Overview of Financial Accounting
and Financial Statement Analysis
Analysis for Decision Making
Financial statement analysis is a tool
for making complex investment and
credit decisions. Specifically, it is
used to:
 Evaluate
 Predict
historical performance
future cash flows
 Establish
the value of an
enterprise
 Evaluate
management
Pricing Investments

The price an investor is willing to pay
depends on predicted future cash flows

Future cash flows from extending credit
 Interest
 Return

income
of principal
Future cash flows from equity
investments
 Dividends
 Proceeds
– attributable to value
growth – from stock sale
Estimating cash flows
requires

Current and relevant information

An evaluation of the firm’s profit
and growth potential

An assessment of the firm’s survival
likelihood
Cash Flows and Prices
Investors would like to pay an amount for
an investment such that its annual
future cash flows will provide a rate of
return (r) greater than or equal to the
return other potential uses of the
money would provide.
Cash Flows and Prices
In cases of identical payouts, return equals
annual future cash flows
r
purchase price
Cash Flows and Prices
Given a desired rate of return and an estimate of future
cash flows, purchase price can be estimated as:
Price 
Future cash flows
Rate of return
Evaluating Management

Financial statement analysis may be
the basis for a manger’s
performance appraisal

Managers’ compensation may be a
function of the this appraisal

It’s important to understand which
elements of performance are within
or beyond managers’ control
Analysis Techniques

Use publicly available data from
financial statements including
 Income
Statement
 Statement
 Balance
Sheet
 Statement
 Notes
of Owners’ Equity
of Cash Flows
to Financial Statements
Analysis Techniques
Time series analysis

Compare a firm to itself over time

Firms provide at least two periods
of comparable data in each set of
financial statements
Analysis Techniques
Cross-sectional Analysis
Compare several firms over the same time
period
 Designed to hold economic effects constant
 Enables analyst to determine how a firm is
doing given the prevailing macroeconomic
conditions
 Comparison of large, diverse, multinational
firms is complex (and covered in detail in
chapters 9 and 18)

Financial Statements and
Performance

Financial statements are prepared
in a consistent manner (enabling
cross-sectional and time series
comparisons)

Accounting rules are designed to
reflect firm performance
Basic Financial Statements

Income Statement


Balance Sheet


provides results of business activities
states assets and claims against them
(liabilities and owner’s equity)
Statement of Cash Flows

provides prior cash flow information

helps analyst assess the firm’s ability to
pay interested parties
Accounting and Reporting
Standards
Analysts must become familiar enough
with the accounting options
available to the firm being studied
in order to understand and evaluate
the information presented in the
financial statements
Development of US Accounting Standards

1900


No mandated reporting requirements even though the
professions of accounting and auditing existed.
1933/34
Securities Acts give the SEC authority to regulate
financial reporting.
 The accounting profession worked to develop and refine
accounting principles and auditing procedures.


1970s

Financial Accounting Standards Board is created as the
authority on financial reporting for publicly traded US
firms.
Development of International Accounting
Standards

International Accounting Standards (IASB)
 14
member committee of auditors,
accountants, academics and financial
statement users
 Developed
International Accounting
Standards (IAS) to help investors cope with
financial analysis in global capital markets
 Rules
are not used worldwide, but a number
of countries do use the framework
Regulatory Requirements

SEC filing requirements
 Form
10-K audited annual report
 Form
10-Q quarterly report
 Form
8-K periodic informational reports
Transactions and the Accounting Process

Remember, Assets = Claims

Original owners put $1,000 in corporate
checking account
Assets
Cash
$1,000
=
=
Claims
Common Stock
$1,000
Transactions and the Accounting Process

Maintain the Assets = Claims equality

Build on previous transaction

Corporation spends $50 on inventory
Assets
Cash
Inventory
$1,000
($50)
$50
$950
$50
=
=
Claims
Common Stock
$1,000
=
$1,000
Transactions and the Accounting Process

Change the previous transaction:

Corporation purchases $50 of inventory on
credit
Assets
Cash
Inventory
$1,000
$50
$1,000
$50
=
=
=
Claims
Accts. Payable Common Stock
$1,000
$50
$50
$1,000
Transactions and the Accounting Process
Expanded Transaction Model

Original owners put $1,000 in corporate checking
account

Corporation purchases $50 of inventory on credit

Purchase a $5,000 building for $500 cash and $4,500
mortgage
Expanded Transaction Model
Assets
Cash
Inventory
=
Building
Claims
Accounts
Payable
Mortgage
Payable
$1,000
$1,000
$50
($500)
$500
Common
Stock
$50
$5,000
$50
$5,000
$4,500
=
$50
$4,500
$1,000
Transactions and the Accounting
Process
Expanded Transaction Model

The company pays rent of $2,000
for the current month

The company sells inventory to a
customer on account (receivable) at
a retail price of $30,000

The portion of the inventory which
was sold cost $15,000 to purchase
Expanded Transaction Model
Assets
Cash
A/R
=
Inventory
Accounts
Payable
($2,000)
Common
Stock
Retained
Earnings
($2,000)
$30,000
$30,000
($15,000)
($2,000)
Claims
$30,000
($15,000)
($15,000)
=
$13,000
Basic Financial Statements
Using recorded information
the…

Balance Sheet


Reports totals of assets and claims on the
date ending the reporting period
Statement of Cash Flows
Reports all cash inflows and outflows
(more in chapter 4)
 The cash column of the transaction model


Statement of Shareholders’ Equity

Reports changes in the owners’ claim
accounts during the period
The Professional Analyst
Buy-Side and Sell-Side
Analysts

Buy-side
 Provide
information within the
investment firm
 Information
is rarely available to
outsiders

Sell-side
 Provide
information to brokers who
work with external clients
 Reports
are created with external
clients in mind
The Professional Analyst
Professional Designation

Association for Investment
Management and Research (AIMR)
Established professional standards and
ethics for financial analysts
 Sets disciplinary procedures in the event
that unethical behavior is suspected or
detected
 Manages the Chartered Financial Analyst
(CFA®) exam


A series of three examinations covering
economics, finance, statistics and financial
statement analysis
The Professional Analyst
Role of the Analyst

Incorporate incrementally
informative data into
recommendations

Analysis is an ongoing process
utilizing many types of resources

Financial statement analysis is the
starting point of this process
Understanding the Balance Sheet
and Statement of Owners’ Equity
Assets = Claims
The Accounting Equation

Assets are the cash, property or
other resources controlled by the
entity used to provide future
economic benefits.

