02-introduction to financial statement

Corporate Finance

PGSM International Executive MBA

Lecture 2

Introduction to Financial Statement

Topics Covered

Enterprise Activities

Introduction to financial statement

Balance Sheet

Income Statement

Production cycle and cash flows

Cash equation

Sources and Uses

Cash Flows Statement

Page 1

Corporate Finance


3/7/2015 3

Enterprise activities

& Financial statements

3/7/2015 4

Objectives and Enterprise Activities

Financing (short, long term)

Investing(short, long term)

Operating

Objectives, Strategies

ASSETS DEBT + EQUITY

PROFIT/LOSS

Wealth Products, markets

Page 2

Corporate Finance


3/7/2015 5

ENTERPRISE ACTIVITIES

Any the economics politics system, language, national borders, ownership type, industry, small and large scale organizations, even with a nation, per household or an individual these three activities are the same.

Investing activity

Financing activity

Operating activity

3/7/2015 6

Anyone involved in a business (with rights or responsibilities) want to know two basic information:(1) Current financial position?(2) Performance over time?

TWO QUESTIONS

Discussion:Who is involved in the business?What do they do with the information?

Page 3

Corporate Finance


3/7/2015 7

The results are shown by the financial statements

ANSWERS

3/7/2015 8

Introduction to Financial Statements

Page 4

Corporate Finance


3/7/2015 9

Investing activity and Financing activityare shown by the Balance Sheet

ASSETS

-Current assets:

Cash

Receivables

Inventory

-Non-current assets

-Long term investments

DEBT + EQUITY

-Liabilities (debts):

Borrowings

Payables

-Equity:

Initial capital

Retained earnings

Investing activity Financing activity

3/7/2015 10

Operating activityis shown by the Income statement

Revenue, net:

(-) Cost of Good Sold (COGS)

(=) Gross profits

(-) Operating Expenses

(=) Earning before Interest and Tax (EBIT)

(-) Interests (I)

(=) Earning before Tax (EBT)

(-) Tax (T)

(=) Net Earning (Income) (NI)

(-) Dividends

(=) Retained Earnings (RE)

Operating activity

Page 5

Corporate Finance


3/7/2015 11

The relationship between Balance sheet andIncome statement

Balance sheet

(31/12/2013)

Balance sheet

(31/12/2014)

Income statement

Cc lu : Li nhun t cc hot ng trn bo co thu nhp s lm tng

(nu li) hoc lm gim (nu l) li nhun gi li trn bng cn i k ton.

V li nhun gi li (l vn ca ch s hu) = Doanh thu Chi phNn c th ni: Doanh thu lm tng vn ch s hu Chi ph lm gim vn ch s hu

3/7/2015 12

Cuu Long CompanyBalance sheet

at 31/12

ASSETS 2013 2014 LIABILITY & EQUITY 2013 2014

Cash 200 2 Borrowings 250 130

Accounts Receivable 100 458 Accounts Payable 152 140

Inventory 220 550 Sub: Current liability 402 270

Sub: Current Assets 520 1.010 Capital 800 1.028

Fixed assets, net 920 850 Retained earnings 238 562

Where, Sub: Equity 1.038 1.590

Costs (*) 1000 970

Depreciation (accum.) -80 -120

Total 1.440 1.860 Total 1.440 1.860

(*) Liquidation of assets, price: 20; which, Costs: 30, Accumulated depreciation: 10

Page 6

Corporate Finance


3/7/2015 13

2013 2014Revenue, net 7.000 7.500 (-) Cost of good sold 5.800 6.100 (=) Gross profit 1.200 1.400

(-) Operating expenses 800 825 (-) Depreciation 50 50 (=) Earnings before Interest and Tax

(EBIT) 350 525 (-) Interest 38 53

(=) Earnings before Tax (EBT) 312 472 (-) Tax (25%) 78 118 (=) Net income 234 354

Cuu Long CompanyIncome statement

for the year ended 31/12

3/7/2015 14

Production cycle and cash flows

Cash

Inventory(Production) (Sales on cash)

Fixed assets(Investing) (Depreciation)

Acct. receivable

(Sales on credit)

Collection

Page 7

Corporate Finance


3/7/2015 15

Assets = Liability + Equity

Current assets + Fixed assets = Lia. + Equity

Cash + Accounts receivable + Inventory = Lia. + Equity Fixed assets

Cash = Lia. + Equity Fixed assets Accounts receivable Inventory

Notes: A change in assets will changes in the opposite in cash.

