Financial Statement Analysis يجب على الافراد ان يهتموا بكل من العائد المتوقع (expected return) و المخاطرة (Risk) لأي اصل سيكون ضمن محفظتهم . هذا ولكي نتمكن من بناء توقعات منطقية (reasonable expectations) حول اداء مجموعة من الاستثمارات المتوقعة ، فاننا سنقوم في هذه الوحدة باستعراض الاداء التاريخي لمجموعة من الاصول (assets) وذلك عن طريق استخدام محفظة تتكون من سندات خزينة (treasury bill) كـBenchmark لتقييم هذا الاداء . بناءا عليه فننا سنبدأ (الـslide التالي )

Financial Statement Analysis (objectives) A good working knowledge of financial statement is desirable because such a statement and number derived from those statement are primary means of communicating financial information both with the firm and out side the firm.

Financial Statement Analysis (objectives) Financial statement analysis is performance by:- Stockholders : to measure management’s performance. Creditors : to make their investment decisions. Management: to plan and control operation. And it is also an important tool for accountants and financial analysts to use to better understand their company's competitive position.

Financial Statement Analysis (objectives) Financial statements can be analyzed to identify:- Trends in key financial data. Compare financial performance across companies. Calculate financial ratios which can be used to assess a company's current performance as well as its prospects for the future. Financial statement users should be able to find and interpret information to answer questions about a company.

Financial Statement Analysis Annual reports contain four basic financial statements:- Balance Sheet. Statement of Stockholders’ Equity. Income Statement or Earnings Statement. Statement of Cash Flows.

The Financial Statements The Balance Sheet Also called the statement of condition or the statement of financial position. Shows the financial condition or financial position of a company on a particular date. Prepared on a particular date at the end of an accounting period End of accounting period can be the end of a calendar year, fiscal year, or interim period such as a year, a quarter, etc. Summarizes what the firm owns and what the firm owes to outsiders and to internal owners.

The Financial Statements The Balance Sheet Assets = Liabilities + Stockholders’ equity Assets are what the firm owns. Liabilities are what the firm owes to outsiders. Stockholders’ equity is what the firm owes to internal owners.

Financial Statement : Balance Sheet Current Assets Fixed Assets 1 Tangible 2 Intangible Assets Shareholders’ Equity Current Liabilities Long-Term Debt Liabilities

Financial Statement : Balance Sheet Assets Current Assets: Include cash and assets expected to be converted to cash within one year or one operating cycle. Assets that are continually Cash Cash awaiting deposit Cash in a bank account Marketable Securities Short-term investments of cash that is not needed. Treasury bills, certificates, notes, bonds, commercial paper Accounts Receivable Customer balances outstanding on credit sales.

Financial Statement : Balance Sheet Assets Inventories Items held for sale or used in the manufacture of products that will be sold. Manufacturing Company (three types of inventory):- Raw materials Work-in-process Finished goods Prepaid Expenses Expenses paid in advance. Included in current assets if they expire within one year or one operating cycle:- insurance rent utilities

Financial Statement : Balance Sheet Assets Fixed Assets 1)Tangible: Have physical substance. long-lived Not used up during annual operations. Produce economic benefits for more than one year. Fixed assets other than land are “depreciated” over the period of time they benefit the firm. Straight-line method allocates an equal amount of expense to each year of the depreciation period. Land refers to property used in business, not investment property.

Financial Statement : Balance Sheet Assets 2 .Intangible Goodwill recognized in business combinations Patents Trademarks Copyrights Brand Names Franchises

Financial Statement (Balance Sheet) Liabilities Represent claims against assets and include Current Liabilities & Non current liabilities. Current liabilities must be satisfied in one year or one operating cycle and include. Accounts payable Short-term obligations that arise from credit extended by suppliers for the purchase of goods and services .Account is eliminated when bill is satisfied. Notes payable Short-term obligations in the form of promissory notes. Lines of credit to suppliers or financial institutions. Accrued liabilities Result from recognition of an expense prior to actual payment of cash. Unearned revenue Result from payments received in advance for services or products.

