Balance Sheet Income Statement(Profit and Loss Statement) Cash Flow Financial Statement Balance Sheet Income Statement(Profit and Loss Statement) Cash Flow

Financial statement and reports Annual report – most important report corporations issue to stockholders Contain 2 types of information: Verbal section (Letter from chairman) – describe the firm’s operating results during past years Discusses new development that will affect future operations Reports of basic financial statement Balance sheet Income statement Statement of cash flows Statement of retained earnings Give accounting picture of the firm’s operations and financial position. The financial statement report what has actually happened to assets, earnings, and dividends over the past few years Verbal statement attempt to explain why things turned out the way they did and what might happen to future.

Why Evaluate Financial Statements? Internal uses Performance evaluation – compensation and comparison between divisions Planning for the future – guide in estimating future cash flows External uses Creditors Suppliers Customers Stockholders

Balance Sheet

Balance sheet The balance sheet is a snapshot of the firm’s assets and liabilities at a given point in time Assets are listed in order of liquidity Ease of conversion to cash Without significant loss of value

Balance sheet Present in order of liquidity or length of time it takes to convert them to cash Current assets: typical useful life < 1 year Fixed Assets: typical useful life > 1 year Depreciation: non-cash asset that reflects the decline in an asset’s useful life Assets

Balance sheet Liabilities List in order of nearness to maturity Accounts Payable (trade credit): amount owed to business creditors on open accounts (e.g.: utilities, supplies, rent, etc.) debt arising from credit sales and recorded as an account receivable by seller and as an account payable by the buyer Notes Payable: more formal, longer term debt owed to banks or other lenders indicates that a certain RM amount of loans will be repaid to the lender at a future time. Accrued Expenses: estimates of liabilities not paid as of the statement date

Balance sheet Net Assets Difference between assets and liabilities net worth of the organization Net assets increase or decrease based on the operating results from the fiscal year Net Assets

A Typical Balance sheet Due to be paid off within a year Accrued wages and taxes Accounts payable Notes payable A Typical Balance sheet Cash and equivalents (Cash/item that can converted into cash within 1 year) Accounts receivable (balance due from customers) Inventory (supplies, raw material, finished goods etc) Long term loans and bonds that have maturities >1 year depreciation Common equity(Net worth) Retained earning Assets >1 year Physical assets (plants, equipments) IP (copyright/patents) Net Working Capital = Current Assets – Current Liabilities (measure liquidity)

Liabilities: Common equity Retained earnings Money company owes creditors (bank, government etc.) Common equity The capital supplied by common stockholders: common stock, paid-in capital, retained earnings Important to stockholder: to know whether the company actually earned the funds reported in its equity account or whether they came mainly from selling stock. Retained earnings That portion of the firm’s earnings that has been saved rather than paid out as dividends Important to potential creditors: would be interested in the total equity provided by the firm’s owner not with its source.

Sample Balance Sheet Current Assets Current Liabilities Fixed Assets Numbers in millions 2008 2007 Cash 696 58 A/P 307 303 A/R 956 992 N/P 26 119 Inventory 301 361 Other CL 1,662 1,353 Other CA 264 Total CL 1,775 Total CA 1,675 LT Debt 843 1,091 Net FA 3,138 3,358 C/S 2,556 2,167 Total Assets 5,033 Total Liab. & Equity Current Assets Current Liabilities 1,995 Long Term Debt 2,256 Fixed Assets Stockholder’s Equity 5,394 5,394 Less liquidity Net working capital= current assets- current liabilities Assets grew (from 2007 to 2008) = 5394-5033= 6.7%

Balance sheet Cash and equivalents versus other assets: All assets are in RM but only cash and equivalent accounts represents actual spendable money Accounts receivable represents credit sales that have not yet been collected Inventories shows investment in raw materials, work-in-process and finished goods Plant and equipment reflects the amount company paid for its fixed assets Company has RM696mill (2008) cash in hand (versus CL of RM1,195 that due within a year) Noncash assets should generate cash over time BUT they do not represents cash in hand (if they were sold today could be higher or lower than the values in the balance sheet)

