FINANCIAL STATEMENTS
Chapter 3
Balance Sheet
Income Statement
Statement of Cash Flows
Finance from a Personal Viewpoint
A. All us own things and owe money
B. If we own more than we owe – we are said to
have a positive net worth.
C. In Finance:
1. What we own are called Assets.
2. We we owe are called Liabilities.
3. If our Assets exceed our Liabilities then we
have [positive] Equity.
4. Accordingly: Assets = Liabilities + Equity
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Balance Sheet
A. The Balance Sheet answers two general questions:
How has the firm invested its capital (money)?
a. Current Assets (cash, receivables, inventory)
b. Fixed Assets (plant, property, equipment)
2. How has the firm financed its capital investment?
a. Borrowing: short-term (current liabilities) and longterm debt
b. Equity (stock) and Retained Earnings
1.
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INCOME STATEMENT
A. The income statement gives information
relating to the firm’s Revenues and Expenses
for the last accounting (fiscal) period.
B. The I/S is frequently called the P&L (Profit
and Loss).
C. The most important use is for determining
how profitably a firm is operating.
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STATEMENT OF CASH FLOWS
A. The statement of cash flows shows the
financial analyst, stockholder, or other
interested parties where the firm’s cash
came from and how it was used.
B. The firm has 3 possible sources & Uses of
cash:
1. Operating Activity (profits from sales)
2. Financing activity (borrowing or selling
equity)
3. Investing activity (buying/selling assets)
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Important Analytical Concepts
A. Net Working Capital = CA – CL
B. Operating Cash Flows = EBIT ( 1 – Tx) +
Depreciation & Amortization
C. Free Cash Flow = OCF – (Cap Exp + DNWC)
D. MVA = MVF – BV (=TA – TL)
E. EVA = NOPAT - $ Cost of Capital
•
NOPAT = EBIT * (1 – Tax Rate)
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Balance Sheet
(Left hand side)
(Right hand side)
A. Current Assets
A. Current Liabilities
1. Cash
2. Marketable Securities
3. Accounts Receivable
4. Inventory
5. Prepaid expenses
Total Current Assets
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1. Accounts payable
2. Notes payable (loans)
3. Accrued expenses
4. Current L-T Debt
Total Current Liabilities
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Balance Sheet
A. Long-Term assets
1.
2.
3.
A. Long-Term liabilities
Gross Fixed Assets
-Accum. Depreciation
Net Fixed Assets
B. Other Assets
1.
2.
3.
Patents, Copyrights
Goodwill
Investments in other
companies (equity).
1.
2.
3.
Long Term Debt
(bonds)
Deferred Taxes
Contingent Liability
B. Stockholder Equity
1.
2.
3.
4.
Total Assets
Preferred Stock
Common Stock
Paid in Capital
Retained Earnings
Total Liabilities + Equity
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INCOME STATEMENT
A.
B.
C.
D.
E.
Net Sales (gross sales - allow for returns & adjust.)
- Cost of Goods Sold (direct labor, materials)
= Gross Profit (contribution to overhead expenses.)
- Sell, General & Administrative Expenses
= Operating Income before Depreciation /
Amortization, Interest, and Taxes (also termed EBITDA)
1.
EBITDA = Earnings Before Interest, Taxes,
Depreciation, and Amortization.
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INCOME STATEMENT
A. =
B. -
C. =
Operating Income (EBITDA)
Depreciation/Depletion/Amortization
Net Operating Income (EBIT)
a.
D. -
E. +
F. =
EBIT = Earnings Before Interest and Taxes
Interest Expense (cost of borrowed funds.)
Interest Income (interest from s-t investments.)
Earnings Before Taxes (EBT)
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INCOME STATEMENT
A. = Earnings Before Taxes
B. - Taxes (includes federal, state, and foreign)
C. = Net Income before extraordinary items and
discontinued operations (BEIDO)
D. ± Charges for Extraordinary Items,
Discontinued Operations
E.
(See Note 1 on page 8)
F. =
Net Income Including EIDO (IEIDO)
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INCOME STATEMENT
A. =
Net Income including EIDO
B. Preferred Stock Dividends (if issued).
C. = Earnings Available For Common Stockholders.
D. Cash Dividends to Common Stockholders (if paid).
E. = Retained Earnings (reinvested in the business)
F. Net Cash Flow = NI + Deprec. & Amort.
G. Earnings per share (EPS) =Net Income (BEIDO)  Shares
H.
Issued & Outstanding
Primary, Fully Diluted
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STATEMENT OF CASH FLOWS
A. Cash Flows from Operating Activities;
1. Net income; what's left after expenses and
taxes.
2. Adjustments to determine operating cash
flows;
a. + Depreciation expense; (a non-cash expense)
b. - Increases in current asset accounts.
c. + Decreases in current asset accounts.
d. + Increases in current liability accounts.
e. - Decreases in current liability accounts.
3. Net cash flows from operating activities.
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STATEMENT OF CASH FLOWS
B. Cash Flows from Investing Activities;
1. - Increases in investments (buying securities).
2. + Decreases in investments (selling securities).
3. + Interest/dividends received from investments.
4. - Increases in plant, property, and equipment
5. + Decreases in plant, property, and equipment.
6. = Net cash flows from investing activities.
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STATEMENT OF CASH FLOWS
C. Cash Flows from Financing Activities
1.
2.
3.
4.
+ Increase in bonds outstanding (selling bonds).
- Decrease in bonds outstanding (retiring bonds).
- Payments of interest on bonds sold by the firm.
+ Increases in stock (selling preferred or
common shares).
5. - Decreases in stock (buying back shares)
6. - Payment of dividends on preferred and/or
common stock.
7. Net cash flows from financing activities.
D. Cash and Equivalents EOY
1. (equals the change in Cash Balance from last
year)
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HOMEWORK CHAPTER 3
A. Self-Test: ST-1, c, h, g
B. Questions: 3-3, 3-5, 3-7, 3-10
C. Problems: 3-1, 3-3, 3-5