The Income Statement (financial summary of the firm ‘s operating result during a specified period)
The Balance Sheet (summary statement of the firm ‘s financial position at a given point in time)
The Statement of Cash Flows (summary of the cash flows over a specified period)
The Statement of Retained Earnings (reconciles the net income during a year, and any dividends paid, with the change in retained earnings between the start and the endof that year)
- Provides a financial summary of the firm ‘s operating result during a specified period.
- Most common are income statements covering a 1-year period ending December
31. Monthly statements are prepared for use by management. Quaterly statements must be made available to the stockholders of publicly owned corporations.
-Cost of goods sold
= Gross profit
= Operating profit (EBIT)
= Earning Before Taxes (EBT)
= Earning After Taxes (EAT)
- Balances the firm ‘s assets against its financing (debt or equity)
- Short-term x Long-term assets and liabilities
Shotr-term (current assets and liabilities) – they are expected to be converted into cash or paid within 1 year or less.
Long-term (fixed assets, equity, long term debt)
– they are expected to remain on the firm‘s books far more than 1 year.
As is customary, the assets are listed from the most liquid (cash) down to the least liquid.
Liabilities and Equity
Long term debt / liabilities
• Analyses the firm’s ability to generate cash and cash equivalents
• Statement of CF shows:
– Where did the cash come from?
– What was it used for?
– What was the change in the cash balance?
• Operating, Investing and Financing activities
• Sources vs. Usage of funds
- Evaluation of firm ’s performance
- Users: investors, stockholders, management, creditors, business partners
- Types of Ratio Comparisons
- Cross-Sectional Analysis (benchmarking)
- Time-Series Analysis
- Combined Analysis
Categories of Financial Ratios:
Measure the ability of a firm to satisfy its short-term obligations.
Current Ratio = Current Assets / Current Liabilities
(acceptable = 2, depends on industry)
Quick Ratio = (Current Assets – Inventory) /
(acceptable = 1, depends on industry)
Measure the speed with which various accounts are converted into sales or cash.
Inventory Turnover = Cost of Goods Sold / Inventory
Average Collection Period = Accounts receivable /
Average Payment Period = Accounts payable /
Total Assets Turnover = Sales / Total Assets
Debt Ratios measure how much of the firm is financed with other people’s money and the firm’s ability to meet fixed charges.
Debt Ratio = Total Liabilities / Total Assets
Interest Coverage Ratio or Times Interest Earned =
EBIT / Interest
Profitability Ratios measure a firm’s return with respect to sales, assets, or equity.
Common-size Income Statement – each item is expressed as % of sales.
Gross Profit Margin = Gross Profit / Sales
Operating Profit Margin = EBIT / Sales
EPS = Earnings available for comm. Stockh. / number of shares
ROA = Earnings available for comm. Stockh. / Total
ROE = Earnings available for comm. Stockh. /
Common stock Equity
Market Ratios insight into how well investors in the marketplace feel the firm is doing in terms of return and risk.
PE = Market price per share / EPS
Market/Book Ratio = Market price per share / Book value per share
Book value per share = Equity / Number of shares