1 Unidade 11 Interpretação de documentos financeiros Copyright © Prentice Hall Inc Author: Nick Bagley, bdellaSoft, Inc. Objectivos Contrastar modelos contabilísticos e económicos Valor contabilístico

2 Financial Statements Provide: current and historical information to owners and creditors a convenient way for owners and creditors to set performance targets a convenient standard template for financial planning

3 3.1 Functions of Financial Statements Financial Statements: Provide information to the owners & creditors of a firm about the current status and past performance Provide a convenient way for owners & creditors to set performance targets & to impose restrictions of the managers of the firm Provide a convenient templates for financial planning

4 The Balance Sheet Summarizes a firms assets, liabilities, and owner’s equity at a moment in time Amounts measured at historical values and historical exchange rates Prepared according to GAAP, Generally Accepted Accounting Principles GAAP modified occasionally by the Financial Accounting Standards Board Exchange-listed companies must comply with Securities and Exchange Commission (SEC) rules

5 The Balance Sheet Major Divisions: Assets Current assets (less than a year) Long-term assets (longer than a year  Depreciation Liabilities and Stockholder’s Equity Liabilities  Current Liabilities  Long-term debt Equity

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7 The Income Statement Summarizes the profitability of a company during a time period Major Divisions: Revenue & cost of goods sold  Gross margin General administrative and selling expenses (GS&A)  Operating income Debt service  Taxable income Corporate Taxes  Net income

8 The Income Statement Important Reminders: Retained earnings are not added to the cash balance in the balance sheet, but are added to shareholder’s equity Accounts show historical values, not market values. The shareholder’s equity may be much higher or lower than the market value of the firm.  The value of the firm’s land may have halved or doubled, but this would not be reported in the balance sheet

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10 The Cash-Flow Statement Show the cash that flowed into and from a firm in during a time period Focuses attention on a firm’s cash situation A firm may be profitable and short of cash Unlike the balance sheet and income statement, cash flow statements are independent of accounting methods The IRS uses accounting income to compute tax, so accounting rules have a second order effect on cash flows through taxes

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Returns to Shareholders v. Return on Equity Recall our definition in Chapter 2 of the holding period return, and compare this with the economic measure of income This is the Total Shareholder Return

14 Returns to Shareholders v. Return on Equity (Continued) Traditionally, corporate performance has been measured by Return on Equity, ROE

15 Profitability

16 Asset Turnover

17 Financial Leverage

18 Liquidity

19 Market Value

20 Ratio Comparisons Establish Your Perspective Shareholder employee, Management, or Union Creditor Predator, Customer, Supplier, Competitor, Trade Association Benchmarks Other companies ratios The firm’s historical ratios Data extracted from financial markets Sources Dun & Bradstreet, Robert Morris, Commerce Department's Quarterly Financial Report, Trade Associations

21 Relationships Amongst Ratios It is sometimes valuable to decompose ratios into sums, differences, products and quotients of other ratios. Many such schemes start with:

22 Illustration Consider two firms that are identical except that Nodebt is financed using $1,000,000 of equity and Halfdebt is financed using $500,000 of equity and $500,000 of debt further assume that the EBIT of both firms is $120,000 and tax is 40%

23 Case: Borrow at 10%

24 Case: Borrow at 15%

25 Case: Borrow at 10%: Effect of Business Cycle on ROE

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34 External Funds Needed

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36 Observation: Sometimes the new assets required to generate income are not a high as in this example, and the company may able to support a level of growth with no external funding ( in our case)