WEBVTT 1 00:00:00.500 --> 00:00:04.600 In April, we have installed out the entire inventory 2 00:00:03.600 --> 00:00:06.600 of bold puzzles. 3 00:00:07.300 --> 00:00:10.300 And we have built up an inventory. So 4 00:00:10.300 --> 00:00:13.500 manufacturer puzzles manufactured with the 5 00:00:13.500 --> 00:00:17.500 new machine. This led us to really understand the 6 00:00:16.500 --> 00:00:19.400 difference between the cost price of 7 00:00:19.400 --> 00:00:22.700 goods sold and the production cost 8 00:00:22.700 --> 00:00:25.600 of these Goods which are now stored 9 00:00:25.600 --> 00:00:26.600 in the warehouse. 10 00:00:27.700 --> 00:00:30.500 The puzzles were bought at $20 per unit 11 00:00:30.500 --> 00:00:33.400 and the production cost per unit is not 12 00:00:33.300 --> 00:00:36.900 $26 because of the very low 13 00:00:36.900 --> 00:00:40.000 production volume without amortize a 14 00:00:39.300 --> 00:00:42.800 fixed cost at all. We don't generate economies of 15 00:00:42.800 --> 00:00:45.800 scale. The impact of this difference between 16 00:00:45.800 --> 00:00:48.400 cost of goods all and production costs 17 00:00:48.400 --> 00:00:51.500 is absolutely substantial on the growth 18 00:00:51.500 --> 00:00:51.700 margin. 19 00:00:52.400 --> 00:00:55.800 Now we are in May and we are going to sell all 20 00:00:55.800 --> 00:00:59.000 these products we manufactured in April and 21 00:00:58.500 --> 00:01:01.700 store. We are then going to follow the 22 00:01:01.700 --> 00:01:04.500 production process with the new machine and 23 00:01:04.500 --> 00:01:07.800 we are going to observe and analyze the impact 24 00:01:07.800 --> 00:01:10.900 on our economic performance. Now what 25 00:01:10.900 --> 00:01:13.900 happens in may we generate sales as anticipated? 26 00:01:13.900 --> 00:01:16.800 2,200 units 50 27 00:01:16.800 --> 00:01:19.700 50 1100 b2c 28 00:01:19.700 --> 00:01:22.400 1,100 B2B, but we 29 00:01:22.400 --> 00:01:25.400 plan sales for June and we want to have 30 00:01:25.400 --> 00:01:28.700 some inventories to be ready to sell and serve 31 00:01:28.700 --> 00:01:30.100 our customers in June. 32 00:01:30.900 --> 00:01:33.900 Now we increase a little bit the inventory Target 33 00:01:33.900 --> 00:01:36.500 you remember it was 25% now we 34 00:01:36.500 --> 00:01:39.500 get to 30% we increase the Target 35 00:01:39.500 --> 00:01:42.200 because we want to be on the safe side as far as 36 00:01:42.200 --> 00:01:43.300 production is concerned. 37 00:01:43.900 --> 00:01:48.100 30% means that we need to have 870 units 38 00:01:47.100 --> 00:01:50.400 in the warehouse at the end of the month of May. 39 00:01:51.300 --> 00:01:55.200 But the inventory at the beginning of months is 500 and 40 00:01:54.200 --> 00:01:57.400 50. How many units do 41 00:01:57.400 --> 00:02:01.000 we have to produce what we are going to sell in May plus 42 00:02:00.300 --> 00:02:03.200 what we want to see in the warehouse at 43 00:02:03.200 --> 00:02:06.300 the end of May minus all the products. We already 44 00:02:06.300 --> 00:02:10.600 have in the warehouse It's 2000 520 45 00:02:09.600 --> 00:02:12.400 and it is a little bit more than 46 00:02:12.400 --> 00:02:15.800 this rice hold of 200500 you 47 00:02:15.800 --> 00:02:19.000 remember that we less than 2,500. We 48 00:02:18.200 --> 00:02:22.000 need only three operators with 49 00:02:21.300 --> 00:02:24.600 more than 2,500 units and 50 00:02:24.600 --> 00:02:27.100 of course less than 5,000 because it is 51 00:02:27.100 --> 00:02:30.100 a capacity of the machine then we need six people 52 00:02:30.100 --> 00:02:33.600 so we have already three operators. We 53 00:02:33.600 --> 00:02:37.100 need to hire three additional machine operators. 54 00:02:38.400 --> 00:02:41.700 What will be the technical difficulty of this month's 55 00:02:41.700 --> 00:02:43.600 on an accounting point of view? Of course? 