2 Financial Statements Accrual-based approach Revenues are recorded at the point of sale and costs when they are incurred, not necessarily when a firm receives or pays out cash. Cash flow approach Used by financial professionals to focus attention on current and prospective inflows and outflows of cash.
3 Financial Statements Statement of Retained Earnings Balance SheetIncome Statement Statement of Cash Flows Notes to Financial Statements
4 Balance Sheet A firm’s balance sheet presents a “snapshot” view of the company’s financial position at a specific point in time. assets = liabilities + stockholders’ equity
5 Balance Sheet for Global Petroleum Corporation
6 Income Statement Income is also called profit, earnings, or margin. Income = revenue expenses Measures of Income Gross profit Operating profit Other income Earnings before interest and taxes Pretax income Net income / net profit after taxes
7 Income Statement for Global Petroleum Corporation
8 Statement of Retained Earnings The statement of retained earnings reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and end of that year.
9 Statement of Retained Earnings for Global Petroleum Corporation
10 Financial Statements Statement of Cash Flows Reconciles the firm’s operating, investment, and financing cash flows with changes in its cash and marketable securities during the year. Notes to Financial Statements Explanatory notes that provide detailed information on the accounting policies, calculations, and transactions underlying entries in the financial statements.
11 Cash Flow Analysis Although financial managers are interested in the information contained in the firm’s accrual- based financial statements, their primary focus is on cash flows. Without adequate cash to pay obligations on time, to fund operations and growth, and to compensate owners, the firm will fail.
15 Statement of Cash Flows for Global Petroleum Corporation
16 Analyzing Financial Performance Using Ratio Analysis Liquidity Ratios Measure a firm’s ability to satisfy its short- term obligations as they come due. Activity Ratios Measure the speed at which a firm converts various accounts into sales or cash. Debt Ratios Measure the proportion of total assets financed by a firm’s creditors. Profitability Ratios Relate a firm’s earnings to its sales, assets, or equity. Market Ratios Relate a firm’s market value to certain accounting values.
17 Using Financial Ratios Benchmark 1 Analysts compare the current year’s financial ratios with previous years’ ratios to identify trends that help them evaluate the firm’s prospects. Benchmark 2 Analysts compare the ratios of one company with those of other firms in the same industry.
25 Corporate Taxes Corporate taxes represent a significant cash outflow. Ordinary corporate income Progressive tax rate schedule Average tax rate: tax divided by the pretax income More relevant for financial decision making: marginal tax rate Corporate capital gains Under existing tax laws, ordinary income tax rates apply