Chapter 3 Statements and Ratios © 2012 Pearson Prentice Hall. All rights reserved. 1-1

© 2012 Pearson Prentice Hall. All rights reserved. 3-2 The Stockholders’ Report Generally accepted accounting principles (GAAP) are the practice and procedure guidelines used to prepare and maintain financial records and reports; The Sarbanes-Oxley Act of 2002, passed to eliminate the many disclosure and conflict of interest problems of corporations More Countries Adopt International Financial Reporting Standards –International Financial Reporting Standards (IFRS) are established by the International Accounting Standards Board (IASB).

© 2012 Pearson Prentice Hall. All rights reserved. 3-3 Focus on Ethics Take Earnings Reports at Face Value –Near the end of each quarter, many companies unveil their quarterly performance. –Firms that beat analyst estimates often see their share prices jump, while those that miss estimates by even a small amount, tend to suffer price declines. –The practice of manipulating earnings in order to mislead investors is known as earnings management. Why might financial managers be tempted to manage earnings? Is it unethical for managers to manage earnings if they disclose their activities to investors?

© 2012 Pearson Prentice Hall. All rights reserved. 3-4 The Four Key Financial Statements: The Income Statement The income statement provides a financial summary of a company ’ s operating results during a specified period. Although they are prepared quarterly for reporting purposes, they are generally computed monthly by management and quarterly for tax purposes.

© 2012 Pearson Prentice Hall. All rights reserved. 3-5 Table 3.1 Bartlett Company Income Statements ($000) Concentrate on control issue Gross profit – control expenses of production Operating profit – control of the expenses of “running” the company Net income – remaining profits after all expenses paid

© 2012 Pearson Prentice Hall. All rights reserved. 3-6 The Four Key Financial Statements: The Balance Sheet The balance sheet presents a summary of a firm ’ s financial position at a given point in time. The statement balances the firm ’ s assets (what it owns) against its financing, which can be either debt (what it owes) or equity (what was provided by owners).

© 2012 Pearson Prentice Hall. All rights reserved. 3-7 Table 3.2a Bartlett Company Balance Sheets ($000) Represents the assets that management has purchased and uses to achieve it’s mission and goals.

© 2012 Pearson Prentice Hall. All rights reserved. 3-8 Table 3.2b Bartlett Company Balance Sheets ($000) Represents how management gets the $$ to purchase the assets of the firm.

© 2012 Pearson Prentice Hall. All rights reserved. 3-9 The Four Key Financial Statements: Statement of Retained Earnings The statement of retained earnings reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and the end of that year.

© 2012 Pearson Prentice Hall. All rights reserved The Four Key Financial Statements: Statement of Cash Flows The statement of cash flows provides a summary of the firm ’ s operating, investment, and financing cash flows and reconciles them with changes in its cash and marketable securities during the period. This statement not only provides insight into a company ’ s investment, financing and operating activities, but also ties together the income statement and previous and current balance sheets.

© 2012 Pearson Prentice Hall. All rights reserved Table 3.4 Bartlett Company Statement of Cash Flows ($000) for the Year Ended December 31, 2012 The cash flow statement illustrates the primary decisions that managers make. Managers make decisions on how to run the business (operations) Managers decide what kinds of assets to buy (investment) Managers decide where to get the $$ to run the business (financing)

Financial Ratio Analysis 12 of 34

The Balance-Sheet Model of the Firm 13 of 34 Current Assets Fixed Assets 1 Tangible 2 Intangible Total Book Value of Assets: Shareholders’ Equity Current Liabilities Long-Term Debt Total Firm Value to Investors: All the “stuff” we have purchased for the firm Where did the money come from to buy the “stuff”

Using Financial Ratios: Cautions for Doing Ratio Analysis Ratios must be considered together; a single ratio by itself means relatively little. Financial statements that are being compared should be dated at the same point in time. Use audited financial statements when possible. The financial data being compared should have been developed in the same way. Be wary of inflation distortions. 14 of 34

Molson Coors (TAP) 15 of 34 Business Finance/ Income Statement (data)

Molson Coors (TAP) 16 of 34 Business Finance / Balance Sheet (data)

Molson Coors (TAP) 17 of 34 Business Finance / Cash Flow Statement (data)

18 of 34 Malt Beverage Industry Business Finance / Industry Ratios

Liquidity ratios 19 of 34 Measures the ability of the firm to pay current obligations Use both if inventory is a large portion of the company’s current assets

20 of 34 Business Finance / Financial Ratios

Asset mgt ratios (Activity) 21 of 34 Average number of days inventory on the shelf Average number of days for customers to pay for their accounts Average number of days it takes us to pay our accounts

22 of 34 Business Finance / Financial Ratios

23 of 34 Business Finance / Financial Ratios

24 of 34 Business Finance / Financial Ratios

25 of 34 Asset mgt ratios (Activity, Efficiency) Measures management’s efficient use of assets

26 of 34 Business Finance / Financial Ratios

Leverage ratios Degree of indebtedness (how much) – cannot say whether good or bad – Mgt chooses a level of debt – NW = common equity = TA - TL Ability to pay int Financial leverage - use of other peoples money to make a higher return 27 of 34

leverage ratios 28 of 34

29 of 34 Business Finance / Financial Ratios

30 of 34 Business Finance / Financial Ratios

Profitability ratios 31 of 34

32 of 34 Business Finance / Financial Ratios

33 of 34 Business Finance / Financial Ratios

Profitability ratios 34 of 34

35 of 34 Business Finance / Financial Ratios

Market Based Ratios 36 of 34 Graph EPS & PE for the presentation

37 of 34 Business Finance / Financial Ratios

ROE(Dupont analysis) Owner profitability can be measured by – profitability – asset management – Leverage equity multiplier of financial leverage multiplier (leverage number) 38 of 34

39 of 34 Business Finance / DuPont Analysis

Personal Financial Statements 1.Personal Net Worth 2.Cash Mgt and Budgets 40 of 34