56 00:02:44.400 --> 00:02:47.700 It's about the cost of goods all the cost price of 57 00:02:47.700 --> 00:02:50.500 goods all because we are going to sell the 58 00:02:50.500 --> 00:02:53.500 goods we manufactured in April and some Goods 59 00:02:53.500 --> 00:02:56.500 we are going to manufacture in May which cost 60 00:02:56.500 --> 00:02:59.700 price are we going to allocate to each and every 61 00:02:59.700 --> 00:03:02.300 unit Soul the method which 62 00:03:02.300 --> 00:03:05.900 I am going to use is very classical and traditional one 63 00:03:05.900 --> 00:03:09.800 first thing first out fifo first, 64 00:03:08.800 --> 00:03:11.300 I sell the products 65 00:03:11.300 --> 00:03:14.700 which are currently stored in the warehouse. They are 66 00:03:14.700 --> 00:03:18.000 showing in my beginning inventory inventory at 67 00:03:17.100 --> 00:03:20.600 the beginning of the months. So I sell the 68 00:03:20.600 --> 00:03:23.400 quote all dust product in the 69 00:03:23.400 --> 00:03:26.500 warehouse. Once they are sold out and I 70 00:03:26.500 --> 00:03:29.500 ran out of this category of inventory. I said 71 00:03:29.500 --> 00:03:32.100 the goods which I manufactured during the months. 72 00:03:32.700 --> 00:03:35.400 Now I manufacture more than one 73 00:03:35.400 --> 00:03:38.300 I need then I will have in my 74 00:03:38.300 --> 00:03:41.300 warehouse some products which we are 75 00:03:41.300 --> 00:03:44.300 manufactured during May and they are not sold. They are 76 00:03:44.300 --> 00:03:47.500 going to show at their production cost in invertery and 77 00:03:47.500 --> 00:03:50.900 of the mods, let's have a look at the organizational chart 78 00:03:50.900 --> 00:03:54.400 no change in management and registration sales 79 00:03:53.400 --> 00:03:57.500 and generating production supervision, 80 00:03:56.500 --> 00:04:00.200 but I need now six operators 81 00:03:59.200 --> 00:04:02.800 as opposed to three operators, which 82 00:04:02.800 --> 00:04:05.700 will have an impact on my production price. 83 00:04:07.400 --> 00:04:10.500 Now to calculate the production cost. I need to plan my 84 00:04:10.500 --> 00:04:13.800 production calculate the production cost and divide 85 00:04:13.800 --> 00:04:16.300 one by the other sales forecast in June. 86 00:04:16.300 --> 00:04:18.800 You remember 2,900 product? 87 00:04:19.600 --> 00:04:22.300 30% objective Target and of 88 00:04:22.300 --> 00:04:26.300 the months in terms of inventories of finished goods 870 units 89 00:04:26.300 --> 00:04:29.100 and we calculate that we need to plan a production of 90 00:04:29.100 --> 00:04:32.700 2,000 500 and 20 units. 91 00:04:33.800 --> 00:04:36.600 Raw materials this figure of multiplied 92 00:04:36.600 --> 00:04:39.900 by 16 dollars per unit supervision one 93 00:04:39.900 --> 00:04:43.400 engineer workers six of them depreciation 94 00:04:42.400 --> 00:04:45.300 1000 business as usual 95 00:04:45.300 --> 00:04:48.300 $60,000 divided by 60 months. 96 00:04:48.300 --> 00:04:54.200 Now the total cost for the production is 48,820. 97 00:04:51.200 --> 00:04:54.500 When 98 00:04:54.500 --> 00:04:58.700 I divide this figure by 2,520 units 99 00:04:58.700 --> 00:05:01.400 actually produced I get the 100 00:05:01.400 --> 00:05:05.500 production cost per unit which is 19.37 per 101 00:05:04.500 --> 00:05:07.300 unit. These are the products 102 00:05:07.300 --> 00:05:11.000 which are manufactured in May and it's going to be very useful 103 00:05:10.500 --> 00:05:13.400 to calculate the value of the 104 00:05:13.400 --> 00:05:15.300 inventory at the end of the month. 105 00:05:16.400 --> 00:05:20.500 Now we get to the most complex part of the accounting calculations. 106 00:05:21.400 --> 00:05:24.300 inventories and cost of goods all 107 00:05:24.900 --> 00:05:27.400 in factories in units that's not difficult. 108 00:05:27.400 --> 00:05:30.400 We have 550 units 109 00:05:30.400 --> 00:05:35.900 today in the warehouse. We produce 2,520 available 110 00:05:34.900 --> 00:05:38.800 for sales 30070. We 111 00:05:38.800 --> 00:05:41.300 sell 2200 and of 112 00:05:41.300 --> 00:05:45.000 course we have 870 units. That's no 113 00:05:44.200 --> 00:05:46.500 problem at the end of the month. 114 00:05:47.600 --> 00:05:50.200 Now the value of the inverter is 115 00:05:50.200 --> 00:05:53.200 something which is much more delicate to calculate. 