Balance sheet The time dimension Balance sheet is a snapshot of the firm’s financial position at a point in time. Example: on Dec 2008 Company has cash RM58mill (Dec2007), increase RM696mill(by end of 2008) Balance sheet changes every day: Inventories ( increased or decreased) Fixed asset ( increased or decreased) Bank loans (increased or decreased) Etc. If business is seasonal, large balance sheet changes over the year. Example: inventories are high just before Hari Raya BUT low inventories and high account receivable just after Hari Raya Therefore, balance sheets change during the year depending on the date at which the statement is constructed.

Net Working Capital and Liquidity Current Assets – Current Liabilities Positive when the cash that will be received over the next 12 months exceeds the cash that will be paid out Usually positive in a healthy firm Liquidity Ability to convert to cash quickly without a significant loss in value Liquid firms are less likely to experience financial distress But liquid assets earn a lower return Trade-off to find balance between liquid and illiquid assets

U.S Corporation Balance Sheet

Income Statement Profit and Loss Statement

Income Statement The income statement is more like a video of the firm’s operations for a specified period of time. You generally report revenues first and then deduct any expenses for the period

Operating income increased Also known as operating income Use to compare companies’ operating performance Income Statement 2005 2004 Net Sales Operating cost except depreciation Earning before interest, taxes, and depreciation 3000.0 2616.2 383.8 2850.0 2497.0 353.0 Depreciation Earning before interest and taxes 100.0 283.8 90.0 263.0 Less interest Earning before taxes 88.0 195.0 60.0 203.0 Taxes 78.3 81.2 Net Income 117.5 121.8 Common dividend 57.5 53.0 Addition to retained earnings 68.8 Per-share Data: Common stock price Earning per-share(EPS) Dividends per share (DPS) 23.0 2.35 1.15 26.0 2.44 1.06 Operating income increased Net Income decline EPS decrease Most important to stock holder Also known as `bottom line’ Dividend increased

US Corporation Income Statement

Income Statement Different company have different financial structures Different tax situation Different amounts of non-operating assets Income statement reports on operation over a period of time Example: during 2005, company 2005 sales were RM3billion, Net income was RM117.5 mill Income statement can cover any period of time, most companies prepared them monthly, quarterly and annually Quarter and annual statement are released to investors Monthly statement are used internally for planning and control purpose, comparing actual results with forecasted (budgeted) results If revenues drop below or cost rise above the forecasted levels, company should find out WHY? And take corrective action before problem become serious.

Cash Flow

Cash Flow A statement summarizing the firm’s revenues and expenses over an accounting period, generally a quarter or a year. Accounting profits vs. Actual Cash Flows

Statement of Cash Flows Statement that summarizes the sources and uses of cash Changes divided into 3 major categories Operating Activity – includes net income and changes in most current accounts Investment Activity – includes changes in fixed assets Financing Activity – includes changes in notes payable, long-term debt and equity accounts as well as dividends

Sources and Uses Sources Uses Cash inflow – occurs when we “sell” something Decrease in asset account Accounts receivable, inventory, and net fixed assets Increase in liability or equity account Accounts payable, other current liabilities, and common stock Uses Cash outflow – occurs when we “buy” something Increase in asset account Cash and other current assets Decrease in liability or equity account Notes payable and long-term debt

The Concept of Cash Flow Cash flow is one of the most important pieces of information that a financial manager can derive from financial statements Show how cash is generated from utilizing assets and how it is paid to those that finance the purchase of the assets

Cash Flow Pro Forma (projected) financial Statement To Be Continued…..

- Roger Ward Babson, (1875–1967) American financial statistician “More people should learn to tell their dollars where to go instead of asking them where they went.” - Roger Ward Babson, (1875–1967) American financial statistician March 2006

Reference Brigham E.F. and Houston, J.F. (2007), ‘Essentials of Financial Management’, 1st edition, Cengage Learning.