Chapter 2
Financial Statements And Cash
Flow Analysis
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© 2007 Thomson South-Western
Financial Statements
Balance Sheet
Income Statement
Managers and Analysts Use Financial Statements to Conduct:
- Cash Flow Analysis
- Performance (Ratio) Analysis
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Four Key Financial Statements
1. Balance sheet
2. Income statement
3. Statement of retained earnings
4. Statement of cash flows
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Global Petroleum’s Balance Sheet
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Global Petroleum’s Income Statement
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The Sources and Uses of Corporate Cash
Sources





Decrease in any asset
Increase in any liability
Net profits after taxes
Depreciation and other
non-cash charges
Sale of stock
Uses





Increase in any asset
Decrease in any liability
Net loss
Dividends paid
Repurchase or retirement
of stock
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Global Petroleum’s Statement of
Retained Earnings
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Global Petroleum’s Statement Of Cash
Flows
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Accounting Profit vs. Cash Flow
Accounting Profit based on accrual
accounting—focus on past periods
Finance emphasizes the importance of timing
“You can’t deposit net income, only cash”
Timing of cash flow matters.
Accrual accounting may obscure timing.
What are key measures of cash flow?
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Key Measures of Cash Flow
Cash Flow
from
Operations
Total Cash Generated
Operating
Cash Flow
Cash Flow Before Repaying
Lenders
Free Cash
Flow
Cash Flow Firm Could
Distribute to Investors
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Types Of Financial Ratios
Liquidity Ratios
Current Ratio
Quick Ratio
Activity Ratios
Turnover Ratios
Collection/Payment Period
Debt Ratios
Debt-to-Equity Ratio
Times Interest Earned Ratio
Profitability Ratios
Gross Margin
EPS
Market Ratios
P/E Ratio
Market-to-Book Ratio
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Liquidity Ratios
current assets
Current ratio =
current liabilities
current assets- inventory
Quick ratio =
current liabilities
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Activity Ratios
cost of goods sold
Inventory turnover =
inventory
sales
Fixed asset turn over =
net fixed assets
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Profitability Ratios
Gross profit margin =
Gross profits
sales
Earnings before interest & taxes
Operating profit margin =
sales
Net income
Net profit margin =
sales
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Profitability Ratios
Earnings per share =
Net income
number of shares of common stock outstandin g
Net income
Return on total assets =
Total assets
Net income
Return on common equity =
Stockholde rs' equity
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Market Ratios
Price/earn ings (P/E) ratio =
market price per share of common stock
earnings per share
Book value per share =
common stock equity
number of shares of common stock outstandin g
Market/boo k (M/B) ratio 
Market value per share of common stock
Book value per share of common stock
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Financial Ratios For Cross-Sectional and
Trend Analysis

Cross-Sectional Analysis: Comparing Different
Firms’ Financial Ratios at the Same Point in
Time
 Compared
to firms in same industry
 Benchmarking - compares a company’s ratio
values to those of competitors that company
wishes to emulate

Trend Analysis - Performance Evaluation
Over Time
 Developing
comparison
trends can be seen using multiyear
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Financial Statements and Financial
Ratios
Balance Sheet
Income Statement
Liquidity Ratios
Activity Ratios
Debt Ratios
Profitability Ratios
Market Ratios
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