Financial Statement (Balance Sheet) Liabilities Long–term liabilities: Obligations with maturities beyond one year. Long-term debt :Bonds, Long-Term Notes Payable. Deferred Taxes: Result of temporary differences in the recognition of revenue and expense for taxable income relative to reported income.

Financial Statement (Balance Sheet) Stockholders’ Equity Stockholders’ Equity: Final section of balance sheet Also called shareholders’ equity Residual interest in assets that remains after deducting liabilities Common Stock Shareholders Do not ordinarily receive a fixed return. Have voting privileges in proportion to ownership interest. Can benefit through price appreciation. Can suffer through price depreciation. Dividends are declared at the discretion of a company’s board of directors.

Financial Statement (Balance Sheet) Stockholders’ Equity Additional paid-in capital : Reflects the amount by which the original sales price of the stock shares exceeded par value. Retained Earnings: Funds a company has elected to reinvest in the operations of the business rather than pay out in stock. Preferred stock : Carries a fixed annual dividend payments Carries no voting rights.

Financial Statement : Balance Sheet The assets are listed in order by the length of time it would normally take a firm with ongoing operations to convert them into cash. Clearly, cash is much more liquid than property, plant, and equipment. 2007 2006 2007 2006 Current assets: Current Liabilities: Cash and equivalents $140 $107 Accounts payable $213 $197 Accounts receivable 294 270 Notes payable 50 53 Inventories 269 280 Accrued expenses 223 205 Other 58 50 Total current liabilities $486 $455 Total current assets $761 $707 Long-term liabilities: Fixed assets: Deferred taxes $117 $104 Property, plant, and equipment $1,423 $1,274 Long-term debt 471 458 Less accumulated depreciation (550) (460) Total long-term liabilities $588 $562 Net property, plant, and equipment 873 814 Intangible assets and other 245 221 Stockholder's equity: Total fixed assets $1,118 $1,035 Preferred stock $39 $39 Common stock ($1 per value) 55 32 Capital surplus 347 327 Accumulated retained earnings 390 347 Less treasury stock (26) (20) Total equity $805 $725 Total assets $1,879 $1,742 Total liabilities and stockholder's equity $1,879 $1,742

The Financial Statements The Income Statement Also called the earnings statement Presents the results of operations for the accounting period. revenues expenses net income earnings per share Reveals management’s ability to translate sales dollars into profits.

The Financial Statements The Income Statement Sales (operating revenues) are the major revenue source for most companies. Cost of Goods Sold: Cost to seller of products or services sold to customers. Operating Expenses: Selling and administrative, Advertising. Depreciation Cost of assets other than land that will benefit a business enterprise for more than a year is allocated over the asset’s service life.

The Financial Statements The Income Statement Operating Profit (Operating income) Also called earnings before interest and taxes (EBIT) Measures overall performance of company’s operations: sales revenue less expenses associated with generating sales. Provides a basis for assessing success of a firm apart from financing and investing activities and separate from tax considerations.

The Financial Statements The Income Statement Other Income (Expense) Revenues and costs other than from operations such as dividend and interest income interest expense investment gains (losses) equity earnings (losses) gains (losses) from sale of fixed assets

Financial Statement : Income Statement The operations section of the income statement reports the firm’s revenues and expenses from principal operations. Total operating revenues $2,262 Cost of goods sold ( 1,655) Selling, general, and administrative expenses ( 327) Depreciation ( 90) Operating income $190 Other income 29 Earnings before interest and taxes $219 Interest expense ( 49) Pretax income $170 Taxes ( 84) Current: $71 Deferred: $13 Net income $86 Addition to retained earnings $43 Dividends: $43

Financial Statement : Income Statement The non-operating section of the income statement includes all financing costs, such as interest expense. Total operating revenues $2,262 Cost of goods sold 1,655 Selling, general, and administrative expenses 327 Depreciation 90 Operating income $190 Other income 29 Earnings before interest and taxes $219 Interest expense 49 Pretax income $170 Taxes 84 Current: $71 Deferred: $13 Net income $86 Addition to retained earnings: $43 Dividends: $43

