Financial Statement
The Balance Sheet
The Income Statement
The Statement of Cash Flows
Accounting for Differences
Fin 301 - Dr. Menahem Rosenberg
1
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).
Fin 301 - Dr. Menahem Rosenberg
2

The Balance Sheet
The Main Balance Sheet Items
Current Liabilities
Payables
Accruals
Short-term Debt
Current Assets
Cash & Securities
Receivables
Inventories
+
=
Fixed Assets
Tangible Assets
Intangible Assets
Fin 301 - Dr. Menahem Rosenberg
+
Long-term Liabilities
+
Shareholders’ Equity
3
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”
Fin 301 - Dr. Menahem Rosenberg
4
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).
Fin 301 - Dr. Menahem Rosenberg
5
The Income Statement
Earnings Before Income & Taxes (EBIT)
EBIT = - total Revenues
- costs
- deprecation
Fin 301 - Dr. Menahem Rosenberg
6
The Income Statement
Timberland Co. Year End 12/31/2001- in thousands
Revenue
1,183,623
COGS
662,848
SG&A
334,490
EBIT
186,285
Depreciation & Amortization
Interest Expense
Other income
Average O/S
shares 40,247
23,192
1,560
196
EBT
161,729
Tax Expense
54,988
Net Income
106,741
Fin 301 - Dr. Menahem Rosenberg
7
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
Fin 301 - Dr. Menahem Rosenberg
8
The Statement of Cash Flows
Definition
Financial statement that shows
the firm’s cash receipts and cash
payments over a period of time.
Fin 301 - Dr. Menahem Rosenberg
9
The Statement of Cash Flows
+ Net Income
+ Non-cash expenses
+ Depreciation
Changes in working capital
- chg A/R +chg A/P -chg Inv
= Cash Flow from Operations
Cash from New Investments - purchases + sales
Cash from Financing - repurchase of stock or debt
+ sales of stock or debt
- dividend
Net Change in Cash Position (from previous B/S to current)
Fin 301 - Dr. Menahem Rosenberg
10
Accounting for Differences
Subjective aspects exist in reporting
earnings and book value
Some liabilities may excluded from balance
sheets (off balance sheet financing).
International accounting standards vary
Share outstanding in per share computations
Fin 301 - Dr. Menahem Rosenberg
11
Leverage Ratios
Long Term Debt
Long Term Debt Ratio 
Long Term Debt  Equity
Long Term Debt
Debt Equity Ratio 
Equity
Total Liability
Total Debt Ratio 
Total Assets
EBIT
Time Interest Earned 
Interest Expense
Fin 301 - Dr. Menahem Rosenberg
12
Liquidity Ratios
Net Workin g Capital  Current Assets - Current Liab.
Current Assets
Current Ratio 
Current Liabilitie s
Current Assets - Inventory
Quick Ratio 
Current Liabilitie s
Cash and Equivalent s
Cash Ratio 
Current Liabilitie s
Fin 301 - Dr. Menahem Rosenberg
13
Efficiency Ratios
Sales
Assets turnover 
Average Assets
COGS
Inventory turnover 
Average Inventory
365
Inventory Days 
Inventory Turnover
Sales
Receivable Days 
Average Receivable s/365
Fin 301 - Dr. Menahem Rosenberg
14
Profitability Ratios
EBIT - Tax
Net Profit Margin 
Sales
EBIT - Tax
Return on Assets (ROA) 
Average Total Assets
NI avaiable to common equity
Return on Equity 
Average common equity
Dividend
Payout Ratio 
NI
Fin 301 - Dr. Menahem Rosenberg
15
Market Value Ratios
NI available to equity
Earning Per Share (EPS) 
Average O/S shares
Stock Price
Price Earning Ration PE 
Earning Per Share
Dividend Per Share
Dividend Yiels 
Stock price
Book Value  Total Assets - Total Liabilitie s
Stock Price
Market to BV per Share 
BV per Share
Fin 301 - Dr. Menahem Rosenberg
16