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FINANCIAL STATEMENTS

FINANCIAL STATEMENTS. Accounting and Finance. The Balance Sheet The Income Statement The Statement of Cash Flows Accounting Practice & Malpractice Taxes. Financial Statements reflect the financial resuts of the firm. The Balance Sheet. Definition

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FINANCIAL STATEMENTS

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  1. FINANCIAL STATEMENTS

  2. Accounting and Finance • The Balance Sheet • The Income Statement • The Statement of Cash Flows • Accounting Practice & Malpractice • Taxes Financial Statements reflect the financial resuts of the firm.

  3. The Balance Sheet Definition Financial statements that show the value of the firm’s assets and liabilitiesat a particular point in time (from an accounting perspective).

  4. Current Liabilities Payables Short-term Debt + Long-term Liabilities + Shareholders’ Equity Current Assets Cash & Securities Receivables Inventories + Fixed Assets Tangible Assets Intangible Assets = The Balance Sheet The Main Balance Sheet Items

  5. Market Value vs. Book Value Book Values are determined by GAAP Market Values are determined by current values Equity and Asset “Market Values” are usually higher than their “Book Values”

  6. Market Value vs. Book Value Example According to GAAP, your firm has equity worth $6 billion, debt worth $4 billion, assets worth $10 billion. The market values your firm’s 100 million shares at $75 per share and the debt at $4 billion. Q: What is the market value of your assets? A: Since (Assets=Liabilities + Equity), your assets must have a market value of $11.5 billion.

  7. Market Value Balance Sheet Assets = $11.5 bilDebt = $4 bil Equity = $7.5 bil Market Value vs. Book Value Example (continued) Book Value Balance Sheet Assets = $10 bilDebt = $4 bil Equity = $6 bil

  8. The Income Statement Definition Financial statement that shows the revenues, expenses, and net income of a firm over a period of time (from an accounting perspective).

  9. The Income Statement Earnings Before Income & Taxes (EBIT) EBIT = Total Revenues- COGS - DEPRECATION

  10. The Income Statement Pepsico Income Statement (year end 2001) Net Sales 26,935 (-) Cost of Goods Sold (10,754) Gross Profit16,181 (-) Selling, G&A expenses (10,918) (-) Depreciation expense (1,082) EBIT 4,181 (-) Net interest expense (152) Taxable Income 4,029 (-) Income Taxes (1,367) Net Income 2,662

  11. Profits vs. Cash Flows Differences • “Profits” subtract depreciation (a non-cash expense) • “Profits” ignore cash expenditures on new capital (the expense is capitalized) • “Profits” record income and expenses at the time of sales, not when the cash exchanges actually occur • “Profits” do not consider changes in working capital

  12. The Statement of Cash Flows Definition Financial statement that shows the firm’s cash receipts and cash paymentsover a period of time.

  13. The Statement of Cash Flows Pepsico Statement of Cash Flows (excerpt - year end 2001) Net Income 2,662 Non-cash expenses Depreciation 1,082 Changes in working capital (41) A/R=(13) A/P=26 Inv=(118) other=64 Cash Flow from operations 3,703 Cash Flow from investments (1,784) Cash provided by financing (1,775) Net Change in Cash Position 144

  14. Taxes • Taxes have a major impact on financial decisions Marginal Tax Rate is the tax that the individual pays on each extra dollar of income. Average Tax Rate is the total tax bill divided by total income.

  15. Taxes Example - Taxes and Cash Flows can be changed by the use of debt. Firm A pays part of its profits as debt interest. Firm B does not. Example - Taxes and Cash Flows can be changed by the use of debt. Firm A pays part of its profits as debt interest. Firm B does not. Firm A Firm B EBIT 100 100 Interest 40 0 Pretax Income 60 100 Taxes (35%) 21 35 Net Income 39 65

  16. Taxes FOOD FOR THOUGHT - If you were both the debt and equity holders of the firm, which would generate more cash flow to you? (assume Net Income = Cash Flow) Firm A Firm B EBIT 100 100 Interest 40 0 Pretax Income 60 100 Taxes (35%) 21 35 Net Income 39 65 ?

  17. Taxes FOOD FOR THOUGHT - If you were both the debt and equity holders of the firm, which would generate more cash flow to you? (assume Net Income = Cash Flow) Firm A Firm B Net Income 39 65 + Interest40 0 Net Cash Flow 79 65 ?

  18. Corporate Tax Rates (2002)

  19. Personal Tax Rates (2002)

  20. FINANCIAL RATIOS LeverageRatios: LongTermDebtRatio= LTD / (LTD+ Equity) Debt/Equity = Total Debt / Total Equity Times InterestEarnings: EBIT / Interestpayments Liquidity Ratios: Current Ratio= Current Assets/ Current Liabilities Cash Ratio = (Cash+ Marketable Securities) / Current Liabilities Quick Ratio= (Cash+ Receivables) / Current Liabilities Efficiency Ratios: Inventory Turnover= COGS/ Inventory Receivables Turnover= Net Sales/ Receivables

  21. FINANCIAL RATIOS Profitability Ratios: NPM (Net profit margin)= Net Income / Net Sales ROE= Net income / Equity Growth Ratios : Payout Ratio= Dividends / Net income Sustainable Growth= ROE/(1- Payout)

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