Claims are the contractual and
other obligations held against the
firm’s assets.
 Liabilities
 Owners’
– creditors’ claims
equity – residual claim
Basic Financial Statements

Balance sheet
Assets = Liabilities + Owners’ Equity
 A snapshot at a particular moment in time


Income statement
Revenue – Expenses
 Covers a period of time


Cash flow statement


Changes in cash during the period
Equity statement

Changes in equity during the period
Articulation of Financial
Statements
Income Statement
Balance Sheet
Revenue
Assets
Equity Statement
Cash Flows
-Expenses
=
Beginning cash
Net Income Beginning balance
Liabilities
± Operating
+ Net Income
+
± Investing
- Dividends
Equity
± Financing
Ending balance
Ending cash
Assets
(GAAP)
Probable future economic benefits obtained
or controlled by a particular entity as a
result of past transactions or events
 List in order of liquidity



Begin with cash
IAS does not specify an order
Differentiate between current and longterm


Longer of one year or the operating cycle
Current ratio = Current assets/Current
liabilities
Current Assets





Cash and cash equivalents
Accounts receivable (net of estimated bad debts)
Inventory

Raw material, work in process, finished goods,
merchandise

LIFO, FIFO, Weighted average, Specific identification

At lower of historical cost or current market value
Prepaid expenses
Marketable securities

At market value
Motorola, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31 (In millions, except per share amounts)
ASSETS
Current Assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories
Deferred income taxes
Other current assets
Total current assets
2001
6,082
80
4,583
2,756
2,633
1,015
17,149
2000
3,301
354
7,092
5,242
2,294
1,602
19,885
Noncurrent Assets

Property, plant and equipment

Net book value

Historical cost less accumulated depreciation

Except for land which is not depreciated
Include all costs incurred in preparing the
asset for use
 Construction period (capitalized) interest
for self-constructed assets


Be aware of exceptions to historical
cost (IAS 16)
Noncurrent Assets
Intangible assets

Copyrights, trademarks



Historical cost less accumulated
amortization
Amortization is similar to straight-line
depreciation
Goodwill
Excess acquisition cost beyond current
market value of net assets acquired
 Tested for impairment annually (GAAP)
 Amortized over no more than 20 years (IAS)

Motorola, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31 (In millions, except per share amounts)
Property, plant and equipment, net
Investments
Long-term deferred income taxes
Other assets
TOTAL ASSETS
2001
2000
8,913
2,995
1,152
3,189
35,399
11,157
5,926
5,375
44,343
Nokia Consolidated balance sheet, IAS (EURm)
December 31,
2001
ASSETS
Fixed assets and other non-current assets
Capitalized development costs
893
Goodwill
854
Other intangible assets
237
Property, plant and equipment
2,514
Investments in associated companies
49
Available-for-sale investments
399
Deferred tax assets
832
Long-term notes receivable
1,128
Other non-current assets
6
6,912
Current assets
Inventories
1,788
Accounts receivable, less allowances for
doubtful accounts (2001:217, 2000: 236)
5,719
Prepaid expenses and accrued income
1,480
Short-term loan receivable
403
Available-for-sale investments
4,271
Bank and cash
1,854
15,515
Total assets
22,427
2000
640
1,112
242
2,732
61
337
401
808
55
6,388
2,263
5,594
1,418
44
2,774
1,409
13,502
19,890
Special assets

Deferred tax asset
 Results
from a current tax
payment that relates to a future
financial statement expense
A
prepayment (a deferred tax
liability represents a deferred
payment)

Inventory reserves
 Reflect
a reduction of market
value below historical cost
Motorola, Inc. Inventories (Note 2)
Inventories, net, consist of the following:
31-Dec
Finished goods
Work-in-process and production materials
Less inventory reserves
2001
2000
1,140
2,005
2,782
3,922
(1,166)
2,756
4,281
6,286
(1,044)
5,242
Claims

Liabilities (GAAP)
 Probable
future economic sacrifices
arising from present obligations as a
result of past transactions
 Claims
that must be paid first are listed
first (GAAP)
 IAS

does not specify an order
Equity
 Residual
claims against assets
Current Liabilities

Accounts payable to suppliers
 Purchase

Accrued expenses
 Interest,

material without paying cash
taxes, wages…
Current portion of debt
 Principal
to be paid within the next year
Motorola, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31 (In millions, except per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and current portion of long-term debt
Accounts payable
Accrued liabilities
Total current liabilities
2001
2000
870
2,434
6,394
9,698
6,391
3,492
6,374
16,257
Noncurrent Liabilities





Principal associated with
 Long-term portion of Loans, Notes,
Mortgages, Bonds
Interest is a component of Current
liabilities
Current portion of debt is a Current
liability
Net of discounts or premiums
Details are discussed in the notes to
the statements
Motorola, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31 (In millions, except per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
Other Liabilities
Company-obligated... preferred securities…
2001
2000
1,152
1,192
485
485
Nokia Consolidated balance sheet, IAS (EURm)
December 31,
2001
2000
Minority interests
196
177
Long-term liabilities
Long-term interest-bearing liabilities
207
173
Deferred tax liabilities
177
69
Other long-term liabilities
76
69
460
311
Current liabilities
Short-term borrowings
831
1,069
Current portion of long-term debt
47
Accounts payable
3,074
2,814
Accrued expenses
3,477
2,860
Provisions
2,184
1,804
9,566
8,594
Total shareholders' equity and liabilities
22,427
19,890
Owners’ Equity
Stock
 Value listed


Par or stated value

Additional paid in capital

Reflects what was paid for stock at original issuance
Number of shares

Authorized – Upper limit of number of shares that can
be issued

Issued – Sold to investors

Outstanding – Held by investors (Issued less Treasury)

Treasury – Firm purchased its own shares on the market
Owners’ Equity

Retained earnings
 Increased
(decreased) by net
income (loss)
 Decreased

by dividends paid
Comprehensive income
 Nonowner
changes to equity
Owners’ Equity
Preferred Stock

Listed after Liabilities and before
Common stock

Shares properties of debt and
equity

In the event of liquidation, receive
funds before Common shareholders

Dividend specified as dollar amount
or percentage of par
Motorola, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31 (In millions, except per share amounts)
Shareholders' equity
Preferred stock, $100 par value (none issued)
Common stock, $3 par
Authorized shares: 2001 and 2000, 4,200
Issued and outstanding 2001, 2,254; 2000, 2,191.2
Additional paid-in capital
Retained earnings
Non-owner changes to equity
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
2001
6,764
1,707
5,434
(214)
13,691
25,026
2000
6,574
1,188
9,727
1,123
18,612
36,546
Nokia Consolidated balance sheet, IAS (EURm)
December 31,
2001
2000
SHAREHOLDERS' EQUITY AND LIABILITIES
Shareholders' equity
Share capital
284
282
Share issue premium
2,060
1,695
Treasury shares
(21)
(157)
Translation differences
326
347
Fair value and other reserves
20
Retained earnings
9,536
8,641
12,205
10,808
Nonowner changes to equity
Other comprehensive income (GAAP)

Adjustments to fair value for available-for-sale
securities

Foreign currency translation adjustment

Gains/losses on cash flow hedge derivatives

Gains/losses on investment hedge instruments

Adjustments related to underfunding a defined
benefit pension plan
Statement of Shareholders’ Equity

