FINANCIAL STATEMENTS
Accounting and Finance
The Balance Sheet
 The Income Statement
 The Statement of Cash Flows
 Accounting Practice & Malpractice
 Taxes

Financial Statements reflect the financial resuts of the firm.
The Balance Sheet
Definition
Financial statements that show
the value of the firm’s assets
and liabilities at a particular
point in time
(from an accounting perspective).

The Balance Sheet
The Main Balance Sheet Items
Current Liabilities
Payables
Short-term Debt
Current Assets
Cash & Securities
Receivables
Inventories
+
Fixed Assets
Tangible Assets
Intangible Assets
=
+
Long-term Liabilities
+
Shareholders’ Equity
Market Value vs. Book Value
Book Values are determined by GAAP
Market Values are determined by current
values
Equity and Asset “Market Values” are usually
higher than their “Book Values”
Market Value vs. Book Value
Example
According to GAAP, your firm has equity worth $6
billion, debt worth $4 billion, assets worth $10
billion. The market values your firm’s 100
million shares at $75 per share and the debt at
$4 billion.
Q: What is the market value of your assets?
A: Since (Assets=Liabilities + Equity), your
assets must have a market value of $11.5
billion.
Market Value vs. Book Value
Example (continued)
Book Value Balance Sheet
Assets = $10 bil
Debt = $4 bil
Equity = $6 bil
Market Value Balance Sheet
Assets = $11.5 bil
Debt = $4 bil
Equity = $7.5 bil
The Income Statement
Definition
Financial statement that shows
the revenues, expenses, and
net income of a firm over a
period of time
(from an accounting perspective).
The Income Statement
Earnings Before Income & Taxes (EBIT)
EBIT =
Total Revenues - COGS - DEPRECATION
The Income Statement
Pepsico Income Statement (year end 2001)
Net Sales
(-) Cost of Goods Sold
Gross Profit
(-) Selling, G&A expenses
(-) Depreciation expense
EBIT
(-) Net interest expense
Taxable Income
(-) Income Taxes
Net Income
26,935
(10,754)
16,181
(10,918)
(1,082)
4,181
(152)
4,029
(1,367)
2,662
Profits vs. Cash Flows
Differences
 “Profits” subtract depreciation (a non-cash
expense)
 “Profits” ignore cash expenditures on new
capital (the expense is capitalized)
 “Profits” record income and expenses at the
time of sales, not when the cash exchanges
actually occur
 “Profits” do not consider changes in working
capital
The Statement of Cash Flows
Definition
Financial statement that shows
the firm’s cash receipts and cash
payments over a period of time.
The Statement of Cash Flows
Pepsico Statement of Cash Flows
(excerpt - year end 2001)
Net Income
Non-cash expenses
Depreciation
Changes in working capital
2,662
1,082
(41)
A/R=(13) A/P=26 Inv=(118) other=64
Cash Flow from operations
Cash Flow from investments
Cash provided by financing
Net Change in Cash Position
3,703
(1,784)
(1,775)
144
Taxes

Taxes have a major impact on financial
decisions
Marginal Tax Rate is the tax that the
individual pays on each extra dollar of
income.
Average Tax Rate is the total tax bill
divided by total income.
Taxes
Example - Taxes
Taxes and
and Cash
Cash Flows
Flows can
can be
be
changed by the use of debt. Firm A pays part
of its profits as debt interest. Firm B does
not.
EBIT
Interest
Pretax Income
Taxes (35%)
Net Income
Firm A
100
40
60
21
39
Firm B
100
0
100
35
65
Taxes
FOOD FOR THOUGHT - If you were both the debt
and equity holders of the firm, which would
generate more cash flow to you? (assume Net
Income = Cash Flow)
EBIT
Interest
Pretax Income
Taxes (35%)
Net Income
Firm A
100
40
60
21
39
Firm B
100
0
100
35
65
?
Taxes
FOOD FOR THOUGHT - If you were both the debt
and equity holders of the firm, which would
generate more cash flow to you? (assume Net
Income = Cash Flow)
Net Income
+ Interest
Net Cash Flow
Firm A
Firm B
39
65
40
79
0
65
?
Corporate Tax Rates (2002)
Taxable Income ($)
0-50,000
50,001-75,000
75,001-100,000
100,001-18,333,333
over 18,333,333
Tax Rate (%)
15
25
34
34-39
35
Personal Tax Rates (2002)
Single Taxable
Income ($)
0-6,000
6,000-27,950
27,950-67,700
67,700-141,250
141,250-307,050
over 307,050
Married Taxable
Income ($)
0-12,000
12,000-46,700
46,700-112,850
112,850-171,950
171,950-307,050
over 307,050
Tax Rate (%)
10
15
27
30
35
38.6
FİNANSAL ORANLAR
Kaldıraç Oranları:
Faaliyet Kaldıracı = Toplam Borçlar / Toplam Valıklar
Borç/Özkaynak = Toplam Borçlar / Öz Kaynaklar
Likidite Oranları:
Cari Oran = Dönen Varlıklar / Kısa Vadeli Borçlar
Nakit Oranı = (Kasa + Pazarlanabilir Menkul Kıymetlar) / Kısa Vadeli
Borçlar
Faaliyet Oranları:
Alacak Devir Hızı = Ortalama Alacaklar / Ortalama Günlük Satışlar
Stok Devir Hızı = Satılan Malların Maliyeti / Ortalama Stoklar
FİNANSAL ORANLAR
Karlılık Oranları:
Net Kar Marjı = Net Kar / Satışlar
Öz Sermaye Karlılığı = Net Kar / Ortalama Özkaynak
Pazar Değeri Oranları:
Fiyat / Kazanç Oranı = Hisse Fiyatı / Hisse Başına Kazanç
Kar Payı Verimi = Hisse Başına Kar / Hisse Fiyatı