 O 17,839
Other accrued liabilities 69,068 O 44,283
Current portion of long-term debt 358 F 871
Total current liabilities 233,444 220,499
Long-term debt 150,000 F 150,358
Other long-term liabilities 25,504 O 25,483
Total liabilities 408,948 396,340

Stockholders' equity:
Preferred stock - F -
Special common stock 853 -
Redeemable common stock - 1,002
Common stock 1,532 1,343
Additional paid-in capital 1,281,640 1,207,720
Retained earnings 263,749 129,127
Net unrealized gain on securities
available for sale 54,273 9,592
Total stockholders' equity 1,602,047 1,348,784
Total liabilities and stockholders' equity $2,010,995 $1,745,124
========== ==========

9-48
 1995 1994
OPERATING ASSETS
Cash $ 10,000 $ 10,000
Accounts receivable, less allowances 172,160 146,267
Genentech, Inventories 93,648 103,200
Prepaid expenses and other current assets 39,267 28,475
Inc. 1995 Property, plant and equipment 503,654 485,293
Other assets 105,452 60,989
Reformulate Operating assets 924,181 834,224
d Balance
OPERATING LIABILITIES
Sheet Accounts payable 37,101 30,963
Accrued compensation 36,945 36,939
Accrued royalties 23,159 25,864
Logo used with permission of Genetech, Inc.

Accrued marketing and promotion costs 18,863 27,463

Accrued clinical and other studies 33,621 36,277
Income taxes payable 14,329 17,839
Other accrued liabilities 69,068 44,283
Other long-term liabilities 25,504 25,483
Operating liabilities 258,590 245,111

NET OPERATING ASSETS (NOA) 665,591 589,113

NET FINANCIAL ASSETS (NFA)

Cash equivalents 127,043 56,713
Short-term investments 603,296 652,461
Long-term investments 356,475 201,726
Current portion of long-term debt (358) (871)
Long-term debt (150,000) (150,358)
936,456 759,671

COMMON SHAREHOLDERS’ EQUITY $1,602,047 $1,348,784

========== ==========

9-49
 Genentech, Inc. 1995
Reported Income Statement
YEAR ENDED DECEMBER 31 1995 1994
Revenues
O Product sales $635,263 $601,064
O Royalties 190,811 126,022
O Contract and other 31,209 25,556
F Interest 60,562 42,748
Logo used with permission of Genetech, Inc.

Total revenues 917,845 795,390

Costs and expenses
O Cost of sales 97,930 95,829
O Research and development 363,049 314,322
O Marketing, general and administrative 251,653 248,604
O Special charge (primarily merger related) 25,000 -
F Interest 7,940 7,058
Total costs and expenses 745,572 665,813
Income before taxes 172,273 129,577
Income tax provision 25,841 5,183
S Net income $146,432 $124,394
======== ========

Net income per share $ 1.21 $ 1.04

Weighted average number of shares used

in computing per share amounts 121,220 119,465

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 Genentech, Inc. 1995 Reformulated
Income Statement
Operating income:
Operating revenues $857,283
Operating expenses 712,632
Special merger charge 25,000 737,632
Operating income before tax 119,651
Logo used with permission of Genetech, Inc.

Tax reported 25,841

Tax on financial income (20,523) 5,318

Operating income after tax 114,333

Financial income:
Interest revenue 60,562
Interest expense 7,940
Net interest income before tax 52,622
Tax on net interest income (.39) 20,523
Net interest income after tax 32,099
Unrealized gain on securities 44,681
Net financial income 76,780

Comprehensive income available to common $191,113

========
Weighted average shares outstanding 121,220
Comprehensive income per share $1.58

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Common Size Income Statement for Genentech, Amgen & Chiron
Genentech Amgen Chiron
$ % $ % $ %
Operating revenues before other items:
Product sales (unrelated parties) 635.3 74.1 1,818.6 93.7 922.9 90.5
Royalties 190.8 22.3 36.1 1.9 39.3 3.9
Re venues partners and agreements 31.2 3.6 85.2 4.4 58.1 5.7
Operating revenue 857.3 100.0 1,939.9 100.0 1,020.3 100.0
Operating expenses before other items:
Cost of sales 97.9 11.4 272.9 14.1 415.8 40.8
Research and development 363.0 42.3 451.7 23.3 343.8 33.7
Selling, general and administrative 251.7 29.4 418.4 21.6 357.1 35.0
Write-off of purchased in-process technologies - - - - 365.3 35.8
Special change (corporate transactions) 25.0 2.9 - - 49.4 4.8
Restructuring charge - - - - 39.1 3.8
Other - - - - 12.6 1.2
Operating expense 737.6 86.0 1,143.0 5.89 1,583.0 155.1

Operating income before tax and other items 119.7 14.0 796.9 41.1 (562.7) (55.1)

Income tax reported 25.8 3.0 256.7 13.2 21.7 2.1

Income tax on financial items (20.5) (2.4) (19.8) (1.0) 3.3 .3
Tax on operating income 5.3 .6 236.9 12.2 25.0 2.5

Operating income (loss) before other items 114.3 13.3 560.0 28.9 (587.7) (57.6)
Share of income (loss) of subsidiary - - (53.3) (2.7) 80.4 7.9
Foreign currency translation adjustment - - - - 2.4 .2
Operating income after tax 114.3 13.3 506.7 26.1 (504.9) (49.5)