Provides details of changes in Equity

Stock

Other comprehensive income

Retained earnings

Includes beginning and ending balances in accounts
Motorola, Inc. and Subsidiaries
Non-Owner Changes to Equity (net of tax)
(In millions, except per share amounts)
Balances at December 31, 2000
Net loss
Common
Fair Value
Foreign
Comprehen
Stock and
Adjustment to
Currency
Other Retained
sive
Additional
Available For
Translation Items Earnings
Earnings
Paid-In
Sale Securities Adjustments
(Loss)
Capital
7,762
1,536
(339)
(74)
9,727
(3,937)
(3,937)
Unrealized losses on securities, net
(1,193)
Foreign currency translation adjustments
Minimum pension liability adjustment
Issuance of common stock and stock
options exercised
Equity security units issuance costs
Loss on derivative instruments, net
Dividends declared ($0.16 per share)
Balances at December 31, 2001
(1,193)
(173)
(173)
30
30
(1)
(1)
753
(44)
8,471
343
(512)
(45)
(356)
5,434
(5,274)
Nokia Statement of Changes in Shareholders’
Equity
(partial, IAS, EURm)
Balance at 12/31/00
Share issue
Acquisition of
treasury shares
Reissuance of
treasury shares
Stock options
issued on acq'n
Stock opt exerc'd
related to acq'n
Dividend
Translation diff.
Net investment
hedge losses
Cash flow hedge
Other increase
Net profit
Balance at 12/31/01
Number of
shares
4,692,133
41,386
Share
Share
Issue
capital
Premium
282
1,695
2
407
(995)
3,778
(52)
Fair value
Treasury Translation and other Retained
shares differences reserves earnings
(157)
347
(56)
8,641
(21)
(21)
157
105
20
20
(10)
(1,314)
65
(86)
76
4,736,302
284
2,060
Total
10,752
409
(21)
326
20
9
2,200
9,536
(10)
(1,314)
65
(86)
76
9
2,200
12,205
Understanding Financial Reports
and the Income Statement
Securities Regulation
Principal Objectives

Protect investors.

Ensure that market are fair, efficient, and transparent.

Reduce systematic risk.
International Organization of Securities Commissions
Securities Regulation
Issuers of Securities

Full, accurate and timely disclosure of
relevant information

Treat securities holders in fair and
equitable manner

Accounting and auditing standards should
be of high and internationally acceptable
quality
International Organization of Securities Commissions
International Accounting
Standards (IAS)
A complete set of financial
statements includes:

Balance sheet

Income statement

Statement of changes in equity

Cash flow statement

Explanatory notes
Generally Accepted
Accounting Principals (GAAP)
A complete set of financial
statements shows:

Financial position at the end of the
period

Earnings for the period

Comprehensive income

Cash flows

Investments by and distributions to
owners
US Securities Regulations

Annual report to shareholders

Schedule 14A Proxy solicitation
materials

Form 10K Annual report

Form 10Q Quarterly filing

Form 8K Current report
Proxy Statement Table of Contents (edited)
• Voting Procedures
• Proposals 1—8
• Ownership of Securities
• Executive Compensation
• Report of Compensation Committee on Executive Compensation
• Report of Audit and Legal Committee
• Performance Graph
• Other Matters
APPENDIX
• Management's Discussion and Analysis of Financial Condition and
Results of Operations
• Financial Highlights
• Financial Statements and Notes
Form 10K includes

Annual report

Items included by reference to another report



Financial statements included in Proxy statement
Discussion of the nature of business operations

Geographic locations

Stock trading information

Auditor information

Information on management
Other information
Auditor’s Report

Unqualified opinion


Qualified opinion


Everything is fine except for…
Adverse opinion


Statements fairly present the the
company’s position or results
Statements do not fairly present the the
company’s position or results
Disclaimer of opinion

Auditor is unable to state an opinion
Motorola, Inc. and Subsidiaries
Consolidated Statements of Operations
(millions, except per share data)
Year ended December, 31
2001
2000
1999
Net Sales
30,004
37,580
33,075
Costs and Expenses
Manufacturing and other costs of sales
21,445
23,628
20,631
Selling, general and administrative expenses
3,703
5,141
5,220
Research and development expenditures
4,318
4,437
3,560
Depreciation expense
2,357
2,352
2,243
Reorganizations of businesses
1,858
596
(226)
Other charges
3,328
517
1,406
Interest expense, net
437
248
138
Gains on sales of invesements and businesses
(1,931)
(1,570)
(1,180)
Total costs and expenses
35,515
35,349
31,792
Earnings (loss) before income taxes
(5,511)
2,231
1,283
Income tax provision (benefit)
(1,574)
913
392
Net earnings (loss)
(3,937)
1,318
891
Basic Earnings (loss) per common share
Diluted Earnings (loss) per common share
Basic wgtd avg common shares outstanding
Diluted wgtd avg common shares outstanding
(1.78)
(1.78)
2213.3
2213.3
0.61
0.58
2170.1
2256.6
0.42
0.41
2119.5
2202.0
Nokia Consolidated profit and loss (IAS)
Net sales
Cost of goods sold
Research and development expenses
Selling, general and administrative expenses
One-time customer finance charges
Impairment of minority investments
Impairment of goodwill
Amortization of goodwill
Operating profit
Share of results of associated companies
Financial income and expenses
Profit before tax and minority interests
Tax
Minority interests
Net profit
Earnings per share
Basic
Diluted
Average number of shares (thousands)
Basic
Diluted
2001
EURm
31,191
(19,787)
(2,985)
(3,443)
(714)
(80)
(518)
(302)
3,362
(12)
125
3,475
(1,192)
(83)
2,200
2000
EURm
30,376
(19,072)
(2,584)
(2,804)
(140)
5,776
(16)
102
5,862
(1,784)
(140)
3,938
1999
EURm
19,772
(12,227)
(1,755)
(1,811)
(71)
3,908
(5)
(58)
3,845
(1,189)
(79)
2,577
0.47
0.46
0.84
0.82
0.56
0.54
4,702,852
4,787,219
4,673,162
4,792,980
4,593,761
4,743,184
Sales revenue




Proceeds from customers in exchange for the
delivery of goods or services for the use of
assets
Also use the terms revenue and turnover (U.K.)
Generally recognized when earned and realized
or realizable

When goods/services are exchanged for cash or claims
to cash

Substantially accomplished what must be done
Service revenue is recognized with reference to
the percentage of completion
Net sales

Sales revenue less returns and allowances

Returns:
 Customer

returns goods for a refund
Allowance:
 Customer
retains goods but receive a partial
refund if unhappy with quality of merchandise
Cost of Sales and Gross Profit


Net sales – Cost of sales = Gross profit
Cost of sales





Direct cost of purchasing or producing the
goods or services to be delivered to customers
Also Cost of good sold or Cost of services
provided
Retail: purchase cost of goods sold to
customers
Manufacturing: material, labor and overhead
used in the production of goods
Service: cost required to provide service (labor
and supplies)
Gross Margin

Gross profit ÷ Sales

Motorola
 Margin
= (30,004-21,445) ÷30,004
= 28.6%

Nokia
 Margin
= (31,191-19,787) ÷31,191
= 36.6%
Selling, General and
Administrative (SG&A)
Expenses
Operating expenses including
 Salaries
 Pension costs
 Marketing costs
 Insurance
 Rent
 Depreciation
 Other
 Generally reported as a single line item

Depreciation

Can be a component of Cost of sales or SG&A

Allocation of the cost of assets that are
expected to provide benefits over more than
one accounting period

