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.
General form: Revenue -Cost of goods sold = Gross profit -Operating expenses = Operating profit (EBIT) -Financial cost = Earning Before Taxes (EBT) -Taxes = 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
to the least liquid.
Assets Current assets Fixed assets Liabilities and Equity Current liabilities Long term debt / liabilities Equity
• 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: -
Liquidity 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)
Current Liabilities (acceptable = 1, depends on industry)
Activity Ratios 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 / (Annual sales/365) Average Payment Period = Accounts payable / (Annual purchases/365) Total Assets Turnover = Sales / Total Assets
Debt Ratios measure how much of the firm is financed with other firm’s ability to meet fixed charges.
people’s money and the 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 Assets 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