1. Chapter (2) Financial Statements, Cash Flow
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2. Chapter Outline: Overview of Financial Information. The Annual Report.
The Balance sheet.
The Income statement.
Statement of Retained Earnings.
Statement of cash flows.
MVA and EVA.
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3. Financial Information—Where Does It Come From?
Financial information is the responsibility of management
Created by within-firm accountants
Creates a conflict of interest because management wants to portray firm in a positive light
Published to a variety of audiences
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4. Users of Financial Information
Investors and Financial Analysts
Financial analysts interpret information about companies and make recommendations to investors
Major part of analyst’s job is to make a careful study of recent financial statements
Vendors/Creditors
Use financial info to determine if the firm is expected to make good on loans
Management
Use financial info to pinpoint strengths and weaknesses in operations
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5. The Orientation of Financial Analysis
Accounting is concerned with creating financial statements
Finance is concerned with using the data contained within financial statements to make decisions
The orientation of financial analysis is critical.
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6. The Annual Report
It is a report issued annually by a corporation to its stockholders. It contains basic financial statements, as well as management’s analysis of the past year’s operations and opinions about the firm’s future prospects.
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7. The Balance sheet
A statement of the firm’s financial position at a specific point in time.
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8. Balance Sheet: Assets Cash A/R Inventories Total CA Gross FA
Less: Dep.
Net FA
Total Assets
2002
7,282
632,160
1,287,360
1,926,802
1,202,950
263,160
939,790
2,866,592
2001
57,600
351,200
715,200
1,124,000
491,000
146,200
344,800
1,468,800
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9. Balance sheet: Liabilities and Equity
Accts payable
Notes payable
Accruals
Total CL
Long-term debt
Common stock
Retained earnings
Total Equity
Total L & E
2002
524,160
636,808
489,600
1,650,568
723,432
460,000
32,592
492,592
2,866,592
2001
145,600
200,000
136,000
481,600
323,432
203,768
663,768
1,468,800
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10. The Income statement
The Income statement is a statement summarizes a firm’s revenues and expenses over a given period of time, generally a quarter or a year.
Reflects performance during the period
Income statements can cover any period of time, but they are usually prepared monthly, quarterly and annually
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11. Income statement Sales COGS Other expenses EBITDA Depr. & Amort. EBIT
Interest Exp.
EBT
Taxes
Net income
2002
6,034,000
5,528,000
519,988
(13,988)
116,960
(130,948)
136,012
(266,960)
(106,784)
(160,176)
2001
3,432,000
2,864,000
358,672
209,328
18,900
190,428
43,828
146,600
58,640
87,960
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12. Statement of Retained Earnings.
It is a statement reporting how much of the firm’s earnings were retained in the business rather than paid out in dividends.
A positive number in the retained earnings account indicates only that in the past the firm earned some income
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13. Statement of Retained Earnings (2002)
Balance of retained
earnings, 12/31/01
Add: Net income, 2002
Less: Dividends paid
earnings, 12/31/02
$203,768
(160,176)
(11,000)
$32,592
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14. Statement of Cash Flows:
A statement reporting the impact of a firm’s operating, investing, and financing activities on cash flows over an accounting period.
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15. Statement of Cash Flows
Summarizes the changes in a company’s cash position
The statement separates activities into three categories, plus a summary section:
Operating activities
Investment activities
Financing activities
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16. Statement of Cash Flows
Is used to help answer questions such as:
Is the firm generating enough cash to purchase the additional assets required for growth?
Is the firm generating any extra cash that can be used to repay debt or to invest in new products?
Such information is useful both for managers and investors
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17. Operating activities Includes: net income, depreciation,
changes in current assets other than cash,
Changes in current liabilities other than notes payable,
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18. Investing activities Includes: investments in fixed assets
or sales of fixed assets
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19. Financing activities Includes:
Raising cash by selling short-term investments or by issuing short-term debt
Long term debt, or stock
Also because both dividends paid and cash used to buy back outstanding stock or bonds reduce the company’s cash, such transactions are included here
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20. Business Cash Flows Cash Flows Rules
The following rules can be applied to any business’s financial statements
Asset increase  use of cash
Asset decrease  source of cash
Liability increase  source of cash
Liability decrease  use of cash
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21. Sources and Uses of Cash
Sources of cash
Uses of cash
Dividend payments
Net income + depreciation
Increase in long-term debt
Decrease in long-term debt
Increase in equity
Cash and cash equivalents
Decrease in equity
Increases in current liabilities
Increases in fixed assets
Decreases in fixed assets
Decreases in current assets other than cash
Increases in current assets other than cash
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22. Statement of Cash Flows (2002)
OPERATING ACTIVITIES
Net income
Add (Sources of cash):
Depreciation
Increase in A/P
Increase in accruals
Subtract (Uses of cash):
Increase in A/R
Increase in inventories
Net cash provided by ops.
(160,176)
116,960
378,560
353,600
(280,960)
(572,160)
(164,176)
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23. Statement of Cash Flows (2002)
L-T INVESTING ACTIVITIES
Investment in fixed assets
FINANCING ACTIVITIES
Increase in notes payable
Increase in long-term debt
Payment of cash dividend
Net cash from financing
NET CHANGE IN CASH
Plus: Cash at beginning of year
Cash at end of year
(711,950)
436,808
400,000
(11,000)
825,808
(50,318)
57,600
7,282
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24. Net cash from operations = -$164,176, mainly because of negative NI.
What can you conclude about D’Leon’s financial condition from its statement of CFs?
Net cash from operations = -$164,176, mainly because of negative NI.
The firm borrowed $825,808 to meet its cash requirements.
Even after borrowing, the cash account fell by $50,318.
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25. Market Value Added (MVA):
The difference between the market value of the firm’s stock and the amount of equity capital investors have supplied.
MVA= Market value of stock – Equity capital supplied by shareholders.
MVA= (Stock Price) (Shares outstanding) - Total common equity.
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26. Market Value Added (MVA):
($25*50)- (663,768)=586,232
MVA 2002:
($20*50)- (492,592)=507,408
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27. Economic Value Added (EVA):
Value added to shareholders by management during a given year.
In order to generate positive EVA, a firm has to more than just cover operating costs. It must also provide a return to those who have provided the firm with capital.
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28. Economic Value Added (EVA):
EVA = After-tax __ After-tax
Operating Income Capital costs
EVA = NOPAT – After-tax Cost of Capital
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29. Economic Value Added (EVA):
Assume the firm’s after-tax percentage cost of capital was 10% in 2001 and 13% in 2002.
EVA02 = NOPAT – (A-T cost of capital) (Capital)
= -$78,569 – (0.13)($1,852,832)
= -$78,569 - $240,868
= -$319,437
EVA01 = $114,257 – (0.10)($1,187,200)
= $114,257 - $118,720
= -$4,463
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30. End of Chapter 2
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