Financial income after tax:

Net interest income 52.6 68.5 50.8 163.9 (8.3) (21.3)
Tax on interest income (20.5) (26.7) (19.8) (63.9) 3.3 8.5
Unrealized gain on securities 44.7 58.2 - - 44.0 112.9
76.8 100.0 31.0 100.0 38.9 100.0

Comprehensive income, net 191.1 22.3 537.7 27.7 (466.0) (45.7)

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 Genentech Amgen Chiron
Balance Sheet Components: % $ % $ %
Operating assets:
Cash 1.0 19.0 1.4 11.0 .9
Accounts receivable 18.6 199.3 14.2 285.8 22.4
Common Size Inventories 10.1 88.8 6.3 165.9 13.0
Balance Sheet Deferred taxes - 51.7 3.6 - -
Other current assets 4.2 64.0 4.6 50.0 3.9
for Genentech, Property, plant & equipment 54.5 743.8 53.1 517.8 40.5
Purchased technologies - - - 80.6 6.3
Amgen & Other intangibles assets - - - 71.6 5.6
Chiron Investments in subsidiaries - 95.7 6.8 54.4 4.3
Other long-term assets 11.4 139.2 9.9 40.0 3.1
100.0 1,401.5 100.0 1,277.1 100.0
Operating liabilities:
Accounts payable 14.3 54.4 10.6 81.1 22.9
Accrued liabilities 70.2 459.7 89.4 57.0 16.1
Taxes payable 5.5 - - 27.6 7.8
Unearned revenue - - - 20.8 5.9
Other current liabilities - - - 132.1 37.3
Other long-term liabilities 9.9 - - 35.9 10.1
100.0 514.1 100.0 354.5 100.0
Financial assets:
Cash equivalents 11.7 47.7 4.6 63.3 29.7
Short-term investments 55.5 983.6 95.4 61.1 28.7
Long-term investments 32.8 - - 88.7 41.6
100.0 1,031.3 100.0 213.1 100.0
Financial obligations:
Short-term borrowings - 69.7 28.2 50.0 10.8
Current maturities .2 - - - -
Long-term debt 99.8 177.2 71.8 413.3 89.2
100.0 246.9 100.0 463.3 100.0
Common stockholders’ equity - 1,671.8 - 672.4 -

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 Common Size Balance Sheet for Genentech,
Amgen & Chiron

Genentech Amgen Chiron

Totals Relative to Equity (%):

Operating assets 57.7 83.8 189.9
Operating liabilities (16.1) 30.8 (52.7)
Net operating assets 41.5 53.1 137.2

Financial assets 67.8 61.7 31.7

Financial obligations (9.4) (14.8) (68.9)
Net financial assets 58.4 46.9 (37.2)
100.0 100.0 100.0
==== ==== ====

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 Trend Analysis:
VF Corporation’s Income Statement
Base in
1998 1997 1996 1995 1994 1993
Sales 126.8 120.9 118.9 117.2 115.1 4,320
Cost of sales 120.6 115.7 116.3 120.2 113.9 2,974
Gross margins 140.6 132.3 124.7 110.3 117.7 1,346
Advertising expense 143.5 154.5 135.5 115.5 109.5 200
Admin and general expense 127.6 121.3 119.2 126.1 115.8 714
Operating income before tax 166.4 135.7 129.8 87.4 129.8 420
Taxes on operating income 157.7 145.2 135.7 90.5 123.8 168
Operating income after tax 172.2 129.0 125.8 85.3 134.1 252
Net financial expense 155.7 82.2 136.4 174.2 189.4 26
Comprehensive income 174.9 134.1 124.3 74.8 127.4 226

Trend analysis of selected financial statement items for VF Corporation, 1994-98. Base = 100 for 1993

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 Trend Analysis: VF
Corporation’s Balance Sheet
Base in
1998 1997 1996 1995 1994 1993
Accounts receivable 137.9 114.8 115.8 123.0 119.7 512
Inventory 122.5 99.5 93.8 108.1 102.8 779
Property, plant and equipment (gross) 136.9 125.5 123.4 119.2 112.3
1,250
Property, plant and equipment (net)108.8 99.0 101.3 105.2 107.6 713
Goodwill (gross) 167.1 143.1 152.3 153.3 151.7 715
Goodwill (net) 165.6 141.6 150.3 154.4 158.4 575
Deferred tax asset, before allowance253.7 229.0 182.8 181.7 119.4 93
Deferred tax asset, after allowance 220.9 197.8 153.8 161.5 109.9 91
Operating assets 136.3 115.9 115.2 122.0 119.1 2,794
Accounts payable 138.1 121.9 130.0 112.1 117.8 247
Accrued liabilities 166.4 164.2 159.3 134.0 110.8 268
Other liabilities 143.3 113.4 129.1 133.1 120.5 127
Operating liabilities 151.2 138.1 142.1 125.6 115.6 641
Net operating assets 131.9 109.2 107.2 120.9 120.1 2,153
Financial assets 36.4 84.8 197.7 57.6 38.6 132
Financial obligations 115.5 81.0 80.9 123.2 122.5 737
Net financial obligations 127.9 80.2 55.4 137.5 140.8 605
Common shareholders’ equity 133.5 120.7 127.6 114.5 112.1 1,547
Trend analysis of selected financial statement items for VF Corporation, 1994-98. Base = 100 for 1993

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