Text of Financial Statements and Cash Flows. Financial Statements
Slide 1
Financial Statements and Cash Flows
Slide 2
Financial Statements
Slide 3
Balance sheet Income statement Statement of cash flows
Slide 4
Balance Sheet Statement of financial position. The balance
sheet is a financial statement that shows the firms assets,
liabilities and equity at a given point in time. Balance Sheet
Identity Assets = Liabilities + Shareholders Equity (Owners
Equity)
Slide 5
Assets and Liquidity The speed and ease with which an asset can
be converted to cash. Ease of conversion to cash. Without
significant loss in value. Trade-off between the advantages of
liquidity and foregone potential profits. The more liquid a firm
is, the less likely it is to experience financial distress. The
return on liquid assets is low.
Slide 6
Debt versus Equity Shareholders equity = Assets Liabilities
Shareholders equity is the residual portion and equity owners are
entitled to only the residual value. The use of debt in a firms
capital is called financial leverage. The more debt a firm has, the
greater of financial leverage.
Slide 7
Net Working Capital Net Working Capital = Current Assets
Current Liabilities Positive when current assets exceed current
liabilities. Positive when the cash that will become available over
the next 12 months exceeds the cash that will be paid over the next
12 months. Usually positive in a healthy firm.
Slide 8
Market Value versus Book Value Book value the balance sheet
Assets at historical costs. Market value - the price at which an
item could be bought or sold Stockholder wealth maximization is to
maximize the market value of the stock, not the book value.
Slide 9
Income Statement Profit and loss statement. Statement of
financial performance. The income statement shows the revenue and
expenses of a firm during a period of time. Revenue Expenses =
Income Accounting net income is not the same as cash flow.
Depreciation, a noncash expense, is deducted when net income is
calculated.
Slide 10
Sources and Uses of Cash Sources of cash Cash inflows Decrease
in assets other than cash Increase in liabilities or equity Uses of
cash Cash outflows Increase in assets other than cash Decrease in
liabilities or equity
Slide 11
Statement of Cash Flows The statement which summarizes the
sources and uses of cash. Three categories Operating activities
Investment activities Financing activities
Slide 12
Cash Flows
Slide 13
Cash Flow The difference between the number of money that came
in and the number that went out. The actual net cash, as opposed to
accounting net income, that flows into or out of a firm during a
certain period. Free cash flow refers to the cash that the firm is
free to distribute to creditors or stockholders because it is not
needed for working capital or fixed asset investment.
Slide 14
Cash Flow Identity Cash Flow From Assets (CFFA) = Cash Flow to
Creditors + Cash Flow to Stockholders Cash Flow From Assets =
Operating Cash Flow Net Capital Spending Change in NWC Operating
cash flow = Earnings before interest and equity (EBIT) +
Depreciation Taxes Net capital spending = Ending net fixed assets
Beginning net fixed assets + Depreciation Change in NWC = Ending
NWC Beginning NWC Cash Flow to Creditors = Interest paid Net new
borrowing Cash Flow to Stockholders = Dividends paid Net new equity
raised
Slide 15
Example Current assets 2011: Current assets = 8,800 2010:
Current assets = 7,000 Current liabilities 2011: Current
liabilities = 3,000 2010: Current liabilities = 2,400 Fixed assets
2011: Net fixed assets = 6,800; 2010: Net fixed assets = 6,200
Depreciation Expense = 800 Long-term debt and Equity 2011:
Long-term debt = 8,000; Common stock = 800 2010: Long-term debt =
7,900; Common stock = 800 Income Statement EBIT = 4,000; Taxes =
600 Interest expense = 700; Dividends = 1000 Calculate the
CFFA
Standardized Financial Statements Common-size balance sheets
Express each item as a percent of total assets Common-size income
statements Express each item as a percent of sales Common-size
statements of cash flows Express each item as a percent of total
sources or uses Standardized financial statements are useful for
comparing companies of different sizes.
Slide 19
Trend Analysis Common base-year statements Choose a base year
and express each item relative to the base amount. Combined
common-size base-year analysis As the assets grow, most of the
other accounts must grow as well. By forming the common-size
statements, the effect of the overall growth would be
eliminated.
Slide 20
Ratio Analysis Ratio analysis are useful for comparing through
time or between companies. Categories of financial ratios
Short-term solvency or liquidity ratios Long-term solvency or
financial leverage ratios Asset management or turnover ratios
Profitability ratios Market value ratios
Slide 21
Short-Term Solvency Ratios Current ratio = Current assets /
Current liabilities Quick ratio = (Current assets Inventory) /
Current liabilities Cash ratio = Cash / Current liabilities Net
working capital to total assets = Net working capital / Total
assets Interval measure = Current assets / average daily operating
costs
Slide 22
Long-Term Solvency Ratios Total debt ratio = (Total assets
Total equity) / Total assets Debt-equity ratio = Total debt / Total
equity Equity multiplier = Total assets / Total equity = 1 +
Debt-equity ratio Long-term debt ratio = Long-term debt / (Long-
term debt + Total equity) Times interest earned ratio = EBIT /
Interest Cash coverage ratio = (EBIT + Depreciation) /
Interest
Slide 23
Asset Management Ratios Inventory turnover = Cost of goods sold
/ Inventory Days sales in inventory = 365 / Inventory turnover
Receivables turnover = Sales / Accounts receivable Days sales in
receivables = 365 / Receivables turnover NWC Turnover = Sales / NWC
Fixed asset turnover = Sales / Net fixed assets Total asset
turnover = Sales / Total assets
Slide 24
Profitability Ratios Profit margin = Net income / Sales Return
on assets (ROA) = Net income / Total assets Return on equity (ROE)
= Net income / Total equity
Slide 25
Market Value Ratios Price-earnings ratio = Price per share /
Earnings per share Price-sales ratio = Price per share / Sales per
share Market-to-book ratio = Market value per share / Book value
per share Tobins Q = Market value of the firms assets / Replacement
cost of the firm s assets = Market value of the firms debt and
equity / Replacement cost of the firm s debt and equity
Slide 26
The Du Pont Identity ROE = Net income / Total equity ROE =
(Sales / Sales)(Net income/ Total assets)(Total assets / Total
equity) ROE = (Net income / Sales)(Sales / Total assets)(Total
assets / Total equity) ROE = (ROA)(Equity multiplier) ROE = (Profit
margin)(Total asset turnover )(Equity multiplier)
Slide 27
The Du Pont Identity ROE = (Profit margin)(Total asset
turnover)(Equity multiplier) Profit margin profitability ratio,
operating efficiency Total asset turnover asset management ratio,
asset use efficiency Equity multiplier long-term solvency ratio,
financial leverage
Slide 28
Why Evaluate Financial Statements? Internal uses Performance
evaluation Planning for the future External uses Creditors
Suppliers Customers Credit-rating agencies
Slide 29
Choosing a Benchmark Time-trend analysis Compared to history
Peer group analysis Compare to the peer group
Slide 30
Limitations The results of ratio analysis depend on the quality
of financial statements. It is difficult for diversified firms to
find a benchmark. Factors such as inflation, different operating
and accounting practices, seasonal factors can distort comparisons.
It is difficult to judge whether a particular ratio is good or bad.
It is difficult to judge whether a firm is good or bad if some
ratios look good and some ratios look bad.