116 00:05:54.300 --> 00:05:57.600 What is the value of this 550 units which 117 00:05:57.600 --> 00:06:01.700 we produced and manufactured in April Warehouse 118 00:06:00.700 --> 00:06:05.800 beginning of May 14,300. And 119 00:06:05.800 --> 00:06:08.500 you remember that the unit cost price 120 00:06:08.500 --> 00:06:10.800 was 26 dollars per unit. 121 00:06:11.400 --> 00:06:16.000 The production cost is 48,820 which 122 00:06:15.100 --> 00:06:18.600 we just calculated the production 123 00:06:18.600 --> 00:06:22.100 cost of the 2,520 units 124 00:06:21.100 --> 00:06:26.500 we manufacture in May is 48,820. 125 00:06:24.500 --> 00:06:27.200 We just 126 00:06:27.200 --> 00:06:31.000 calculated now the total production cost 127 00:06:30.400 --> 00:06:33.600 of all these units are a 128 00:06:33.600 --> 00:06:37.100 combination of 26 and 19.37. 129 00:06:38.400 --> 00:06:41.200 At the end of the month of May the products which 130 00:06:41.200 --> 00:06:44.200 are stored in a warehouse are the products which 131 00:06:44.200 --> 00:06:48.200 were manufactured in May and not sold but 132 00:06:47.200 --> 00:06:50.200 there were manufactured at a unit 133 00:06:50.200 --> 00:06:53.300 price of 19.37 how many 134 00:06:53.300 --> 00:06:56.900 units of them 870 so 135 00:06:56.900 --> 00:06:59.100 the value of the inventory at the 136 00:06:59.100 --> 00:07:04.700 end of the month is 16,855. It 137 00:07:03.700 --> 00:07:06.800 means that the cost of sales the 138 00:07:06.800 --> 00:07:09.500 cost of this good soul is a difference 139 00:07:09.500 --> 00:07:14.500 between the total production cost 63,100 and 140 00:07:14.500 --> 00:07:18.400 20 minus the production course all 141 00:07:17.400 --> 00:07:20.300 this good which are still stored in 142 00:07:20.300 --> 00:07:24.100 a warehouse the cost of sales. He's 46,000 to 143 00:07:23.100 --> 00:07:27.100 100 and 65 you 144 00:07:26.100 --> 00:07:29.700 divide this figure by the number of 145 00:07:29.700 --> 00:07:33.200 units sold, which is 2,200 and 146 00:07:32.200 --> 00:07:35.600 you have the average cost of 147 00:07:35.600 --> 00:07:37.700 good Soul, which is 21. 148 00:07:38.800 --> 00:07:41.400 Ours 0.03 the average cost 149 00:07:41.400 --> 00:07:45.000 of goods sold is 21 dollars Dotson and a 150 00:07:44.300 --> 00:07:49.600 total of goods sold is 46,265. That's 151 00:07:48.600 --> 00:07:51.600 a difficulty of the calculation. 152 00:07:51.600 --> 00:07:54.800 There is another way to calculate the unit 153 00:07:54.800 --> 00:07:57.400 cost of good Soul you start 154 00:07:57.400 --> 00:08:01.300 with a beginning inventory 550 units 155 00:08:00.300 --> 00:08:04.000 26 dollars per unit and 156 00:08:03.200 --> 00:08:06.400 you calculate the total cost of all 157 00:08:06.400 --> 00:08:09.400 these units you produced in May and 158 00:08:09.400 --> 00:08:13.000 sold in May. It is a difference between 2002 159 00:08:12.200 --> 00:08:15.500 and 200 and 550 which 160 00:08:15.500 --> 00:08:18.400 is 1,000 650 units. And 161 00:08:18.400 --> 00:08:22.700 you remember that do you need production costs was 19.37 162 00:08:21.700 --> 00:08:25.200 you then calculate total 163 00:08:24.200 --> 00:08:27.800 cost of these goods sold the 164 00:08:27.800 --> 00:08:31.400 550. It's 14,300 and 165 00:08:30.400 --> 00:08:33.800 the 1,650. It 166 00:08:33.800 --> 00:08:36.900 is 31,965. Of 167 00:08:36.900 --> 00:08:37.200 course. 168 00:08:37.900 --> 00:08:40.100 Add to exactly the same figure. 169 00:08:40.800 --> 00:08:43.700 Now this is being done. The rest of the calculation 170 00:08:43.700 --> 00:08:46.100 is quite simple because it's the same process. 171 00:08:46.900 --> 00:08:49.500 Now we have the sales figure. We sell 172 00:08:49.500 --> 00:08:53.700 1,100 units at 30 dollars 1,100 173 00:08:52.700 --> 00:08:55.500 units at $25 a sum 174 00:08:55.500 --> 00:08:58.500 is 60,500 Minus cost 175 00:08:58.500 --> 00:09:01.100 of sales. We've seen how to calculate that 176 00:09:01.100 --> 00:09:04.500 and we had the two calculations which were nicely getting 177 00:09:04.500 --> 00:09:10.000 to the same figure gross. Margin 14,235 no 178 00:09:09.500 --> 00:09:12.800 change in the indirect cost and administrative 179 00:09:12.800 --> 00:09:15.800 expense selling an engineering experience. 