Professor XXXXX Course Name / Number Financial Statements And Cash Flow Analysis Professor XXXXX Course Name / Number

Financial Statements Balance Sheets Income Statements Financial Managers and analysts use financial statements to conduct: Cash Flow Analysis - Performance (Ratio) Analysis

Four Key Financial Statements 1. Balance sheet 2. Income statement 3. Statement of retained earnings 4. Statement of cash flows

Staples Balance Sheet ($ Thousands)

Staples Liabilities & Stockholders’ Equity ($ Thousands)

Staples Income Statement ($ Thousands)

Sources and Uses of Corporate Cash Decrease in any asset Increase in any liability Net profits after taxes Depreciation and other non-cash charges Sale of stock Uses Increase in any asset Decrease in any liability Net loss Dividends paid Stock repurchase or retirement

Staples Statement Of Retained Earnings ($ Thousands) 559,732 (561,099) 2,209,302 81,002 1,933,379 Balances January 31, 2004 --- (367) Other (4,315) Purchase of treasury stock 490,211 Net income for year 28 97 Reissuance of treasury stock 69,521 Translation adjustments 18,389 Issues of restricted stock 16,170 Sale of CS under ESOP 9,136 CS to employee saving plan 30,613 Tax benefit for option exercise 121,553 CS issues for option exercise 252,972 Equity offering 484,710 (556,812) 1,719,091 11,481 1,485,132 Balances February 1, 2003 Income Treasury stock Retained earnings Cumul. Translat adjustmt Common stock

Staples Statement Of Cash Flows ($ Thousands)

Staples Statement Of Cash Flows ($Thousands)

Accounting Profit vs. Cash Flow Accounting Profit based on accrual accounting—focus on past periods Finance emphasizes the importance of timing “You can’t deposit net income, only cash” Timing of cash flow matters. Accrual accounting may obscure timing. Value of any financial asset is the PV of future cash flows Bonds: PV of promised interest & principal payments Stocks: PV of all future dividends Patents, trademarks: PV of future royalties Valuation is the process linking risk & return Output of process is asset’s expected market price A key input is the required [expected] return on an asset Defined as the return an arms-length investor would require for an asset of equivalent risk Debt securities: risk-free rate plus risk premium(s) Required return for stocks found using CAPM or other asset pricing model Beta determines risk premium: higher beta, higher reqd return What are key measures of cash flow?

Key Measures of Cash Flow Cash Flow from Operations Total cash generated Operating Cash Flow Cash flow before repaying lenders Value of any financial asset is the PV of future cash flows Bonds: PV of promised interest & principal payments Stocks: PV of all future dividends Patents, trademarks: PV of future royalties Valuation is the process linking risk & return Output of process is asset’s expected market price A key input is the required [expected] return on an asset Defined as the return an arms-length investor would require for an asset of equivalent risk Debt securities: risk-free rate plus risk premium(s) Required return for stocks found using CAPM or other asset pricing model Beta determines risk premium: higher beta, higher reqd return Free Cash Flow Cash flow that firm could distribute to investors. 12

Types Of Financial Ratios Current ratio Quick ratio Inventory turnover ratio Average collection period Debt-to-equity ratio Times interest earned ratio Gross margin EPS P/E ratio Market-to-book ratio Liquidity Ratios Activity Ratios Debt Ratios Profitability Ratios Market Ratios

Financial Ratios: Trends and Benchmarking Benchmarking: comparison of a company’s ratio values to industry competitors’ ratios Firms’ financial ratios compared at the same point in time Trend analysis - performance evaluation over time Developing trends can be seen using multi-year comparisons.

Liquidity Ratios Staples (2004) Office Depot (2004)

Activity Ratios Staples (2004) Office Depot (2004)

Activity Ratios (Continued) Staples (2004) Office Depot (2004)

Debt Ratios Staples (2004) Office Depot (2004)

Debt Ratios (Continued) Staples (2004) Office Depot (2004)

Profitability Ratios Staples (2004) Office Depot (2004)

Profitability Ratios (Continued) Staples (2004) Office Depot (2004)

Profitability Ratios (Continued) Staples (2004) Office Depot (2004)

Market Ratios Staples (2004) Office Depot (2004)

Market Ratios Staples (2004) Office Depot (2004)

Significant cash outflow Corporate Taxes Significant cash outflow Ordinary income tax Progressive tax rate schedule Average tax rate: tax divided by the pretax income More relevant: marginal tax rate Capital gains tax Under existing tax laws, use ordinary income tax rates for capital gain taxes

Financial Statements and Financial Ratios Balance Statement Income Statement Liquidity Ratios Activity Ratios Debt Ratios Profitability Ratios Market Ratios