3-1 Unit 3 Financial Statements and ratios Key Financial Statements Balance sheet Income statements Statement of cash flows Statement of retained earnings Financial Ratios (Table 2-6 Pg. 29)

3-2 The annual report Balance sheet – provides a snapshot of a firm’s financial position at one point in time. Income statement – summarizes a firm’s revenues and expenses over a given period of time. Statement of cash flows – reports the impact of a firm’s activities on cash flows over a given period of time. Statement of retained earnings – shows how much of the firm’s earnings were retained, rather than paid out as dividends.

3-3 Balance sheet (Table 2-1): Assets Current Assets Cash And Cash Equivalents Short Term Investments Net Receivables Inventory Other Current Assets Total CA Long-term Assets Long Term Investments Property Plant and Equipment Goodwill Intangible Assets Total Assets = Total CA + Total Long-term Assets

3-4 Balance sheet (Table 2-1): Liabilities and Equity Current Liabilities Accts payable Notes payable Accruals Total CL Long-term debt Total Liabilities Stockholder’s Equity Common stock Retained earnings Total Equity Total L & E = Total Liabilities + Total Equity

3-5 Income statement Sales COGS (VC & FC) Other expenses EBITDA Depr. & Amort. EBIT Interest Exp. EBT Taxes Net income

3-6 Statement of Cash Flows Operating Activities Long-Term Investing Activities Financing Activities Cash & Equivalents at end of the year

3-7 Statement of Retained Earnings Balance of retainedearnings (last period) Add: Net income (this period) Less: Dividends paid (this period) Balance of retained earnings (this period)

3-8 Financial Ratios (Table 2-6 Pg. 29) Liquidity: Can we make required payments? Asset management: right amount of assets vs. sales? Debt management: Right mix of debt and equity? Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA? Market value: Do investors like what they see as reflected in P/E and M/B ratios?

3-9 Liquidity ratios Current ratio = Current assets / Current liabilities Quick ratio = (CA – Inventories) / CL

3-10 Asset Management Ratios: Inventory turnover Inv. turnover = Sales / Inventories DSO= Receivables / Avg sales per day = Receivables / (Annual sales/365)

3-11 Asset Management Ratios: Fixed assets and total assets turnover FA turnover= Sales / Net fixed assets TA turnover= Sales / Total assets

3-12 Debt management ratios Debt ratio= Total debt / Total assets TIE= EBIT / Interest expense

3-13 Profitability ratios: Profit margin and Basic earning power Profit margin= Net income / Sales BEP= EBIT / Total assets BEP removes the effects of taxes and financial leverage, and is useful for comparison.

3-14 Profitability ratios: Return on assets and Return on equity ROA= Net income / Total assets ROE= Net income / Total common equity

3-15 Market value ratios P/E: How much investors are willing to pay for $1 of earnings. P/CF: How much investors are willing to pay for $1 of cash flow. MV/BV: How much investors are willing to pay for $1 of book value equity.

3-16 Market value ratios: Price/Earnings, Price/Cash flow, Market/Book ratios. P/E= Price / Earnings per share P/CF= Price / Cash flow per share MV/BV = Market value / book value

3-17 The Du Pont system Focuses on expense control (PM), asset utilization (TATO), and debt utilization (Equity multiplier.) ROA = Net income/Total Assets = PM Total assets turnover ROE= Net income / Total common equity