180 00:09:15.800 --> 00:09:19.300 You can calculate then your e-bit gross 181 00:09:18.300 --> 00:09:21.800 margin minus indirect cost. It's 182 00:09:21.800 --> 00:09:25.100 5,835 interest 183 00:09:24.100 --> 00:09:27.800 expense. No change you calculate 184 00:09:27.800 --> 00:09:30.700 your earnings before tax and you deduct 20% of 185 00:09:30.700 --> 00:09:34.100 that for the tax payable near earnings 186 00:09:33.100 --> 00:09:39.000 bottom line 4,476. You 187 00:09:37.100 --> 00:09:40.200 remember each and every month. We 188 00:09:40.200 --> 00:09:43.300 always ask the same question which percentage of that 189 00:09:43.300 --> 00:09:45.700 do we distribute to the shareholders? 190 00:09:46.500 --> 00:09:49.700 And you remember we have cash problems? So definitely 191 00:09:49.700 --> 00:09:52.500 we reinvest 100% And we 192 00:09:52.500 --> 00:09:55.300 distribute 0% So 100% of the 193 00:09:55.300 --> 00:09:58.600 net income of the period are going to be reinvested and 194 00:09:58.600 --> 00:10:01.900 retained as Equity. Now, the 195 00:10:01.900 --> 00:10:04.500 p&l is completed. Let's move to cash. 196 00:10:05.300 --> 00:10:08.400 Cash in cash out. Let's start with cash in 197 00:10:08.400 --> 00:10:11.400 there's no increase in finance all that. It was in 198 00:10:11.400 --> 00:10:14.400 April when we bought the machine. So the figure is Neil, 199 00:10:14.400 --> 00:10:17.500 but we have to calculate how much cash we collect from 200 00:10:17.500 --> 00:10:20.600 sales. You remember it's about accounts receivable 201 00:10:20.600 --> 00:10:23.300 at the beginning of the months. How much is 202 00:10:23.300 --> 00:10:27.600 you from the customers 22,500 we 203 00:10:27.600 --> 00:10:30.700 generate sales, but you remember that b2c sales 204 00:10:30.700 --> 00:10:33.300 are immediately paid me to be sales are 205 00:10:33.300 --> 00:10:36.800 going to be paid in one month though. The accounts receivable 206 00:10:36.800 --> 00:10:39.400 figure at the end of the month will be the B to be 207 00:10:39.400 --> 00:10:42.600 sales of the months. How much do we collect during 208 00:10:42.600 --> 00:10:45.300 the months the b2c sales of the 209 00:10:45.300 --> 00:10:48.200 months plus the B2B sales of the 210 00:10:48.200 --> 00:10:51.500 prior months. So some of these two figures is 211 00:10:51.500 --> 00:10:54.300 55,000 and 500. This is 212 00:10:54.300 --> 00:10:57.500 a total cash inflows because again, there is 213 00:10:57.500 --> 00:11:00.200 no change in the final debt. What do we 214 00:11:00.200 --> 00:11:03.200 pay to our suppliers? What we'll do at the 215 00:11:03.200 --> 00:11:04.700 beginning of the months was 216 00:11:05.200 --> 00:11:06.300 2,400 217 00:11:06.800 --> 00:11:09.600 we make some purchases which you remember show 218 00:11:09.600 --> 00:11:10.800 in the production cost. 219 00:11:11.500 --> 00:11:14.900 40,320 15% of 220 00:11:14.900 --> 00:11:17.600 that is going to be a liability at the 221 00:11:17.600 --> 00:11:20.800 end of the month twenty thousand one hundred sixty which 222 00:11:20.800 --> 00:11:23.300 basically means that we pad during the 223 00:11:23.300 --> 00:11:27.000 months what was due at the beginning of the month plus 50% 224 00:11:26.300 --> 00:11:29.100 of the purchases of the months, which is 225 00:11:29.100 --> 00:11:32.300 almost 48,000 now, we can 226 00:11:32.300 --> 00:11:35.600 calculate the total cash outlay suppliers just 227 00:11:35.600 --> 00:11:39.500 calculated Administration sales engineering 228 00:11:38.500 --> 00:11:42.100 production supervision production 229 00:11:41.100 --> 00:11:45.200 workers six of them no taxes 230 00:11:44.200 --> 00:11:48.200 because they are going to be bad later. No dividend 231 00:11:47.200 --> 00:11:50.200 because we definitely reinvest when 232 00:11:50.200 --> 00:11:53.800 100% of the profit and machine purchase price. It 233 00:11:53.800 --> 00:11:56.800 was in April. It's no more in may interest expense 234 00:11:56.800 --> 00:11:59.400 is bad each and every month and then 235 00:11:59.400 --> 00:12:05.100 you understand that the cash outlays are 55,700. How 236 00:12:04.100 --> 00:12:07.400 much cash do we generate during this 237 00:12:07.400 --> 00:12:10.400 month? Basically nothing because cash 238 00:12:10.400 --> 00:12:11.200 inflows is 239 00:12:11.500 --> 00:12:14.200 500 cash Outlets is 240 00:12:14.200 --> 00:12:17.200 55,700. So the net change in cash 241 00:12:17.200 --> 00:12:21.200 position is negative a little bit negative by 200 242 00:12:20.200 --> 00:12:24.100 under the good reason for not Distributing 243 00:12:23.100 --> 00:12:26.400 The Profit cash at the 244 00:12:26.400 --> 00:12:30.000 beginning of the period was 2,980 and 245 00:12:29.300 --> 00:12:32.400 at the end of the period it's 200 less 246 00:12:32.400 --> 00:12:34.900 2,780. 