Financial Statements

Financial Statements

Main Source:BE Chapter 3

Basic forms of financial statements

Balance sheet Income statement Statement of retained earnings Statement of cash flows

Balance sheet

Represents “snapshots” of company’s financial position at a point of time.

The left side lists assets while the right side lists the claims to be paid.

See table 3-1 for an example

Table 3-1: MicroDrive Inc.December 31 Balance Sheets        

(in millions of dollars)          

        2004 2003

Assets            

Cash and equivalents       $10 $15

Short-term investments       $0 $65

Accounts receivable       $375 $315

Inventories         $615 $415

Total current assets       $1,000 $810

Net plant and equipment       $1,000 $870

Total assets         $2,000 $1,680

Liabilities and equity          

Accounts payable       $60 $30

Notes payable       $110 $60

Accruals         $140 $130

Total current liabilities       $310 $220

Long-term bonds       $754 $580

Total debt         $1,064 $800

Preferred stock (400,000 shares)     $40 $40

Common stock (50,000,000 shares)     $130 $130

Retained earnings       $766 $710

Total common equity       $896 $840

Total liabilities and equity       $2,000 $1,680

Income statement

Informs company’s financial performance over a period of time.

Usually prepared monthly, quarterly, or annually.

See table 3-2 for an example.

Table 3-2: MicroDrive Income Statements for Years Ending December 31    

(in millions of dollars)          

          2004 2003

INCOME STATEMENT          

Net sales         $3,000.0 $2,850.0

Operating costs except depreciation     $2,616.2 $2,497.0

Earnings before interest, taxes, deprn, and amortization (EBITDA)* $383.8 $353.0

Depreciation         $100.0 $90.0

Earnings before interest and taxes (EBIT)     $283.8 $263.0

Less interest       $88.0 $60.0

Earnings before taxes (EBT)       $195.8 $203.0

Taxes         $78.3 $81.2

Net Income before preferred dividends     $117.5 $121.8

Preferred dividends       $4.0 $4.0

Net Income available to common stockholders     $113.5 $117.8

Common dividends       $57.5 $53.0

Addition to retained earnings       $56.0 $64.8

 *MicroDrive has no amortization charge            

Statement of retained earnings

Shows the last cumulative balance of undistributed earnings.

See table 3-3 for an example

MicroDrive: Statement of Retained Earnings for Year Ending December 31, 2004 (million of dollars)

          2004

    Balance of Retained Earnings, Dec. 31, 2003   $710.0

    Add: Net Income, 2004   $113.5

Less: Dividends to common tockholders     -$57.5

    Balance of Retained Earnings, Dec. 31, 2004   $766.0

Statement of Cash Flows

Cash position (reported in the balance sheet) is affected by: Net income before preferred dividends Non cash adjustments to net income Changes in working capital Changes in fixed assets Security transactions Dividend payments, etc.

Free cash flow:Cash flow actually available for

distribution to investors after the company has made all investments in fixed assets and working capital necessary to sustain ongoing operations.

FCF = NOPAT-net investment in operating capital

Note: Even though two companies have the same

EBIT, their net income (EAT) might be different due to different level of debt. Thus, EAT does not always reflect true performance of company’s operations.

So, we need to calculate NOPAT (Net operating profit after tax), i.e. the amount of profit a company would generate if it had no debt and held no financial assets.

NOPAT = EBIT (1-T), while EAT=(EBIT-i)(1-T)

Uses of FCF Debt repayments Dividend payments Stock repurchase Purchase of stock and other non

operating assets

Market Value Added (MVA)

Note: Shareholders’ wealth is maximized by maximizing market value added, i.e. the difference between the market value of stock and the amount of equity capital that was supplied by the shareholders.

MVA = (shares outstd)(stock price)-total common equity

Economic Value Added (EVA)

Note: MVA reflects the effects of managerial actions

since the very inception of the company. EVA shows managerial effectiveness in a given

year. EVA = NOPAT-after tax cost of capital

used to support operation = EBIT(1-T)-(ttl net opcap)(WACC) See table 3-4 for MVA and EVA