Financial Statement and Cash Flow Analysis

1. Financial Statement and Cash Flow Analysis Chapter 2

2. Revenues are recorded at the point of sale and costs when they are incurred, not necessarily when a firm receives or pays out cash. Accrual-based approach • Used by financial professionals to focus attention on current and prospective inflows and outflows of cash. Cash flow approach Financial Statements

3. Balance Sheet Income Statement Statement of Retained Earnings Statement of Cash Flows Notes to Financial Statements Financial Statements • Financial Statements

4. Actual Examples of Financial Statements • Devon Energy • http://media.corporate-ir.net/media_files/irol/67/67097/reports/AR2007/08_04.htm • General Electric • http://www.ge.com/ar2007/cfs_fp.jsp

5. 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

6. Balance Sheet Assets and Liabilities are listed in descending order of liquidity

7. Balance Sheet for fictitious Global Petroleum Corporation

8. Gross profit • Operating profit • Other income • Earnings before interest and taxes • Pretax income • Net income / net profit after taxes Measures of Income Income Statement • Income is also called profit, earnings, or margin. Income = revenue  expenses

9. Income Statement for Global Petroleum Corporation

10. 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.

11. Statement of Retained Earningsfor Global Petroleum Corporation

12. Reconciles • the firm’s operating, investment, and financing cash flows • with changes in its cash and marketable securities • during the year. Statement of Cash Flows • Explanatory notes • that provide detailed information on the accounting policies, calculations, and transactions • underlying entries in the financial statements. Notes to Financial Statements Financial Statements

13. 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.

14. 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

15. Inflows and Outflows of Cash

16. Statement of Cash Flows for Global Petroleum Corporation

17. 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. Analyzing Financial PerformanceUsing Ratio Analysis

18. Analysts compare the current year’s financial ratios with previous years’ ratios • to identify trends that help them evaluate the firm’s prospects. Benchmark 1 Benchmark 2 • Analysts compare the ratios of one company with those of other firms in the same industry. Using Financial Ratios

19. Liquidity Ratios

20. Activity Ratios

21. Debt Ratios

22. Profitability Ratios

23. Profitability Ratios

24. Profitability Ratios DuPont System of Analysis

25. Market Ratios