247 00:12:35.700 --> 00:12:38.700 Now once penal cash are 248 00:12:38.700 --> 00:12:41.100 known or built up we can go to 249 00:12:41.100 --> 00:12:44.600 the balance sheet, which is a picture at the end of the month and there's 250 00:12:44.600 --> 00:12:47.300 a very interesting point on the assets side 251 00:12:47.300 --> 00:12:48.200 of the balance sheet. 252 00:12:48.700 --> 00:12:51.900 In factories calculated accounts receivable 253 00:12:51.900 --> 00:12:55.000 calculated cash calculator, but 254 00:12:54.300 --> 00:12:57.400 what is very interesting is to observe the 255 00:12:57.400 --> 00:13:01.300 evolution of the net value of the machine property 256 00:13:00.300 --> 00:13:03.200 plant and Equipment growth is 257 00:13:03.200 --> 00:13:06.400 a historical purchasing prices machine 60,000. 258 00:13:07.100 --> 00:13:10.600 But we have to show not only the Precision of the months 259 00:13:10.600 --> 00:13:12.700 but the accumulator depreciation. 260 00:13:13.700 --> 00:13:16.700 When an asset is used is consumed? 261 00:13:17.400 --> 00:13:21.300 It gets out of the balance seed for example a 262 00:13:20.300 --> 00:13:23.400 unit which is stored in a warehouse is 263 00:13:23.400 --> 00:13:26.900 still it gets out of the inventories on 264 00:13:26.900 --> 00:13:29.400 the asset side of the balancing. But what about 265 00:13:29.400 --> 00:13:32.700 the machine the machine is not consumed in one operating 266 00:13:32.700 --> 00:13:35.700 cycle. It is consumed each and 267 00:13:35.700 --> 00:13:38.900 every month months after months during 60 months. 268 00:13:38.900 --> 00:13:41.600 So we have to show in the balance. It's 269 00:13:41.600 --> 00:13:45.300 a progressive consumption of the machine when 270 00:13:44.300 --> 00:13:47.800 the machine was purchased. It 271 00:13:47.800 --> 00:13:50.300 showed in the bounce it at its cost which is 272 00:13:50.300 --> 00:13:53.800 60,000 at the end of April after 273 00:13:53.800 --> 00:13:56.200 one month of production. It was 274 00:13:56.200 --> 00:13:59.500 consumed by 1,000 the depreciation 275 00:13:59.500 --> 00:14:02.500 of the months, but now we have to show that 276 00:14:02.500 --> 00:14:05.400 a certain month as gone. And now 277 00:14:05.400 --> 00:14:08.400 we have to show the consumption for two months. This 278 00:14:08.400 --> 00:14:11.500 is why the property plant and Equipment net 279 00:14:11.500 --> 00:14:14.500 is not property plant and Equipment grows miners 280 00:14:14.500 --> 00:14:16.800 at the Precision of the months, but 281 00:14:17.300 --> 00:14:20.500 Is the accumulated depreciation which was 282 00:14:20.500 --> 00:14:24.400 introduced in the account? And in the production cost months 283 00:14:23.400 --> 00:14:26.300 after months from the moment you bought 284 00:14:26.300 --> 00:14:29.300 the machine then the net property plant and 285 00:14:29.300 --> 00:14:34.800 equipment is 60 minus twice 1,058,000 and 286 00:14:34.800 --> 00:14:37.300 it's interesting to observe an accounting point 287 00:14:37.300 --> 00:14:40.200 of view what happens for this fixed assets. You have 288 00:14:40.200 --> 00:14:43.700 a progressive consumption. It's about depreciation 289 00:14:43.700 --> 00:14:46.600 and step by step cycle by 290 00:14:46.600 --> 00:14:49.700 cycle months by monster depreciation is 291 00:14:49.700 --> 00:14:51.800 introduced in the production cost. 292 00:14:52.500 --> 00:14:55.400 And then is going to be used to evaluate the 293 00:14:55.400 --> 00:14:58.600 inventories of finished goods. So you understand what happens 294 00:14:58.600 --> 00:15:01.300 in the balance sheet the 60,000 is 295 00:15:01.300 --> 