Download - Ch. 2
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© 2009 Cengage Learning/South-Western
Financial Statement and Cash Flow Analysis
Chapter 2
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Financial Statements
Accrual-based
approach
• Revenues are recorded at the point of sale and costs when they are incurred, not necessarily when a firm receives or pays out cash.
Cash flow approach
• Used by financial professionals to focus attention on current and prospective inflows and outflows of cash.
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Financial Statements
Statement ofRetained Earnings
Balance Sheet
Income Statement
Statement ofCash Flows
Notes toFinancial Statements
Financial Statemen
ts
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Balance Sheet
• A firm’s balance sheet presents a “snapshot” view of the company’s financial position at a specific point in time.assets = liabilities + stockholders’ equity
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Balance Sheet for Global Petroleum Corporation
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Income Statement
• Income is also called profit, earnings, or margin.
Income = revenue expenses
Measures of Income
• Gross profit• Operating profit• Other income• Earnings before interest and
taxes• Pretax income• Net income / net profit after
taxes
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Income Statement for Global Petroleum Corporation
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Statement of Retained Earnings
• The statement of retained earnings reconciles
• the net income earned during a given year, and any cash dividends paid,
• with the change in retained earnings between the start and end of that year.
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Statement of Retained Earningsfor Global Petroleum Corporation
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Financial Statements
Statement of Cash Flows
• Reconciles• the firm’s operating,
investment, and financing cash flows
• with changes in its cash and marketable securities
• during the year.
Notes to Financial
Statements
• Explanatory notes • that provide detailed
information on the accounting policies, calculations, and transactions
• underlying entries in the financial statements.
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Cash Flow Analysis
• Although financial managers are interested in the information contained in the firm’s accrual-based financial statements, their primary focus is on cash flows.
• Without adequate cash to pay obligations on time, to fund operations and growth, and to compensate owners, the firm will fail.
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The Firm’s Cash Flows
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Free Cash Flow
• Operating cash flow= earnings before interest and taxes
taxes+ depreciation
• Free cash flow= operating cash flow
change in gross fixed assets change in current assets+ change in account payables+ change in accrued liabilities
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Inflows and Outflows of Cash
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Statement of Cash Flows for Global Petroleum Corporation
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Analyzing Financial PerformanceUsing Ratio Analysis
Liquidity Ratios
• Measure a firm’s ability to satisfy its short-term obligations as they come due.
Activity Ratios
• Measure the speed at which a firm converts various accounts into sales or cash.
Debt Ratios• Measure the proportion of total assets
financed by a firm’s creditors.
Profitability Ratios
• Relate a firm’s earnings to its sales, assets, or equity.
Market Ratios
• Relate a firm’s market value to certain accounting values.
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Using Financial Ratios
Benchmark 1
• Analysts compare the current year’s financial ratios with previous years’ ratios
• to identify trends that help them evaluate the firm’s prospects.
Benchmark 2
• Analysts compare the ratios of one company with those of other firms in the same industry.
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Liquidity Ratios
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Activity Ratios
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Debt Ratios
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Profitability Ratios
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Profitability Ratios
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Profitability Ratios
DuPont System of Analysis
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Market Ratios
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Corporate Taxes
Corporate taxes represent a significant cash outflow.
Ordinary corporate income
• Progressive tax rate schedule• Average tax rate: tax divided
by the pretax income• More relevant for financial
decision making: marginal tax rate
Corporate capital gains
• Under existing tax laws, ordinary income tax rates apply
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Financial Statement and Cash Flow Analysis
• Balance Sheet
• Income Statement
• Cash Flow Analysis
• Liquidity Ratios
• Activity Ratios
• Debt Ratios
• Profitability Ratios
• Market Ratios