Straight-line depreciation
 Most
common method
 Annual

expense = (Cost – salvage value) ÷ Life
Accelerated depreciation
 Greater
expense in early years of assets life
Accelerated Depreciation
Sum of the years’ digits

Annual expense =
(Cost – SV) * (Years remaining/Sum of the years’ digits)

A 4-year asset costing $450,000 with a $50,000 SV

Year 1 = ($450,000-$50,000)*(4/10) = $160,000

Year 2 = ($450,000-$50,000)*(3/10) = $120,000

Year 3 = ($450,000-$50,000)*(2/10) = $ 80,000

Year 4 = ($450,000-$50,000)*(1/10) = $ 40,000

Total depreciation expense = $400,000
Accelerated Depreciation
Declining balance









Determine straight-line rate (1/Useful life)
Determine acceleration factor (150%, 175%, 200%)
Depreciation rate = (SL rate * acceleration factor)
Depreciation expense =
Cost – Accumulated depreciation * Depreciation rate
Return to previous data, use acceleration factor of 150%
Year 1 = ($450,000)*(.375) = $ 168,750
Year 2 = ($450,000-$168,750)*(.375) = $ 105,469…
Discontinue depreciation when Net book value = SV
Total depreciation expense = $400,000
Research and Development



Searching for new knowledge and translating this
knowledge into a plan or design for a new process or
product.
Expensed immediately on the income statement
Purchased in-process R&D appears when one company
purchases another
Restructuring and Other Charges

Appears when a business reorganizes

Includes charges associated with asset write downs
and employee separations

Consider whether these charges will continue
Operating income

Results of primary operations, independent of
investment, financing and tax expenses
Sales
(Cost of sales)
Gross profit
(S G & A)
Operating income
Income statement, continued

Nonoperating income
 Peripheral
activities: interest income/expense,
dividend income, gain/losses on asset sales

Income before income taxes

Provision for income taxes
 Expected

amount of taxes to be paid
Net income or loss
Income statement - Special items

Minority share of income


Discontinued operations


Disposition (actual or planned) of a large component of
business
Extraordinary items


Subsidiaries owned less than 100%
Unusual and infrequent
Cumulative effect of change in accounting
principles
Earnings per share

Basic


Net income/Weighted average number of shares
outstanding
Diluted
EPS equation includes securities that can
be converted into common stock (options)
 As if dilutive securities were exercised


Discontinued operations, extraordinary
items and changes in accounting
principles are shown in total and on a
per share basis
Special revenue
recognition methods

Long-term contract
 Completed
contract
 Percentage
of completion

Warranty contracts

Installment sales

Commodities
Comprehensive income

All income statement items

Other comprehensive income
 Change
in the value of some
securities held for investment
 Gain/losses
translation
on foreign currency
Quality of income
Consider
 Conservatism
 Accounting
method (depreciation,
inventory valuation, revenue
recognition)
 Assumptions
regarding retirement
benefits
 Reserves
(sales returns, bad
debts)
 Deferral
or unusual expenses
Understanding the
Statement
of Cash Flows
Importance of cash flows
Accrual-based accounting requires
reporting revenues when earned
and expenses when incurred – not
when cash is exchanged.
 A company cannot pay employees,
creditors and others with accrualbased net income.
 Valuation models used in financial
analysis are often based on
projections of future cash flows.

Statement of Cash Flows

Summarizes all activity in the cash
accounts of the firm via three
categories:

Operating
 Indirect
 Direct

Investing

Financing
Motorola, Inc. and Subsidiaries
Years Ended December 31 (in millions)
Net cash provided by (used for) operating activities
Net cash provided by (used for) investing activities
Net cash provided by (used for) financing activities
Effect of exchange rate change on cash and cash equivalents
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
2001
1,976
2,477
(1,820)
2000
(1,164)
(4,091)
5,119
1999
2,140
(960)
788
148
(100)
(33)
2,781
3,301
6,082
(236)
3,537
3,301
1,935
1,602
3,537
Nokia
Cash flow summary (EURm)
2001
2000
1999
Operating
6,547
3,509
3,102
Investing
(2,679)
(2,531)
(1,359)
Financing
(1,895)
(1,034)
(574)
Operating activities

Primarily captures
 Income

statement items
 Short-term/operating
assets
 Short-term/operating
liabilities
Methods of presentation
 Indirect
 Direct
Cash Flows from Operating Activities
Indirect method


Reconciles accrual-based net income with
cash generated via operations
Begin with accrual-basis net income


Adjust accrual items to reflect cash basis

Noncash items (depreciation and amortization)

Changes in working capital (current assets, current
liabilities)
Reclassify nonoperating items

Appear in other sections of the Statement

Gains/losses on sales of fixed assets or debt
extinguishment
Adjustments to Net Income
Add back noncash expenses
 Depreciation and amortization
 Add working capital decreases
 Decreases in current assets
 Increases in current liabilities
 Subtract working capital increases
 Increases in current assets
 Decreases in current liabilities

Motorola, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31 (in millions)
2001
OPERATING
Net earnings (loss)
(3,937)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization
2,552
Charges for reorganization of businesses and other
charges
5,998
Acquired in-process research and development charges
40
Gains on sales of investments and businesses
(1,931)
Deferred income taxes
(2,273)
Changes in assets and liabilities, net of effects of
acquisitions and dispositions:
Accounts receivable
2,445
Inventories
1,838
Other current assets
249
Accounts payable and accrued liabilities
(3,030)
Other assets and liabilities
25
Net cash provided by (used for) operating activities
1,976
2000
1999
1,318
891
2,527
2,371
1,483
332
(1,570)
239
1,893
67
(1,180)
(443)
(1,471)
(2,305)
(532)
(666)
(519)
(1,164)
(135)
(678)
(16)
361
(991)
2,140
Nokia
Consolidated Cash Flow Statements, IAS
Financial year ended December 31,
2001
2000
EURm
EURm
Cash flow from operating activities
Net profit
2,200
3,938
Adjustments, total
4,132
2,805
Net profit before change in net working capital
6,332
6,743
Change in net working capital
978
(1,377)
Cash generated from operations
7,310
5,366
Interest received
226
255
Interest paid
(155)
(115)
Other financial income and expenses
99
(454)
Income taxes paid
(933)
(1,543)
Net cash from operating activities
6,547
3,509
1999
EURm
2,577
1,928
4,505
(21)
4,484
189
(212)
(113)
(1,246)
3,102
Cash Flows from Operating Activities
Direct method
Recast the income statement to conform to
cash-basis listing:
 Cash from customers
 Cash to suppliers
 Cash for wages
 Cash for selling, general and administrative
costs
 Cash for interest…

Calculating Cash from
customers
+ Beginning balance in Accounts Receivable
+ Revenues
-
Ending Accounts Receivable
= Cash received from customers
Beginning A/R + Sales – Payments received =
Ending A/R
Calculating Cash paid to suppliers
+ Cost of (sales) revenue
+/- Increase (decrease) in inventory
-/+ Increase (decrease) in accounts payable
= Cash paid to suppliers
The cost of what was sold adjusted for
changes in inventory and payments made.
Motorola’s Cash from Operating
Activities in Direct Method Format
Cash received from customers
32,449
Cash paid to suppliers
(22,637)
Cash paid for S, G & A
(1,998)
Cash paid for research and development
(4,318)
Cash paid for interest
(844)
Cash paid for taxes
(676)
Cash from operating activities
1,976
Nokia’s Cash from Operating
Activities in Direct Method Format
Cash received from customers
30,905
Cash paid to suppliers
(18,156)
Cash paid for S, G & A
(2,556)
Cash paid for research and development
(2,558)
Cash paid for interest
(155)
Cash paid for taxes
(933)
Cash from operating activities
6,547
Cash Flows from Investing Activities

