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1、Chapter Outline2.1 The Balance Sheet2.2 The Income Statement2.3 Net Working Capital2.4 Financial Cash Flow2.5 Summary and ConclusionsSources of InformationAnnual reportsWall Street JournalInternetNYSE ()Nasdaq ()Text ( & 10Q reports2.1 The Balance SheetAn accountants snapshot of the firms accounting
2、 value as of a particular date.The Balance Sheet Identity is:When analyzing a balance sheet, the financial manager should be aware of three concerns: accounting liquidity, debt versus equity, and value versus cost.The Balance Sheet of the U.S. Composite Corporation(in $ millions)20X2 and 20X1Balance
3、 SheetU.S. COMPOSITE CORPORATIONLiabilities (Debt)Assets20X220X1and Stockholders Equity20X220X1Current assets:Current Liabilities: Cash and equivalents$140$107 Accounts payable$213$197 Accounts receivable294270 Notes payable5053 Inventories269280 Accrued expenses223205 Other5850 Total current liabil
4、ities$486$455 Total current assets$761$707Long-term liabilities:Fixed assets: Deferred taxes$117$104 Property, plant, and equipment$1,423$1,274 Long-term debt471458 Less accumulated depreciation-550-460 Total long-term liabilities$588$562 Net property, plant, and equipment873814 Intangible assets an
5、d other245221Stockholders equity: Total fixed assets$1,118$1,035 Preferred stock$39$39 Common stock ($1 per value)5532 Capital surplus347327 Accumulated retained earnings390347 Less treasury stock-26-20 Total equity$805$725Total assets$1,879$1,742Total liabilities and stockholders equity $1,879$1,74
6、2The assets are listed in order by the length of time it normally would take a firm with ongoing operations to convert them into cash.Clearly, cash is much more liquid than property, plant and equipment.Balance Sheet AnalysisWhen analyzing a balance sheet, the financial manager should be aware of th
7、ree concerns:1.Accounting liquidity2.Debt versus equity3.Value versus costAccounting Liquidity Refers to the ease and quickness with which assets can be converted to cash.Current assets are the most liquid.Some fixed assets are intangible.The more liquid a firms assets, the less likely the firm is t
8、o experience problems meeting short-term obligations.Liquid assets frequently have lower rates of return than fixed assets.Debt versus EquityGenerally, when a firm borrows it gives the bondholders first claim on the firms cash flow.Thus shareholders equity is the residual difference between assets a
9、nd liabilities.Value versus CostUnder GAAP audited financial statements of firms in the U.S. carry assets at cost.Market value is a completely different concept.2.2 The Income StatementThe income statement measures performance over a specific period of time.The accounting definition of income isU.S.
10、C.C. Income Statement (in $ millions)20X2Income StatementU.S. COMPOSITE CORPORATIONTotal operating revenuesCost of goods soldSelling, general, and administrative expensesDepreciationOperating incomeOther incomeEarnings before interest and taxesInterest expensePretax incomeTaxes Current: $71 Deferred
11、: $13Net income Retained earnings: $43 Dividends: $43The operations section of the income statement reports the firms revenues and expenses from principal operations$2,262- 1,655- 327- 90$19029$219- 49$170- 84$86(in $ millions)20X2Income StatementU.S. COMPOSITE CORPORATIONTotal operating revenues$2,
12、262Cost of goods sold- 1,655Selling, general, and administrative expenses- 327Depreciation- 90Operating income$190Other income29Earnings before interest and taxes$219Interest expense- 49Pretax income$170Taxes- 84 Current: $71 Deferred: $13Net income$86 Retained earnings: $43 Dividends: $43The non-op
13、erating section of the income statement includes all financing costs, such as interest expense.U.S.C.C. Income Statement(in $ millions)20X2Income StatementU.S. COMPOSITE CORPORATIONTotal operating revenuesCost of goods soldSelling, general, and administrative expensesDepreciationOperating incomeOthe
14、r incomeEarnings before interest and taxesInterest expensePretax incomeTaxes Current: $71 Deferred: $13Net income Retained earnings: $43 Dividends: $43Usually a separate section reports as a separate item the amount of taxes levied on income.$2,262- 1,655- 327- 90$19029$219- 49$170- 84$86U.S.C.C. In
15、come Statement(in $ millions)20x2Income StatementU.S. COMPOSITE CORPORATIONTotal operating revenuesCost of goods soldSelling, general, and administrative expensesDepreciationOperating incomeOther incomeEarnings before interest and taxesInterest expensePretax incomeTaxes Current: $71 Deferred: $13Net
16、 income Retained earnings: $43 Dividends: $43Net income is the “bottom line”.$2,262- 1,655- 327- 90$19029$219- 49$170- 84$86U.S.C.C. Income StatementIncome Statement AnalysisThere are three things to keep in mind when analyzing an income statement:1.GAAP2.Non Cash Items3.Time and CostsGenerally Acce
17、pted Accounting Principles1.GAAPThe matching principal of GAAP dictates that revenues be matched with expenses. Thus, income is reported when it is earned, even though no cash flow may have occurredIncome Statement Analysis2.Non Cash ItemsDepreciation is the most apparent. No firm ever writes a chec
18、k for “depreciation”.Another noncash item is deferred taxes, which does not represent a cash flow.Income Statement Analysis3.Time and CostsIn the short run, certain equipment, resources, and commitments of the firm are fixed, but the firm can vary such inputs as labor and raw materials.In the long r
19、un, all inputs of production (and hence costs) are variable.Financial accountants do not distinguish between variable costs and fixed costs. Instead, accounting costs usually fit into a classification that distinguishes product costs from period costs.2.3 Net Working CapitalNWC is usually growing wi
