© 2007 Thomson South-Western Chapter 2 Financial Statements And Cash Flow Analysis Professor XXXXX Course 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 SourcesUses

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 Ratios Current Ratio Quick Ratio Turnover Ratios Collection/Payment Period Debt-to-Equity Ratio Times Interest Earned Ratio Gross Margin EPS P/E Ratio Market-to-Book Ratio Activity Ratios Debt Ratios Profitability Ratios Market Ratios

12 Liquidity Ratios

13 Activity Ratios

14 Profitability Ratios

15 Profitability Ratios

16 Market Ratios

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