Typically involves noncurrent capital
(long-term) assets

Cash acquisitions of investments,
property

Cash generated upon disposal of assets

Noncash acquisitions/disposals are
reported as Supplemental Information
rather than in the body of the Statement
of Cash Flows
Motorola, Inc. and Subsidiaries
Years Ended December 31 (in millions)
2001
INVESTING
Acquisitions and investments, net
(512)
Proceeds from dispositions of investments and businesses
4,063
Capital expenditures
(1,321)
Proceeds from dispositions of property, plant and equipment
14
Sales (purchases) of short-term investments
233
Net cash provided by (used for) investing activities
2,477
2000
1999
(1,912)
1,433
(4,131)
174
345
(4,091)
(632)
2,556
(2,856)
468
(496)
(960)
Nokia
Consolidated Cash Flow Statements, IAS
Financial year ended December 31,
2001
2000
EURm
EURm
Cash flow from investing activities
Acquisition of Group companies, net of acquired
cash
(131)
(400)
Purchase of non-current available-for-sale
investments
(323)
(111)
Additions in capitalized development costs
(431)
(393)
Long-term loans made to customers
(1,129)
(776)
Proceeds from (payment of) other long-term
receivables
84
Proceeds from (payment of) short-term
receivables
(114)
378
Capital expenditures
(1,041)
(1,580)
Proceeds from disposal of share in Group
companies, net of disposed cash
4
Proceeds from sale of non-current available-forsale investments
204
75
Proceeds from sale of fixed assets
175
221
Dividends received
27
51
Net cash used in investing activities
(2,679)
(2,531)
1999
EURm
(178)
(37)
(271)
(171)
128
(1,302)
27
121
318
6
(1,359)
Cash Flows from Financing Activities


Long-term liabilities
 Cash from borrowing
 Cash used for repayment of principle
 Under IAS cash interest payments may
be here
Equity
 Cash from stock issuance
 Cash used to purchase treasury shares
 Cash used for dividend payments
Motorola, Inc. and Subsidiaries
Years Ended December 31 (in millions)
2001
FINANCING
Net proceeds from (repayment of) commercial paper and
short-term borrowings
(5,688)
Net proceeds from issuance of debt
4,167
Repayment of debt
(305)
Issuance of preferred securities of subsidiary trust
Issuance of common stock
362
Payment of dividends
(356)
Net cash provided by (used for) financing activities
(1,820)
2000
3,884
1,190
(5)
383
(333)
5,119
1999
(403)
501
(47)
484
544
(291)
788
Nokia
Consolidated Cash Flow Statements, IAS
Financial year ended December 31,
2001
2000
EURm
EURm
Cash flow from financing activities
Proceeds from share issue
77
72
Purchase of treasury shares
(21)
(160)
Capital investment by minority shareholders
4
7
Proceeds from long-term borrowings
102
Repayment of long-term borrowings
(59)
(82)
Proceeds from (repayment of) short-term
borrowings
(602)
133
Dividends paid
(1,396)
(1,004)
Net cash used in financing activities
(1,895)
(1,034)
1999
EURm
152
(25)
28
(6)
(126)
(597)
(574)
Statement of Cash Flows
Additional Disclosures
1.
Cash paid for interest
2.
Cash paid for taxes

Presented at end of statement (GAAP) or in body
of statement (IAS)

May also highlight significant noncash transactions
Motorola, Inc. and Subsidiaries
Years Ended December 31 (in millions)
Effect of exchange rate change on cash and cash equivalents
2001
148
2000
(100)
1999
(33)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
2,781
3,301
6,082
(236)
3,537
3,301
1,935
1,602
3,537
844
676
529
130
323
301
Supplemental Cash Flow Information
CASH PAID DURING THE YEAR FOR:
Interest
Income taxes
Nokia
Consolidated Cash Flow Statements, IAS
Financial year ended December 31,
2001
2000
Foreign exchange adjustment
(43)
80
1999
99
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
1,930
4,183
6,113
24
4,159
4,183
1,268
2,891
4,159
Change in net fair value of current Available-forsale investments
As reported on balance sheet
12
6,125
4,183
4,159
Cash analysis



Determine and examine all sources
and uses of cash
Determine free cash flow

Important for valuation (present value of
expected future free cash flow)

To the Firm, available to both debt and
equity holders

To Equity, available to equity holders only
Estimate cash flow with EBITDA
Free Cash Flow to the Firm
Operating cash flow
Plus: Interest Paid Times (1-tax rate)
Less: Investments in Fixed Capital
Free Cash Flow to the Firm
Free Cash Flow to Equity
Operating cash flow
Less: Investments in Fixed Capital
Plus: New Debt Borrowing
Less: Debt Repayment
Free Cash Flow to Equity
Earnings before Interest, Taxes,
Depreciation and Amortization
EBITDA
Net income (loss)
Plus: Interest expense
Plus: Tax expense
Plus: Depreciation & Amortization expense
Free Cash Flow Estimate
Common-size Analysis
Common-size Analysis

Allows comparisons of companies of
different sizes

Based on assets or revenues

Understand the nature of costs
 Variable:
move in proportion to
sales
 Fixed:
unchanged within a
relevant range of activity
Common-size Analysis
Income Statement

Vertical analysis – income statement
items are expressed as a percentage of
sales
Sales = 100%
 Each line item = Item/Sales


Horizontal analysis with a base year
Each line item of base year = 100%
 Growth/decline is relative to base year
 Focus on changes over time