Financial Statement : Income Statement Total operating revenues $2,262 Cost of goods sold 1,655 Selling, general, and administrative expenses 327 Depreciation 90 Operating income $190 Other income 29 Earnings before interest and taxes $219 Usually a separate section reports the amount of taxes levied on income. Interest expense 49 Pretax income $170 Taxes 84 Current: $71 Deferred: $13 Net income $86 Addition to retained earnings: $43 Dividends: $43

Financial Statement : Income Statement Total operating revenues $2,262 Cost of goods sold 1,655 Selling, general, and administrative expenses 327 Depreciation 90 Operating income $190 Other income 29 Earnings before interest and taxes $219 Net income is the “bottom line.” Interest expense 49 Pretax income $170 Taxes 84 Current: $71 Deferred: $13 Net income $86 Retained earnings: $43 Dividends: $43

Short-Term Asset Management Current Assets Current Liabilities Net Working Capital Long-Term Debt How should short-term assets be managed and financed? Shareholders’ Equity Fixed Assets 1 Tangible 2 Intangible

Financial Statement : Balance Sheet 2007 2006 2007 2006 Current assets: Current Liabilities: Cash and equivalents $140 $107 Accounts payable $213 $197 Accounts receivable 294 270 Notes payable 50 53 Inventories 269 280 Accrued expenses 223 205 $275m = $761m- $486m Other 58 50 Total current liabilities $486 $455 Total current assets $761 $707 Here we see NWC grow to $275 million in 2006 from $252 million in 2005. Long-term liabilities: Fixed assets: Deferred taxes $117 $104 Property, plant, and equipment $1,423 $1,274 Long-term debt 471 458 Less accumulated depreciation (550) (460 Total long-term liabilities $588 $562 Net property, plant, and equipment 873 814 Intangible assets and other 245 221 Stockholder's equity: $23 million Total fixed assets $1,118 $1,035 Preferred stock $39 $39 Common stock ($1 par value) 55 32 This increase of $23 million is an investment of the firm. Capital surplus 347 327 Accumulated retained earnings 390 347 Less treasury stock (26) (20) Total equity $805 $725 Total assets $1,879 $1,742 Total liabilities and stockholder's equity $1,879 $1,742

The Financial Statements The Statement of Cash Flows Provides information about the cash inflows and outflows during an accounting period Operating activities Financing activities Investing activities

Financial Statement : Financial Cash Flow Operating Cash Flow: EBIT $219 Depreciation $90 Current Taxes -$71 OCF $238 Cash Flow of the Firm Operating 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 Cash Flow of Investors in the Firm Debt $36 (Interest plus retirement of debt minus long-term debt financing) Equity 6 (Dividends plus repurchase of equity minus new equity financing) Total $42

Financial Statement : Financial Cash Flow Cash Flow of the Firm Operating cash flow $238 (Earnings before interest and taxes Capital Spending Purchase of fixed assets $198 Sales of fixed assets -$25 Capital Spending $173 plus depreciation minus taxes) Capital spending -173 (Acquisitions of fixed assets minus sales of fixed assets) Additions to net working capital -23 Note that capital spending can also be calculated as: End NFA – Beg NFA + Depr = $1,118 - $1,035 + $90 = $173 Total $42 Cash Flow of Investors in the Firm Debt $36 (Interest plus retirement of debt minus long-term debt financing) Equity 6 (Dividends plus repurchase of equity minus new equity financing) Total $42

Financial Statement : Financial Cash Flow Cash Flow of the Firm Operating cash flow $238 (Earnings before interest and taxes NWC grew from $275 million in 2007 from $252 million in 2006. This increase of $23 million is the addition to NWC. plus depreciation minus taxes) Capital spending -173 (Acquisitions of fixed assets minus sales of fixed assets) Additions to net working capital -23 Total $42 Cash Flow of Investors in the Firm Debt $36 (Interest plus retirement of debt minus long-term debt financing) Equity 6 (Dividends plus repurchase of equity minus new equity financing) Total $42

