© 2007 Thomson South-Western Chapter 2 Financial Statements And Cash Flow Analysis Professor XXXXX Course Name / Number
Dec 22, 2015
© 2007 Thomson South-Western
Chapter 2Financial Statements And
Cash Flow Analysis
Professor XXXXXCourse Name / Number
2
Financial Statements
Balance Sheet
Income Statement
Managers and Analysts Use Financial Statements to Conduct:- Cash Flow Analysis
- Performance (Ratio) Analysis
3
Four Key Financial Statements
1. Balance sheet
2. Income statement
3. Statement of retained earnings
4. Statement of cash flows
4
Global Petroleum’s Balance Sheet
5
Global Petroleum’s Income Statement
6
The Sources and Uses of Corporate Cash
Decrease in any asset Increase in any liability Net profits after taxes Depreciation and other
non-cash charges Sale of stock
Increase in any asset Decrease in any
liability Net loss Dividends paid Repurchase or
retirement of stock
Sources Uses
7
Global Petroleum’s Statement of Retained Earnings
8
Global Petroleum’s Statement Of Cash Flows
9
Accounting Profit vs. Cash Flow
What are key measures of cash flow?
Accounting Profit based on accrual
accounting—focus on past periods
Finance emphasizes the importance of timing
“You can’t deposit net income, only cash”
Timing of cash flow matters.
Accrual accounting may obscure timing.
10
Key Measures of Cash Flow
Total Cash Generated
Cash Flow Before Repaying Lenders
Cash Flow Firm Could Distribute to Investors
Cash Flow from
Operations
Operating Cash Flow
Free Cash Flow
11
Types Of Financial Ratios
Liquidity RatiosCurrent Ratio Quick Ratio
Turnover RatiosCollection/Payment Period
Debt-to-Equity RatioTimes Interest Earned Ratio
Gross MarginEPS
P/E RatioMarket-to-Book Ratio
Activity Ratios
Debt Ratios
Profitability Ratios
Market Ratios
12
Liquidity Ratios
seitilibailcurrent
assetscurrent = ratioCurrent
seitilibailcurrent
inventoryassets-current = ratioQuick
13
Activity Ratios
inventory
sold goods ofcost = turnoverInventory
assets fixednet
sales = overasset turn Fixed
14
Profitability Ratios
sales
taxes&interestbeforeEarnings = marginprofit Operating
sales
profitsGross = marginprofit Gross
sales
incomeNet = marginprofit Net
15
Profitability Ratios
= shareper Earnings
goutstandinstock common of shares ofnumber
incomeNet
assets Total
incomeNet = assets on totalReturn
equity rs'Stockholde
incomeNet = equitycommon on Return
16
Market Ratios
shareper earnings
stockcommon of shareper pricemarket
= ratio (P/E) ingsPrice/earn
goutstandin stock common of shares ofnumber
equity stock common
= shareper value Book
stockcommonofsharepervalueBook
stockcommonofsharepervalueMarket
ratio (M/B) kMarket/boo
17
Financial Ratios For Cross-Sectional and Trend Analysis
Cross-Sectional Analysis: Comparing Different Firms’ Financial Ratios at the Same Point in Time Compared to firms in same industry Benchmarking - compares a company’s
ratio values to those of competitors that company wishes to emulate
Trend Analysis - Performance Evaluation Over Time Developing trends can be seen using
multiyear comparison
18
Financial Statements and Financial Ratios
Balance Sheet
Income Statement
Liquidity Ratios
Activity Ratios
Debt Ratios
Profitability Ratios
Market Ratios