20、th the firm. The Balance Sheet of the U.S.C.C.(in $ millions)20X2 and 20X1Balance SheetU.S. COMPOSITE CORPORATIONLiabilities (Debt)Assets20X220X1and Stockholders Equity20X220X1Current assets:Current Liabilities: Cash and equivalents$140$107 Accounts payable$213$197 Accounts receivable294270 Notes pa
21、yable5053 Inventories269280 Accrued expenses223205 Other5850 Total current liabilities$486$455 Total current assets$761$707Long-term liabilities:Fixed assets: Deferred taxes$117$104 Property, plant, and equipment$1,423$1,274 Long-term debt471458 Less accumulated depreciation-550-460 Total long-term
22、liabilities$588$562 Net property, plant, and equipment873814 Intangible assets and other245221Stockholders equity: Total fixed assets$1,118$1,035 Preferred stock$39$39 Common stock ($1 par value)5532 Capital surplus347327 Accumulated retained earnings390347 Less treasury stock-26-20 Total equity$805
23、$725Total assets$1,879$1,742Total liabilities and stockholders equity $1,879$1,742Here we see NWC grow to $275 million in 20X2 from $252 million in 20X1. This increase of $23 million is an investment of the firm.$23 million$275m = $761m- $486m$252m = $707- $4552.4 Financial Cash FlowIn finance, the
24、most important item that can be extracted from financial statements is the actual cash flow of the firm.Since there is no magic in finance, it must be the case that the cash from received from the firms assets must equal the cash flows to the firms creditors and stockholders.Financial Cash Flow of t
25、he U.S.C.C.(in $ millions)20X2Financial Cash FlowU.S. COMPOSITE CORPORATIONCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spending-173 (Acquisitions of fixed assets minus sales of fixed assets)Additions to net working capital-23
26、 Total$42Cash Flow of Investors in the FirmDebt$36 (Interest plus retirement of debt minus long-term debt financing)Equity6 (Dividends plus repurchase of equity minus new equity financing) Total$42Operating Cash Flow:EBIT$219Depreciation $90Current Taxes ($71)OCF$238Financial Cash Flow of the U.S.C.
27、C.(in $ millions)20X2Financial Cash FlowU.S. COMPOSITE CORPORATIONCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spending-173 (Acquisitions of fixed assets minus sales of fixed assets)Additions to net working capital-23 Total$42
28、Cash Flow of Investors in the FirmDebt$36 (Interest plus retirement of debt minus long-term debt financing)Equity6 (Dividends plus repurchase of equity minus new equity financing) Total$42Capital SpendingPurchase of fixed assets $198Sales of fixed assets (25)Capital Spending $173Financial Cash Flow
29、of the U.S.C.C.(in $ millions)20X2Financial Cash FlowU.S. COMPOSITE CORPORATIONCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spending-173 (Acquisitions of fixed assets minus sales of fixed assets)Additions to net working capita
30、l-23 Total$42Cash Flow of Investors in the FirmDebt$36 (Interest plus retirement of debt minus long-term debt financing)Equity6 (Dividends plus repurchase of equity minus new equity financing) Total$42NWC grew from $275 million in 20X2 from $252 million in 20X1.This increase of $23 million is the ad
31、dition to NWC.Financial Cash Flow of the U.S.C.C.(in $ millions)20X2Financial Cash FlowU.S. COMPOSITE CORPORATIONCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spending-173 (Acquisitions of fixed assets minus sales of fixed asse
32、ts)Additions to net working capital-23 Total$42Cash Flow of Investors in the FirmDebt$36 (Interest plus retirement of debt minus long-term debt financing)Equity6 (Dividends plus repurchase of equity minus new equity financing) Total$42Financial Cash Flow of the U.S.C.C.(in $ millions)20X2Financial C
33、ash FlowU.S. COMPOSITE CORPORATIONCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spending-173 (Acquisitions of fixed assets minus sales of fixed assets)Additions to net working capital-23 Total$42Cash Flow of Investors in the Fi
34、rmDebt$36 (Interest plus retirement of debt minus long-term debt financing)Equity6 (Dividends plus repurchase of equity minus new equity financing) Total$42Cash Flow to CreditorsInterest$49Retirement of debt 73Debt service122Proceeds from new debt sales (86)Total36Financial Cash Flow of the U.S.C.C.
35、(in $ millions)20X2Financial Cash FlowU.S. COMPOSITE CORPORATIONCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spending-173 (Acquisitions of fixed assets minus sales of fixed assets)Additions to net working capital-23 Total$42Ca
36、sh Flow of Investors in the FirmDebt$36 (Interest plus retirement of debt minus long-term debt financing)Equity6 (Dividends plus repurchase of equity minus new equity financing) Total$42Cash Flow to StockholdersDividends $43Repurchase of stock 6Cash to Stockholders 49Proceeds from new stock issue (4
37、3)Total $6Financial Cash Flow of the U.S.C.C.(in $ millions)20X2Financial Cash FlowU.S. COMPOSITE CORPORATIONCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spending-173 (Acquisitions of fixed assets minus sales of fixed assets)A
38、dditions to net working capital-23 Total$42Cash Flow of Investors in the FirmDebt$36 (Interest plus retirement of debt minus long-term debt financing)Equity6 (Dividends plus repurchase of equity minus new equity financing) Total$42The cash from received from the firms assets must equal the cash flows to the firms creditors and stockholders:2.5 Summary and ConclusionsFinancial statements provide important information regarding the value of the firm.You should keep in mind:Measures of profitability do not take risk or timing of cash flows into account.Financial ratios are linked to one another.