00:15:05.800 stable and depreciation gets down to the inventories through 296 00:15:04.800 --> 00:15:07.700 the production cost then gets 297 00:15:07.700 --> 00:15:10.800 out of the warehouse when the inventory 298 00:15:10.800 --> 00:15:13.900 is sold and is replaced by accounts receivable 299 00:15:13.900 --> 00:15:16.700 for the inventories salt but 300 00:15:16.700 --> 00:15:19.500 not yet paid then we can calculate the 301 00:15:19.500 --> 00:15:23.100 total assets 105,000 100 302 00:15:22.100 --> 00:15:25.800 and 35 dollars. Now the 303 00:15:25.800 --> 00:15:28.300 accounting calculations are completed. We 304 00:15:28.300 --> 00:15:31.200 have the pierl the cash and we have the 305 00:15:31.200 --> 00:15:34.500 balance sheet. We can start now the financial analysis of 306 00:15:34.500 --> 00:15:37.600 what happened in May in terms of revenues and 307 00:15:37.600 --> 00:15:40.500 sales profit and cash start with 308 00:15:40.500 --> 00:15:43.500 sales. We simply observe the commercial success of 309 00:15:43.500 --> 00:15:46.600 our business months after months it 310 00:15:46.600 --> 00:15:49.900 goes up. But when we observe the margins it 311 00:15:49.900 --> 00:15:52.000 is slightly more disappointing. 312 00:15:52.400 --> 00:15:55.900 Why because we have started operating the 313 00:15:55.900 --> 00:15:58.700 machine and you remember that our gross 314 00:15:58.700 --> 00:16:01.700 margin our gross profit is very much affected 315 00:16:01.700 --> 00:16:04.500 by the manufacturing cost of all 316 00:16:04.500 --> 00:16:07.700 these Goods which we manufactured in April and 317 00:16:07.700 --> 00:16:10.400 sold in may they are in our production 318 00:16:10.400 --> 00:16:13.300 costs in April, but in our cost 319 00:16:13.300 --> 00:16:16.400 of goods all in May at 26 dollars, this is 320 00:16:16.400 --> 00:16:19.400 why the average gross margin 321 00:16:19.400 --> 00:16:20.200 is down. 322 00:16:21.100 --> 00:16:24.500 You remember that when we were buying the puzzles, 323 00:16:24.500 --> 00:16:27.700 it was at $20. Now in our 324 00:16:27.700 --> 00:16:30.700 cost of sales. We have a combination of 26 dollars and 325 00:16:30.700 --> 00:16:35.000 19.37. 19.37 is 326 00:16:34.200 --> 00:16:37.700 a little bit less than 20 but it does not compensate 327 00:16:37.700 --> 00:16:40.400 the 26 as opposed to 20. The 328 00:16:40.400 --> 00:16:43.300 gross margin is down when we observe the 329 00:16:43.300 --> 00:16:46.100 operating margin there is a decrease but which is 330 00:16:46.100 --> 00:16:49.400 lower than the decrease in the growth margin for a very 331 00:16:49.400 --> 00:16:52.800 good reason you remember sales are up revenues 332 00:16:52.800 --> 00:16:55.800 are up and as the indirect costs 333 00:16:55.800 --> 00:16:58.600 are quite the same we can generate 334 00:16:58.600 --> 00:17:01.100 some economies of scale on the 335 00:17:01.100 --> 00:17:04.700 indirect costs. This is why the operating margin is 336 00:17:04.700 --> 00:17:07.500 a little bit down much less down 337 00:17:07.500 --> 00:17:10.600 than the gross margin last but not least the 338 00:17:10.600 --> 00:17:13.900 evolution of cash working capital requirements. 339 00:17:13.900 --> 00:17:16.300 There's no capital expenditure of any kind. We don't 340 00:17:16.300 --> 00:17:19.700 buy any machine in may we observe that 341 00:17:19.700 --> 00:17:20.800 the inventory level is 342 00:17:21.100 --> 00:17:24.800 By 2000 and something accounts receivable 343 00:17:24.800 --> 00:17:28.000 are up for a very simple reason revenues are 344 00:17:27.400 --> 00:17:31.800 up and it consumes 5,000 interestingly. 345 00:17:30.800 --> 00:17:33.600 Even though revenues are 346 00:17:33.600 --> 00:17:36.500 up the accounts payable are quite 347 00:17:36.500 --> 00:17:39.400 the same and so at the end there's a very 348 00:17:39.400 --> 00:17:43.000 significant increase in the operating working 349 00:17:42.500 --> 00:17:45.200 capital requirement. We have to 350 00:17:45.200 --> 00:17:48.700 Deep dive a little bit in a calculations to understand 351 00:17:48.700 --> 00:17:51.200 what really happened in each and every 352 00:17:51.200 --> 00:17:54.400 item first about the inventories. 