Chapter 2 Financial Statements And Cash Flow Analysis

© 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