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

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

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

4. Staples Balance Sheet ($ Thousands)

5. Staples Liabilities & Stockholders’ Equity ($ Thousands)

6. Staples Income Statement ($ Thousands)

7. 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

8. 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

9. Staples Statement Of Cash Flows ($ Thousands)

10. Staples Statement Of Cash Flows ($Thousands)

11. 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?

12. 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

13. 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

14. 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.

15. Liquidity Ratios
Staples (2004)
Office Depot (2004)

16. Activity Ratios
Staples (2004)
Office Depot (2004)

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

18. Debt Ratios
Staples (2004)
Office Depot (2004)

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

20. Profitability Ratios
Staples (2004)
Office Depot (2004)

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

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

23. Market Ratios
Staples (2004)
Office Depot (2004)

24. Market Ratios
Staples (2004)
Office Depot (2004)

25. 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

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