Review of Financial Statements FWhy Do We Need Financial Statements?  F 3 Basic Financial Statements For Finance 

Balance Sheet  Definition -  Properties of the Balance Sheet: 

Balance Sheet Example HARRISON INTERNATIONAL (Ticker Symbol = HINT) Assets:Liabilities and Equity: Cash 10Accounts Payable 60 Accounts Receivable 375Notes Payable 110 Inventories 615Accruals 140 Total Current Assets1,000Total Current Liabilities 310 Property, Plant, and Equipment1,250Long-term Bonds 754 less: Accumulated Depreciation 250Total Debt1,064 Total Fixed Assets1,000 Preferred Stock 40 Total Assets2,000Common Stock 130 Retained Earnings 766 Total Common Equity 896 Total Liabilities and Equity2,000

Income Statement FDefinition - FIncome Statement Performance Measures  Earnings per Share (EPS)  Dividends per Share (DPS) Retained Earnings per Share (REPS)

Income Statement Harrison International’s Income Statement Nets Sales (Revenues)$3,000 Less: Cost of Goods Sold (COGS) 1,500 Gross Profit 1,500 Less: Selling and Administrative Expenses 1,150 Earnings Before Interest and Taxes 350 Less: Interest Expenses 85 Earnings Before Taxes 265 Less: Taxes 105 Net Income 160 Less: Preferred Stock Dividend 15 Income Available to Common Stockholders 145 Less: Common Stock Dividends 75 Addition to Retained Earnings 70

Accounting vs. Finance FPrimary Differences: Funds Recognition Decision Making FFunds Recognition Accounting Uses an Accrual Basis - Finance Uses a Cashflow Basis - Example: Harrison Int’l. buys merchandise for $80,000 cash and sells it for $100,000 on credit. What does this transaction look like to accountants and financiers? FDecision Making Accounting - Finance -

Cash Flow Concepts F Net Cash Flow = Net Income - Noncash Revenues + Noncash Charges  What are Noncash Charges?  Depreciation -  Depletion -  Amortization - FNet Cash Flow = Net Income + Depreciation FSeparating Operating and Financing Cash Flows Operating Cash Flow = (EBIT)(1-Tax Rate) + Depreciation Net Cash Flow = Operating Cash Flow - (Interest Expenses)(1-Tax Rate)

Cash Flow Statements Harrison International’s Cash Flow Statement Nets Sales (Revenues)$3,000 Less: Cost of Goods Sold (COGS) 1,500 Gross Profit 1,500 Less: Selling and Administrative Expenses 1,150 Earnings Before Interest and Taxes (EBIT) 350 Less: Interest Expenses 85 Earnings Before Taxes (EBT) 265 Less: Taxes 105 Net Income 160 Plus: Depreciation 20 Net Cash Flow 180

Harrison’s Operating CF Operating Cash Flow = (EBIT)(1-T) + Depreciation Operating Cash Flow = (350)(1-(105/265)) + 20 Operating Cash Flow = (350)(.6038) + 20 Operating Cash Flow = $ Net Cash Flow = Operating CF - (Interest Exp.)(1-T) Net Cash Flow = $ (85)(1-(105/265)) Net Cash Flow = $ (85)(.6038) Net Cash Flow = $ = $180

Market Value Added (MVA)  Market Value Added - MVA = Market Value of Equity - Equity Capital Supplied By Investors Ex. Suppose Harrison Int’l has 100 shares of common stock outstanding, each selling at $ What is Harrison’s Market Value Added (MVA)?

Economic Value Added (EVA)  Economic Value Added - EVA = After-tax Operating Profit - After-tax Cost of Capital Ex. Suppose Harrison Int’ls after-tax cost of capital is 9%, and their corporate tax rate is 35%. What is Harrison’s Economic Value Added (EVA)?