353 00:17:54.900 --> 00:17:58.100 We have some says growth which naturally increases 354 00:17:57.100 --> 00:18:00.400 inventory level but we also have 355 00:18:00.400 --> 00:18:04.300 decided to increase the level of inventories you 356 00:18:03.300 --> 00:18:06.300 remember it was 25% at the 357 00:18:06.300 --> 00:18:09.200 end of April and we decide to make it grow to the 358 00:18:09.200 --> 00:18:12.600 level of 30% of the anticipated sales 359 00:18:12.600 --> 00:18:15.300 for June the other two reasons 360 00:18:15.300 --> 00:18:18.500 why inventories are up accounts receivable 361 00:18:18.500 --> 00:18:21.600 is simply a revenues grows sales grows. 362 00:18:21.600 --> 00:18:24.300 But what is very interesting is to observe what happens 363 00:18:24.300 --> 00:18:28.100 with the accounts payable of course production is growing 364 00:18:27.100 --> 00:18:32.300 then we buy more romaterials, but 365 00:18:31.300 --> 00:18:34.200 you remember that beforehand we 366 00:18:34.200 --> 00:18:37.200 were buying finished goods now, we 367 00:18:37.200 --> 00:18:40.600 pay 50% with one month's delay, but we 368 00:18:40.600 --> 00:18:44.100 use to pay 50% off puzzles bought 369 00:18:43.100 --> 00:18:46.700 at 20 dollars per unit. Now, we 370 00:18:46.700 --> 00:18:49.600 delay the payment of 50% of 371 00:18:49.600 --> 00:18:52.600 raw materials at 16 dollars 372 00:18:52.600 --> 00:18:54.200 per unit and it is 373 00:18:54.800 --> 00:18:57.800 Is the same story when you decide to make as 374 00:18:57.800 --> 00:19:00.400 opposed to buy when you buy the 375 00:19:00.400 --> 00:19:03.600 cash payable is based on the purchasing price 376 00:19:03.600 --> 00:19:06.800 of something in which you have raw materials 377 00:19:06.800 --> 00:19:09.600 and labor related expenses and depreciation and 378 00:19:09.600 --> 00:19:13.000 anything now the day you decide to insource a 379 00:19:12.500 --> 00:19:15.300 manufacturing. The accounts payable is 380 00:19:15.300 --> 00:19:18.700 going to be calculated only on the road materials and 381 00:19:18.700 --> 00:19:21.500 not on the entire purchasing price of the 382 00:19:21.500 --> 00:19:24.300 unit. This is why mechanicaly when you 383 00:19:24.300 --> 00:19:27.900 in Source some production you reduce your 384 00:19:27.900 --> 00:19:30.500 accounts people or at least in our 385 00:19:30.500 --> 00:19:33.300 situation you stabilize it for a while. 386 00:19:33.300 --> 00:19:36.600 Now this change in the operating working capital 387 00:19:36.600 --> 00:19:39.500 requirement obviously has a huge 388 00:19:39.500 --> 00:19:42.800 impact on the funds from operations. There is 389 00:19:42.800 --> 00:19:45.500 no exceptional items. Well the funds from operations 390 00:19:45.500 --> 00:19:48.200 are the same as a Karen phones from operations. 391 00:19:49.200 --> 00:19:55.200 Ebida is a bit plus the Precision amortization 6,835. 392 00:19:55.800 --> 00:19:58.400 And it is quite the same as a current change 393 00:19:58.400 --> 00:20:01.400 in the operating working capital requirement funds from 394 00:20:01.400 --> 00:20:04.200 operations are hardly positive by 40. 395 00:20:05.300 --> 00:20:09.800 Then we have to pay the interest expense 240. There 396 00:20:09.800 --> 00:20:12.500 is no change in capital no change in debt and 397 00:20:12.500 --> 00:20:16.600 no Capital expenditures. This is why 40 minus 398 00:20:15.600 --> 00:20:19.100 240 is minus 200. 399 00:20:18.100 --> 00:20:21.200 It is a change in a cash position 400 00:20:21.200 --> 00:20:24.300 of the company, but here you understand that 401 00:20:24.300 --> 00:20:27.600 the increase in the operating working capital requirement 402 00:20:27.600 --> 00:20:31.000 as a consequence of insulting as 403 00:20:30.400 --> 00:20:33.200 completely consumed the it be 404 00:20:33.200 --> 00:20:36.500 that we have absolutely not improved the situation 405 00:20:36.500 --> 00:20:39.300 of the company on a cash point of view. What did 406 00:20:39.300 --> 00:20:42.300 we learn during this month? We really learn 407 00:20:42.300 --> 00:20:46.100 the difference between production costs cost of 408 00:20:45.100 --> 00:20:48.900 good soul and evaluation of Finnish 409 