Use to forecast earnings
Nokia Income Statements
Net sales
Cost of goods sold
Research and development expenses
Selling, general and administrative expenses
One-time customer finance charges
Impairment of minority investments
Impairment of goodwill
Amortization of goodwill
Operating profit
Share of results of associated companies
Financial income and expenses
Profit before tax and minority interests
Tax
Minority interests
Net profit
2001
EURm
31,191
(19,787)
(2,985)
(3,443)
(714)
(80)
(518)
(302)
3,362
(12)
125
3,475
(1,192)
(83)
2,200
2000
EURm
30,376
(19,072)
(2,584)
(2,804)
(140)
5,776
(16)
102
5,862
(1,784)
(140)
3,938
1999
EURm
19,772
(12,227)
(1,755)
(1,811)
(71)
3,908
(5)
(58)
3,845
(1,189)
(79)
2,577
Nokia’s Vertical Common-size Income Statements
Net sales
Cost of goods sold
Research and development expenses
Selling, general and administrative expenses
One-time customer finance charges
Impairment of minority investments
Impairment of goodwill
Amortization of goodwill
Operating profit
Share of results of associated companies
Financial income and expenses
Profit before tax and minority interests
Tax
Minority interests
Net profit
2001
100%
63%
10%
11%
2%
0%
2%
1%
11%
0%
0%
11%
4%
0%
7%
2000
100%
63%
9%
9%
0%
0%
0%
0%
19%
0%
0%
19%
6%
0%
13%
1999
100%
62%
9%
9%
0%
0%
0%
0%
20%
0%
0%
19%
6%
0%
13%
Nokia Common-size Income Statements
(1999 is base year)
Net sales
Cost of goods sold
Research and development expenses
Selling, general and administrative expenses
One-time customer finance charges
Impairment of minority investments
Impairment of goodwill
Amortization of goodwill
Operating profit
Share of results of associated companies
Financial income and expenses
Profit before tax and minority interests
Tax
Minority interests
Net profit
2001
158%
162%
170%
190%
2000
154%
156%
147%
155%
1999
100%
100%
100%
100%
425%
86%
240%
197%
148%
320%
90%
100%
105%
85%
152%
150%
177%
153%
100%
100%
100%
100%
100%
100%
100%
100%
Nokia Common-size Income Statements
(Change from base, 1999 is base year)
Net sales
Cost of goods sold
Research and development expenses
Selling, general and administrative expenses
One-time customer finance charges
Impairment of minority investments
Impairment of goodwill
Amortization of goodwill
Operating profit
Share of results of associated companies
Financial income and expenses
Profit before tax and minority interests
Tax
Minority interests
Net profit
2001
58%
62%
70%
90%
2000
54%
56%
47%
55%
1999
100%
100%
100%
100%
325%
-14%
140%
97%
48%
220%
-10%
0%
5%
-15%
52%
50%
77%
53%
100%
100%
100%
100%
100%
100%
100%
100%
Motorola, Inc. and Subsidiaries
Consolidated Statements of Operations
(millions, except per share data)
Year ended December, 31
2001
2000
1999
Net Sales
30,004
37,580
33,075
Costs and Expenses
Manufacturing and other costs of sales
21,445
23,628
20,631
Selling, general and administrative expenses
3,703
5,141
5,220
Research and development expenditures
4,318
4,437
3,560
Depreciation expense
2,357
2,352
2,243
Reorganizations of businesses
1,858
596
(226)
Other charges
3,328
517
1,406
Interest expense, net
437
248
138
Gains on sales of invesements and businesses
(1,931)
(1,570)
(1,180)
Total costs and expenses
35,515
35,349
31,792
Earnings (loss) before income taxes
(5,511)
2,231
1,283
Income tax provision (benefit)
(1,574)
913
392
Net earnings (loss)
(3,937)
1,318
891
Basic Earnings (loss) per common share
Diluted Earnings (loss) per common share
Basic wgtd avg common shares outstanding
Diluted wgtd avg common shares outstanding
(1.78)
(1.78)
2213.3
2213.3
0.61
0.58
2170.1
2256.6
0.42
0.41
2119.5
2202.0
Motorola, Inc. and Subsidiaries
Common-Size Consolidated Statements of Operations
Year ended December, 31
2001
2000
1999
Net Sales
100%
100%
100%
Costs and Expenses
Manufacturing and other costs of sales
71%
63%
62%
Selling, general and administrative expenses
12%
14%
16%
Research and development expenditures
14%
12%
11%
Depreciation expense
8%
6%
7%
Reorganizations of businesses
6%
2%
-1%
Other charges
11%
1%
4%
Interest expense, net
1%
1%
0%
Gains on sales of invesements and businesses
-6%
-4%
-4%
Total costs and expenses
118%
94%
96%
Earnings (loss) before income taxes
-18%
6%
4%
Income tax provision (benefit)
-5%
2%
1%
Net earnings (loss)
-13%
4%
3%
Motorola, Inc. and Subsidiaries
Common-size Consolidated Statements of Operations, 1999 is base
2001
2000
1999
Net Sales
91%
114%
100%
Costs and Expenses
Manufacturing and other costs of sales
104%
115%
100%
Selling, general and administrative expenses
71%
98%
100%
Research and development expenditures
121%
125%
100%
Depreciation expense
105%
105%
100%
Reorganizations of businesses
-822%
-264%
100%
Other charges
237%
37%
100%
Interest expense, net
317%
180%
100%
Gains on sales of invesements and businesses
164%
133%
100%
Total costs and expenses
112%
111%
100%
Earnings (loss) before income taxes
-430%
174%
100%
Income tax provision (benefit)
-402%
233%
100%
Net earnings (loss)
-442%
148%
100%
Motorola, Inc. and Subsidiaries
Common-size Consolidated Statements of Operations
Change from 1999
2001
2000
Net Sales
-9%
14%
Costs and Expenses
Manufacturing and other costs of sales
4%
15%
Selling, general and administrative expenses
-29%
-2%
Research and development expenditures
21%
25%
Depreciation expense
5%
5%
Reorganizations of businesses
-922%
-364%
Other charges
137%
-63%
Interest expense, net
217%
80%
Gains on sales of invesements and businesses
64%
33%
Total costs and expenses
12%
11%
Earnings (loss) before income taxes
-530%
74%
Income tax provision (benefit)
-502%
133%
Net earnings (loss)
-542%
48%
Operating Leverage

Positive when percentage increases in net
income exceed percentage increases sales

A scalar indicating how net income will
change as revenues change
[Sales - variable costs]
Operating income
Operating Leverage Example

Revenues = $1,250

Variable costs = $950 (Contribution margin
= $300)

Operating income = $200

Operating leverage = 1.5 ($300/$200)

A 10% increase in sales will result in a 15%
increase in operating income
Operating Leverage
Approximated by:
Percentage Change in Operating Income
Percentage Change in Revenues
Common-size Analysis
Balance Sheet

Vertical analysis
 Set
total assets = 100%
 Divided
each balance sheet time by
total assets

