Presentation on theme: "FINANCIAL STATEMENTS Chapter 3 Balance Sheet Income Statement Statement of Cash Flows."— Presentation transcript:
FINANCIAL STATEMENTS Chapter 3 Balance Sheet Income Statement Statement of Cash Flows
All Rights ReservedChapter 3Page 2 Finance from a Personal Viewpoint A. All us own things and owe money B. If we own more than we owe – we are said to have a positive net worth. C. In Finance: What we own are called Assets. We we owe are called Liabilities. If our Assets exceed our Liabilities then we have [positive] Equity. Accordingly: Assets = Liabilities + Equity
All Rights ReservedChapter 3Page 3 Balance Sheet The Balance Sheet answers two general questions: How has the firm invested its capital (money)? Current Assets (cash, receivables, inventory) Fixed Assets (plant, property, equipment) How has the firm financed its capital investment? Borrowing: short-term (current liabilities) and long- term debt Equity (stock) and Retained Earnings
All Rights ReservedChapter 3Page 4 INCOME STATEMENT A. The income statement gives information relating to the firm’s Revenues and Expenses for the last accounting (fiscal) period. B. The I/S is frequently called the P&L (Profit and Loss). C. The most important use is for determining how profitably a firm is operating.
All Rights ReservedChapter 3Page 5 STATEMENT OF CASH FLOWS The statement of cash flows shows the financial analyst, stockholder, or other interested parties where the firm’s cash came from and how it was used. The firm has 3 possible sources & Uses of cash: Operating Activity (profits from sales) Financing activity (borrowing or selling equity) Investing activity (buying/selling assets)
All Rights ReservedChapter 3Page 6 Important Analytical Concepts A. Net Working Capital = CA – CL B. Operating Cash Flows = EBIT ( 1 – Tx) + Depreciation & Amortization C. Free Cash Flow = OCF – (Cap Exp + NWC) D. MVA = MVF – BV (=TA – TL) E. EVA = NOPAT - $ Cost of Capital NOPAT = EBIT * (1 – Tax Rate)
All Rights ReservedChapter 3Page 7 Balance Sheet (Left hand side) Current Assets Cash Marketable Securities Accounts Receivable Inventory Prepaid expenses Total Current Assets (Right hand side) Current Liabilities Accounts payable Notes payable (loans) Accrued expenses Current L-T Debt Total Current Liabilities
All Rights ReservedChapter 3Page 8 Balance Sheet Long-Term assets Gross Fixed Assets -Accum. Depreciation Net Fixed Assets Other Assets Patents, Copyrights Goodwill Investments in other companies (equity). Total Assets Long-Term liabilities Long Term Debt (bonds) Deferred Taxes Contingent Liability Stockholder Equity Preferred Stock Common Stock Paid in Capital Retained Earnings Total Liabilities + Equity
All Rights ReservedChapter 3Page 9 INCOME STATEMENT Net Sales (gross sales - allow for returns & adjust.) - Cost of Goods Sold (direct labor, materials) = Gross Profit (contribution to overhead expenses.) - Sell, General & Administrative Expenses = Operating Income before Depreciation / Amortization, Interest, and Taxes (also termed EBITDA) EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization.
All Rights ReservedChapter 3Page 10 INCOME STATEMENT = Operating Income (EBITDA) - Depreciation/Depletion/Amortization = Net Operating Income ( EBIT) EBIT = Earnings Before Interest and Taxes - Interest Expense (cost of borrowed funds.) + Interest Income (interest from s-t investments.) = Earnings Before Taxes (EBT)
All Rights ReservedChapter 3Page 11 INCOME STATEMENT = Earnings Before Taxes - Taxes (includes federal, state, and foreign) = Net Income before extraordinary items and discontinued operations (BEIDO) ± Charges for Extraordinary Items, Discontinued Operations (See Note 1 on page 8) = Net Income Including EIDO (IEIDO)
All Rights ReservedChapter 3Page 12 INCOME STATEMENT = Net Income including EIDO - Preferred Stock Dividends (if issued). = Earnings Available For Common Stockholders. - Cash Dividends to Common Stockholders (if paid). = Retained Earnings (reinvested in the business) Net Cash Flow = NI + Deprec. & Amort. Earnings per share (EPS) =Net Income (BEIDO) Shares Issued & Outstanding Primary, Fully Diluted
All Rights ReservedChapter 3Page 13 STATEMENT OF CASH FLOWS Cash Flows from Operating Activities; Net income; what's left after expenses and taxes. Adjustments to determine operating cash flows; + Depreciation expense; (a non-cash expense) - Increases in current asset accounts. + Decreases in current asset accounts. + Increases in current liability accounts. - Decreases in current liability accounts. Net cash flows from operating activities.
All Rights ReservedChapter 3Page 14 STATEMENT OF CASH FLOWS Cash Flows from Investing Activities; - Increases in investments (buying securities). + Decreases in investments (selling securities). + Interest/dividends received from investments. - Increases in plant, property, and equipment + Decreases in plant, property, and equipment. = Net cash flows from investing activities.
All Rights ReservedChapter 3Page 15 STATEMENT OF CASH FLOWS Cash Flows from Financing Activities + Increase in bonds outstanding (selling bonds). - Decrease in bonds outstanding (retiring bonds). - Payments of interest on bonds sold by the firm. + Increases in stock (selling preferred or common shares). - Decreases in stock (buying back shares) - Payment of dividends on preferred and/or common stock. Net cash flows from financing activities. Cash and Equivalents EOY (equals the change in Cash Balance from last year)