Financial Statement : Financial Cash Flow Cash Flow of the Firm Operating 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 Cash Flow of Investors in the Firm Debt $36 (Interest plus retirement of debt minus long-term debt financing) Equity 6 (Dividends plus repurchase of equity minus new equity financing) Total $42

Financial Statement : Financial Cash Flow Cash Flow to Creditors Interest $49 Retirement of debt 73 Debt service 122 Proceeds from new debt sales -86 Total $36 Cash Flow of the Firm Operating 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 Cash flow to creditors can also be calculated as: Interest paid – Net new borrowing = Interest paid – (End LT Debt – Beg LT Debt) =$49 – ($471 - $458) = $36 Total $42 Cash Flow of Investors in the Firm Debt $36 (Interest plus retirement of debt minus long-term debt financing) Equity 6 (Dividends plus repurchase of equity minus new equity financing) Total $42

Financial Statement : Financial Cash Flow Cash Flow of the Firm Operating cash flow $238 (Earnings before interest and taxes Cash Flow to Stockholders Dividends $43 Repurchase of stock 6 Cash to Stockholders 49 Proceeds from new stock issue -43 Total $6 plus depreciation minus taxes) Capital spending -173 (Acquisitions of fixed assets minus sales of fixed assets) Additions to net working capital -23 Total $42 Cash Flow of Investors in the Firm Debt $36 (Interest plus retirement of debt minus long-term debt financing) Equity 6 (Dividends plus repurchase of equity minus new equity financing) Total $42

Financial Statement : Financial Cash Flow The cash flow received from the firm’s assets must equal the cash flows to the firm’s creditors and stockholders: Cash Flow of the Firm Operating 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 Cash Flow of Investors in the Firm Debt $36 (Interest plus retirement of debt minus long-term debt financing) Equity 6 (Dividends plus repurchase of equity minus new equity financing) Total $42

Financial Statement : Financial Cash Flow (Cash Flow from Operations) To calculate cash flow from operations, start with net income, add back non-cash items like depreciation and adjust for changes in current assets and liabilities (other than cash). Operations Net Income Depreciation Deferred Taxes Changes in Assets and Liabilities Accounts Receivable Inventories Accounts Payable Accrued Expenses Notes Payable Other Total Cash Flow from Operations $86 90 13 -24 11 16 18 -3 $199 -8

Financial Statement : Financial Cash Flow (Cash Flow from Investing) Cash flow from investing activities involves changes in capital assets: acquisition of fixed assets and sales of fixed assets (i.e., net capital expenditures). Acquisition of fixed assets Sales of fixed assets Total Cash Flow from Investing Activities -$198 25 -$173

Financial Statement : Financial Cash Flow (Cash Flow from Financing) Retirement of debt (includes notes) Proceeds from long-term debt sales Dividends Repurchase of stock Proceeds from new stock issue Total Cash Flow from Financing -$73 86 -43 43 $7 -6 Cash flows to and from creditors and owners include changes in equity and debt.

Financial Statement : Financial Cash Flow Operations Net Income Depreciation Deferred Taxes Changes in Assets and Liabilities Accounts Receivable Inventories Accounts Payable Accrued Expenses Notes Payable Other Total Cash Flow from Operations $86 90 13 -24 11 16 18 -3 $199 -8 Acquisition of fixed assets Sales of fixed assets Total Cash Flow from Investing Activities -$198 25 -$173 Investing Activities Financing Activities Retirement of debt (includes notes) Proceeds from long-term debt sales Dividends Repurchase of stock Proceeds from new stock issue Total Cash Flow from Financing -$73 86 -43 43 $7 -6 Change in Cash (on the balance sheet) $33 The statement of cash flows is the addition of cash flows from operations, investing, and financing.

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