Horizontal analysis
 Set
base year = 100%
 Determine
relative change
(growth/decline) from base year
amount
Nokia Consolidated Common-size Balance Sheet, IAS (EURm)
December 31,
2001
2000
ASSETS
Fixed assets and other non-current assets
Capitalized development costs
893
4%
640
Goodwill
854
4%
1,112
Other intangible assets
237
1%
242
Property, plant and equipment
2,514
11%
2,732
Investments in associated companies
49
0%
61
Available-for-sale investments
399
2%
337
Deferred tax assets
832
4%
401
Long-term notes receivable
1,128
5%
808
Other non-current assets
6
0%
55
6,912
31%
6,388
Current assets
Inventories
1,788
8%
2,263
Accounts receivable, less allowances for doubtful
accounts (2001:217, 2000: 236)
5,719
26%
5,594
Prepaid expenses and accrued income
1,480
7%
1,418
Short-term loan receivable
403
2%
44
Available-for-sale investments
4,271
19%
2,774
Bank and cash
1,854
8%
1,409
15,515
69%
13,502
Total assets
22,427
100%
19,890
3%
6%
1%
14%
0%
2%
2%
4%
0%
32%
11%
28%
7%
0%
14%
7%
68%
100%
Nokia Consolidated Common-size Balance Sheet, IAS (EURm)
December 31,
2001
2000
SHAREHOLDERS' EQUITY AND LIABILITIES
Shareholders' equity
Share capital
284
1%
282
Share issue premium
2,060
9%
1,695
Treasury shares
(21)
0%
(157)
Translation differences
326
1%
347
Fair value and other reserves
20
0%
Retained earnings
9,536
43%
8,641
12,205
54%
10,808
December 31,
Minority interests
Long-term liabilities
Long-term interest-bearing liabilities
Deferred tax liabilities
Other long-term liabilities
Current liabilities
Short-term borrowings
Current portion of long-term debt
Accounts payable
Accrued expenses
Provisions
Total shareholders' equity and liabilities
1%
9%
-1%
2%
43%
54%
2001
196
9%
1%
2000
177
207
177
76
460
1%
1%
0%
2%
173
69
69
311
1%
0%
0%
2%
831
3,074
3,477
2,184
9,566
22,427
4%
1,069
47
2,814
2,860
1,804
8,594
19,890
5%
0%
14%
14%
9%
43%
100%
14%
16%
10%
43%
100%
10%
1%
Nokia Consolidated Balance Sheet, IAS (EURm), 2000=Base
December 31,
2001 Change
2000
ASSETS
Fixed assets and other non-current assets
Capitalized development costs
893
40%
640
Goodwill
854
-23%
1,112
Other intangible assets
237
-2%
242
Property, plant and equipment
2,514
-8%
2,732
Investments in associated companies
49
-20%
61
Available-for-sale investments
399
18%
337
Deferred tax assets
832
107%
401
Long-term notes receivable
1,128
40%
808
Other non-current assets
6
-89%
55
6,912
8%
6,388
Current assets
Inventories
1,788
-21%
2,263
Accounts receivable, less allowances for
doubtful accounts (2001:217, 2000: 236)
5,719
2%
5,594
Prepaid expenses and accrued income
1,480
4%
1,418
Short-term loan receivable
403
816%
44
Available-for-sale investments
4,271
54%
2,774
Bank and cash
1,854
32%
1,409
15,515
15%
13,502
Total assets
22,427
13%
19,890
Nokia Consolidated Balance Sheet, IAS (EURm). 2000=Base
December 31,
2001 Change
2000
SHAREHOLDERS' EQUITY AND LIABILITIES
Shareholders' equity
Share capital
284
1%
282
Share issue premium
2,060
22%
1,695
Treasury shares
(21)
-87%
(157)
Translation differences
326
-6%
347
Fair value and other reserves
20
Retained earnings
9,536
10%
8,641
12,205
13%
10,808
Minority interests
196
11%
177
Long-term liabilities
Long-term interest-bearing liabilities
207
20%
173
Deferred tax liabilities
177
157%
69
Other long-term liabilities
76
10%
69
460
48%
311
Current liabilities
Short-term borrowings
831
-22%
1,069
Current portion of long-term debt
-100%
47
Accounts payable
3,074
9%
2,814
Accrued expenses
3,477
22%
2,860
Provisions
2,184
21%
1,804
9,566
11%
8,594
Total shareholders' equity and liabilities
22,427
13%
19,890
Motorola, Inc. and Subsidiaries
Common-size Consolidated Balance Sheets
December 31 (millions)
ASSETS
Current Assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories
Deferred income taxes
Other current assets
Total current assets
6,082
80
4,583
2,756
2,633
1,015
17,149
18%
0%
14%
8%
8%
3%
51%
3,301
354
7,092
5,242
2,294
1,602
19,885
8%
1%
17%
12%
5%
4%
47%
Property, plant and equipment, net
Investments
Long-term deferred income taxes
Other assets
TOTAL ASSETS
8,913
2,995
1,152
3,189
33,398
27%
9%
3%
10%
100%
11,157
5,926
5,375
42,343
26%
14%
0%
13%
100%
2001
2000
Motorola, Inc. and Subsidiaries
Common-size Consolidated Balance Sheets
December 31 (millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and current portion of long-term debt
Accounts payable
Accrued liabilities
Total current liabilities
870
2,434
6,394
9,698
3%
7%
19%
29%
6,391
3,492
6,374
16,257
15%
8%
15%
38%
Long-term debt
Long-term deferred income taxes
Other Liabilities
Company-obligated... preferred securities…
8,372
1,152
485
25%
0%
3%
1%
4,293
1,504
1,192
485
10%
4%
3%
1%
6,764
1,707
5,434
(214)
13,691
33,398
20%
5%
16%
-1%
41%
100%
6,574
1,188
9,727
1,123
18,612
42,343
16%
3%
23%
3%
44%
100%
Shareholders' equity
Common stock, $3 par
Additional paid-in capital
Retained earnings
Non-owner changes to equity
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
2001
2000
Motorola, Inc. and Subsidiaries
Common-size Consolidated Balance Sheets
December 31
ASSETS
Current Assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories
Deferred income taxes
Other current assets
Total current assets
Property, plant and equipment, net
Investments
Long-term deferred income taxes
Other assets
TOTAL ASSETS
2001
Change
2000
6,082
80
4,583
2,756
2,633
1,015
17,149
84%
-77%
-35%
-47%
15%
-37%
-14%
3,301
354
7,092
5,242
2,294
1,602
19,885
8,913
2,995
1,152
3,189
33,398
-20%
-49%
11,157
5,926
5,375
42,343
-41%
-21%
Motorola, Inc. and Subsidiaries
Common-size Consolidated Balance Sheets
December 31
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and current portion of long-term debt
Accounts payable
Accrued liabilities
Total current liabilities
Long-term debt
Long-term deferred income taxes
Other Liabilities
Company-obligated... preferred securities…
Shareholders' equity
Common stock, $3 par
Additional paid-in capital
Retained earnings
Non-owner changes to equity
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
2001
Change
2000
870
2,434
6,394
9,698
-86%
-30%
0%
-40%
6,391
3,492
6,374
16,257
8,372
1,152
485
95%
-3%
0%
4,293
1,504
1,192
485
3%
44%
-44%
-119%
-26%
-21%
6,574
1,188
9,727
1,123
18,612
42,343
6,764
1,707
5,434
(214)
13,691
33,398
Cross-sectional Comparisons

Compare firm to peers

Compare firm to industry averages

In a single time period

Differences in accounting methods and
business models make this analysis
difficult
Cross-section: 2001
Nokia
Motorola
Sales
100%
100%
Operating profit
11%
-23%
Pretax income
11%
-18%
Net profit
7%
-13%
Cross-section Balance Sheet
2001
Nokia
Motorola Industry
Current Assets
69%
51%
65%
Fixed Assets, net
11%
27%
23%
Current Liabilities
43%
29%
33%
Long-term Debt
1%
25%
12%
Stockholders’ Equity
54%
41%
51%
Interim Reports

Generally unaudited

More timely; prepared quarterly or
semi-annually

Detect trends and seasonality

Compare results of current period
to those presented in annual
reports

Data can be used to forecast
earnings
Motorola Interim Analysis
Net revenue
First Quarter
First Quarter
2002
2001
$6,021 100% $7,683 100%
Gross margin
1,773
29%
1,566
21%
Operating income
(362)
-6%
(1,106)
-14%
Net income
(449)
-7%
(533)
-7%
Ratio Analysis
Ratio Analysis