00:20:48.900 --> 00:20:51.300 goods inventory, and this is a process which 410 00:20:51.300 --> 00:20:54.200 is very important to understand the day you 411 00:20:54.200 --> 00:20:57.000 are in business operations and you want to have a 412 00:20:57.400 --> 00:21:01.200 good understanding about the evolution of your inventories protection 413 00:21:00.200 --> 00:21:03.900 cost and gross. Margin you remember 414 00:21:03.900 --> 00:21:04.800 I use the 415 00:21:05.300 --> 00:21:09.400 Seen first out method. There are some other methods there's 416 00:21:08.400 --> 00:21:11.700 another one which is very often used 417 00:21:11.700 --> 00:21:14.500 which is calculate the weighted average cost 418 00:21:14.500 --> 00:21:17.800 in this method. There is no differentiation between 419 00:21:17.800 --> 00:21:20.600 product which we are manufactured in April 420 00:21:20.600 --> 00:21:23.400 or manufacturer in may we put that in the 421 00:21:23.400 --> 00:21:27.300 same part and we calculate the weighted average cost beginning 422 00:21:26.300 --> 00:21:30.700 inventory you remember 14,300 which 423 00:21:30.700 --> 00:21:34.000 was a production cost of that the entire production 424 00:21:33.300 --> 00:21:38.400 cost in May. Well 48,820. When 425 00:21:37.400 --> 00:21:40.600 you add them all you get a total production 426 00:21:40.600 --> 00:21:43.300 cost of all the goods which are available for 427 00:21:43.300 --> 00:21:46.500 sale, which is 63,100 and 428 00:21:46.500 --> 00:21:49.700 20 you divide that by all this products 429 00:21:49.700 --> 00:21:53.700 which are available for sale 2017 and 430 00:21:53.700 --> 00:21:57.500 you get a unit cost which is 20 point 56. This 431 00:21:56.500 --> 00:22:00.700 figure is a little bit lower than 21.03 432 00:21:59.700 --> 00:22:02.600 for a very simple reason 433 00:22:02.600 --> 00:22:05.100 which is that we take into account in the 434 00:22:05.200 --> 00:22:08.100 Rage production costs all the goods which 435 00:22:08.100 --> 00:22:11.800 were produced in May and not only the 436 00:22:11.800 --> 00:22:14.800 goods which were produced and sold in May as 437 00:22:14.800 --> 00:22:17.500 it is a larger figure. The weighted 438 00:22:17.500 --> 00:22:19.300 average cost is a little bit lower. 439 00:22:20.300 --> 00:22:24.400 There are some other methods which are sometimes exceptionally 440 00:22:23.400 --> 00:22:27.500 used but the two traditional methods 441 00:22:26.500 --> 00:22:29.600 which are used are weighted average 442 00:22:29.600 --> 00:22:33.300 cost and first in first out now interestingly 443 00:22:32.300 --> 00:22:35.100 in may we can draw the same 444 00:22:35.100 --> 00:22:38.800 conclusion as before we are growing sales 445 00:22:38.800 --> 00:22:42.200 that grows consumes cash. It was 446 00:22:41.200 --> 00:22:44.400 about fixed assets when we bought the 447 00:22:44.400 --> 00:22:47.900 machine and it is about operating working capital 448 00:22:47.900 --> 00:22:51.200 requirements, which is naturally linked 449 00:22:50.200 --> 00:22:53.900 with sales and revenues grows is 450 00:22:53.900 --> 00:22:56.700 great because it means that we have the right business model 451 00:22:56.700 --> 00:22:59.400 and we creating value for customers, but 452 00:22:59.400 --> 00:23:02.600 growth consumes cash. It's observed each 453 00:23:02.600 --> 00:23:05.300 and every month now in June we are 454 00:23:05.300 --> 00:23:08.600 going to be able to observe the full economic performance 455 00:23:08.600 --> 00:23:10.400 of the machine we purchased. 456 00:23:10.900 --> 00:23:13.100 For very good reason we don't 457 00:23:13.100 --> 00:23:16.400 have inventories manufactured at 26 dollars. 458 00:23:16.400 --> 00:23:19.500 Now, we have products manufactured at 459 00:23:19.500 --> 00:23:22.000 19.37 and it will be 460 00:23:22.600 --> 00:23:25.400 lower because we sell more and we produce more 461 00:23:25.400 --> 00:23:29.000 in June than in may we are going to generate economies of 462 00:23:28.100 --> 00:23:31.900 scale and we are going to demonstrate that the 463 00:23:31.900 --> 00:23:34.300 acquisition the purchases machine was an 464 00:23:34.300 --> 00:23:36.700 extremely good economic decision.