A change in debt or capital will changes in the same in cash.

Cash equation

3/7/2015 16

Cuu Long company, Balance sheet

2013 2014 Change Cash flow

Cash 200 2 -198 -198

Accounts receivable 100 458 358 -358

Inventory 220 550 330 -330

Fixed assets, net 920 850 -70 70

Borrowings 250 130 -120 -120

Accounts payable 152 140 -12 -12

Equity 800 1028 228 228

Retained earnings 238 562 324 324

ASSETS

LIA. & EQUITY

Page 8

Corporate Finance


3/7/2015 17

sources and uses

USES

Increase in accounts receivable 358

Increase in inventory 330

Decrease in borrowings 120

Decrease in accounts payable 12

Total: 820

SOURCES

Decrease in fixed assets 70

Increase in equity 228

Increase in retained earnings 324

Decrease in cash balance 198

Total: 820

2013 2014 Change Cash flow

Cash 200 2 -198 -198

Acounts receivable 100 458 358 -358

Inventory 220 550 330 -330

Fixed assets, net 920 850 -70 70

Borrowings 250 130 -120 -120

Acounts payable 152 140 -12 -12

Equity 800 1028 228 228

Retained earnings 238 562 324 324

ASSETS

LIA. & EQUITY

3/7/2015 18

I. OPERATING ACTIVITY

Net income 354

Adjusted the depreciation 50

Adjusted the changes in working capital:

Increase in accounts receivable -358

Increase in inventory -330

Decrease in accounts payable -12

Cash flows from operating activity -296

II. INVESTING ACTIVITY

Liquidation 20

Cash flows from investing activity 20

III. FINANCING ACTIVITY

Borrowings -120

Equity 228

Dividend -30

Cash flows from financing activity 78

NET CASH FLOW (=I+II+III) -198

Compared:

Cash in beginning: 200

Cash in ending: 2

Cuu

Long

com

pany

CA

SH

FLO

W S

TA

TE

ME

NT

(Indirect

meth

od)

Page 9

Corporate Finance


3/7/2015 Nguyn Tn Bnh 19

Cashflow statement can tell us the company is at what stage of development

Cash flows

from activities:

Company

A

Company

B

Company

C

Operating (10) 12 22

Investing (40) (20) (12)

Financing 50 8 (10)

3/7/2015 Nguyn Tn Bnh 20

Discussion:Company A: a new business, growing faster, less profitable activities, accounts receivable and inventories high. To maintain the growth to investment assets and to raise capital from outside.

Company B: still growing and need to invest and funding sources.

Company C: mature and stable. Cashflow from operating activities strongly, and the company has used it to pay the debt, dividend.

Cashflow statement can tell us the company is at what stage of development

Page 10

Corporate Finance


3/7/2015 21

Microsoft Corporation, Cash flow statement (mil. USD)

for the year ended 30/6 20X1 20X2 20X3

OPERATING ACTIVITY

Net income 7,346 7,829 9,993

Depreciation 1,536 1,084 1,439

Change in working capital, net 4,540 5,596 4,365

Cash flow from operating activity 13,422 14,509 15,797

FINANCING ACTIVITY

Cash flow from financing activity (5,586) (4,572) (5,223)

INVESTING ACTIVITY

Cash flow from investing activity (8,734) (10,845) (7,213)

Net cash flow (898) (908) 3,361

Change in exchange rate (26) 2 61

Cash in beginning 4,846 3,922 3,016

Cash in ending 3,922 3,016 6,438

Page 11

02-introduction to financial statement

Documents