Cross-sectional and time series analysis

Controls for size differences

Controls for currency differences

Evaluate related components of different
financial statements simultaneously

Ratios are easily (and commonly)
modified
Ratio Analysis Categories

Activity (operations and asset
management)

Liquidity (meeting short-term obligations)

Solvency (meeting long-term obligations)

Profitability (earnings and cost coverage)

Cash Flow (quality of earnings)

Price Multiples (stock price)
Activity Ratios
How day-to-day operations
function


Inventory management
Inventory Turnover
Compares income statement and balance
sheet amounts
 Must average balance sheet figures ((Beg +
End)/2)
 Turnover = COGS/Average total inventory


Days inventory = 365/Turnover

How many days was inventory held before
being sold?
Activity Ratios
Critical operating cash accounts

Accounts receivable turnover





How many times a credit sale is made and
subsequently collected
[credit sales/average accounts receivable]
May have to use total sales rather than credit
sales
Consistency is important
Days receivable


Number of days between the charge sale and
collection
[365/accounts receivable turnover]
Activity Ratios
Critical operating cash accounts

Accounts payable turnover





Number of times a credit purchase is made and
subsequently paid
[credit purchases/average accounts payable]
Often assume all purchases are on credit
Purchases = [COGS + Ending Inv. - Beginning
Inv.]
Days payable


Number of days between credit purchase and
payment
[365/accounts payable turnover]
Activity Ratios
Cash Cycle

Also a measure of liquidity

If low, small number of days in operating
cycle to finance
[Days inventory + Days receivable Days payable]
Activity Ratios
Asset Turnover

Long-term
 Revenues
generated by long-term
assets
 [Sales
revenue/Average noncurrent
assets]

Total assets
 Efficiency
of generating revenues given
total assets
 [Sales
revenue/Average total assets]
Liquidity Ratios


Current ratio
 Ability to meet short-term obligations
 [Current assets/current liabilities]
Quick ratio
 Remove less liquid assets
 Keep cash, liquid investments, A/R

[(Current assets-inventory-ppd expensesother)/current liabilities]

[(Cash+short-term investments + A/R)/current
liabilities]
Liquidity Ratios


Defensive interval ratio

Compare 1 day’s costs to quick assets

[((COGS+SGA+RD)/365)/(Cash+short-term
investments + A/R)]
For Motorola, defensive interval = .0075

COGS = 21,445

SG&A = 3,703

R&D = 4,318

Quick assets = 10,745 (6,082 + 80 + 4,583)
Solvency Ratios

Debt to assets: Total liabilities/Total
assets
 Proportion

of assets financed with debt
Could include interest bearing debt only
[(short term debt + noncurrent
debt)/total assets]

Be aware that assets are recorded at
historical cost, which may be different
from current market value
Solvency Ratios



Debt to equity: Total liabilities/Total
equity
 A measure of how assets are financed
Or… (current debt + noncurrent
debt)/Total equity
 Examine relative sizes of debt and
equity financing
Capitalization ratio:
[(current debt+noncurrent debt)/
(current debt+noncurrent debt+total
equity)]
Solvency Ratios
Coverage Ratios



Adequacy of resources for meeting firm’s
contractual obligations
Times interest earned
 Can the firm cover its interest
obligations?
 (EBIT/Interest expense)
Cash interest coverage
 (Cash from ops + interest paid + tax
paid)/Interest paid
Solvency Ratios
Coverage Ratios

Target a specific expense
 [(EBIT+Rent
expense)/(Interest expense+rent
expense)]

Target principal on debt that is about to be
repaid
 [EBIT/(interest
expense + principal payments)]
Profitability Ratios
Common-size

Income statement
 Divide
 ROS
= Net income/Sales revenue
 Gross

item of interest by sales
margin = Gross profit/Sales revenue
Balance sheet
 Divide
item of interest by total assets
Profitability Ratios
Return Ratios

ROA = Net income/Average total assets

Or, [(Net income + After-tax interest
expense)/Average total assets]

Also, [EBIT/Average total assets] reflects pretax, pre-interest return
Profitability Ratios
Return Ratios

ROE = Net income/Average total equity
 Return
generated relative to the capital provided by
the owners over time

Or, if firm has preferred stock
[(Net income – Prfd dividends)/Average total common
equity]

ROMVE = Net income/Market value of equity
Cash Flow Ratios
Quality of earnings

Ability to pay obligations
 CFO/Total
 CFO

= Cash flows from operations
Profitability (cash flow relative to sales)
 CFO/Sales

liabilities
revenue
Cash return on assets
 CFO/Average
total assets
Cash Flow Ratios
Quality of earnings

Cash flow-earnings index
 CFO/Net

income
Free cash flow ratio
 CFO/Capital
 If
expenditures
ratio>1, free cash flow exists
Price Multiple Ratios

Market’s valuation of a firm’s common stock
 P/E

= Share price/Earnings per share
Price/book ratio compares stock’s price to the
recorded value of the net assets
[Share price/(Book value of equity/Share
outstanding)]

Price/sales = Share price/Sales per share

Also, compare price to cash flow per share
Ratio Integration
DuPont analysis (decomposition)
ROE
=
ROA
x
Leverage
Net income
Net income
Average total assets


Average total equity Average total assets Average total equity
income
And Net
more…
Average total equity

Net income
Sales
Average total assets


Sales
Average total assets Average total equity
Ratio Integration
ROA
=
Profitability
x
Turnover
Net income
Net income
Sales


Average total assets
Sales
Average total assets
Analysis
Generally compare 3-5 years
 Requires 4-6 years of data
 Balance sheet numbers may be
averaged
 Compare Motorola and Nokia
 Activity
 Liquidity
 Solvency
 Profitability

Activity Ratios
2001
2000
1999
Inventory Turns
1998
MOT
5.36
5.28
5.54
5.33
NOK
9.77
9.45
7.98
6.58
MOT
5.14
A/R Turns
5.91
6.19
5.94
NOK
5.51
6.45
5.96
5.99
Liquidity Ratios
2001
2000
1999
Current ratio
1998
MOT
1.77
1.22
1.36
1.18
NOK
1.62
1.57
1.69
1.75
MOT
1.11
Quick ratio
0.66
0.76
0.58
NOK
1.24
1.14
1.25
1.28
Solvency Ratios
2001
2000
1999
Debt-to-assets
1998
MOT
57.6%
54.9%
52.6%
57.5%
NOK
44.7%
44.8%
47.5%
48.5%
MOT
Times interest earned
-7.54
6.05
5.65
-3.56
NOK
43.38
13.40
51.97
16.14
Profitability Ratios
2001
2000
ROA
1999
1998
MOT
-10.4%
3.2%
2.6%
-3.4%
NOK
10.4%
23.1%
21.2%
20.5%
MOT
-23.7%
ROE
6.9%
5.7%
-7.6%
NOK
18.8%
42.6%
40.7%
40.7%
Limitations to consider

Historical cost of balance sheet
items

GAAP vs. IAS rules

Accounting method differences
 LIFO
vs. FIFO inventory valuation