1. Balance Sheet Income Statement(Profit and Loss Statement) Cash Flow
Financial Statement
Balance Sheet
Income Statement(Profit and Loss Statement)
Cash Flow

2. Financial statement and reports
Annual report – most important report corporations issue to stockholders
Contain 2 types of information:
Verbal section (Letter from chairman) –
describe the firm’s operating results during past years
Discusses new development that will affect future operations
Reports of basic financial statement
Balance sheet
Income statement
Statement of cash flows
Statement of retained earnings
Give accounting picture of the firm’s operations and financial position.
The financial statement report what has actually happened to assets, earnings, and dividends over the past few years
Verbal statement attempt to explain why things turned out the way they did and what might happen to future.

4. Why Evaluate Financial Statements?
Internal uses
Performance evaluation – compensation and comparison between divisions
Planning for the future – guide in estimating future cash flows
External uses
Creditors
Suppliers
Customers
Stockholders

5. Balance Sheet

6. Balance sheet
The balance sheet is a snapshot of the firm’s assets and liabilities at a given point in time
Assets are listed in order of liquidity
Ease of conversion to cash
Without significant loss of value

7. Balance sheet
Present in order of liquidity or length of time it takes to
convert them to cash
Current assets: typical useful life < 1 year
Fixed Assets: typical useful life > 1 year
Depreciation: non-cash asset that reflects the decline
in an asset’s useful life
Assets

8. Balance sheet Liabilities List in order of nearness to maturity
Accounts Payable (trade credit):
amount owed to business creditors on open accounts (e.g.: utilities, supplies, rent, etc.)
debt arising from credit sales and recorded as an account receivable by seller and as an account payable by the buyer
Notes Payable:
more formal, longer term debt owed to banks or other lenders
indicates that a certain RM amount of loans will be repaid to the lender at a future time.
Accrued Expenses:
estimates of liabilities not paid as of the statement date

9. Balance sheet Net Assets Difference between assets and liabilities
net worth of the organization
Net assets increase or decrease based on the operating results from the fiscal year
Net Assets

10. A Typical Balance sheet
Due to be paid off within a year
Accrued wages and taxes
Accounts payable
Notes payable
A Typical Balance sheet
Cash and equivalents (Cash/item that can converted into cash within 1 year)
Accounts receivable (balance due from customers)
Inventory (supplies, raw material, finished goods etc)
Long term loans and bonds that have maturities >1 year
depreciation
Common equity(Net worth)
Retained earning
Assets >1 year
Physical assets (plants, equipments)
IP (copyright/patents)
Net Working Capital = Current Assets – Current Liabilities
(measure liquidity)

11. Liabilities: Common equity Retained earnings
Money company owes creditors (bank, government etc.)
Common equity
The capital supplied by common stockholders: common stock, paid-in capital, retained earnings
Important to stockholder: to know whether the company actually earned the funds reported in its equity account or whether they came mainly from selling stock.
Retained earnings
That portion of the firm’s earnings that has been saved rather than paid out as dividends
Important to potential creditors: would be interested in the total equity provided by the firm’s owner not with its source.

12. Sample Balance Sheet Current Assets Current Liabilities Fixed Assets
Numbers in millions
2008
2007
Cash
696 58
A/P
307
303
A/R
956
992
N/P 26
119
Inventory
301
361
Other CL
1,662
1,353
Other CA
264
Total CL
1,775
Total CA
1,675
LT Debt
843
1,091
Net FA
3,138
3,358
C/S
2,556
2,167
Total Assets
5,033
Total Liab. & Equity
Current Assets
Current Liabilities
1,995
Long Term Debt
2,256
Fixed Assets
Stockholder’s Equity
5,394
5,394
Less liquidity
Net working capital= current assets- current liabilities
Assets grew (from 2007 to 2008) = = 6.7%

13. Balance sheet Cash and equivalents versus other assets:
All assets are in RM but only cash and equivalent accounts represents actual spendable money
Accounts receivable represents credit sales that have not yet been collected
Inventories shows investment in raw materials, work-in-process and finished goods
Plant and equipment reflects the amount company paid for its fixed assets
Company has RM696mill (2008) cash in hand (versus CL of RM1,195 that due within a year)
Noncash assets should generate cash over time BUT they do not represents cash in hand (if they were sold today could be higher or lower than the values in the balance sheet)

14. Balance sheet The time dimension
Balance sheet is a snapshot of the firm’s financial position at a point in time.
Example: on Dec 2008
Company has cash RM58mill (Dec2007), increase RM696mill(by end of 2008)
Balance sheet changes every day:
Inventories ( increased or decreased)
Fixed asset ( increased or decreased)
Bank loans (increased or decreased)
Etc.
If business is seasonal, large balance sheet changes over the year. Example: inventories are high just before Hari Raya BUT low inventories and high account receivable just after Hari Raya
Therefore, balance sheets change during the year depending on the date at which the statement is constructed.

15. Net Working Capital and Liquidity
Current Assets – Current Liabilities
Positive when the cash that will be received over the next 12 months exceeds the cash that will be paid out
Usually positive in a healthy firm
Liquidity
Ability to convert to cash quickly without a significant loss in value
Liquid firms are less likely to experience financial distress
But liquid assets earn a lower return
Trade-off to find balance between liquid and illiquid assets

16. U.S Corporation Balance Sheet

17. Income Statement
Profit and Loss Statement

18. Income Statement
The income statement is more like a video of the firm’s operations for a specified period of time.
You generally report revenues first and then deduct any expenses for the period

19. Operating income increased
Also known as operating income
Use to compare companies’ operating performance
Income Statement
2005
2004
Net Sales
Operating cost except depreciation
Earning before interest, taxes, and depreciation
3000.0
2616.2
383.8
2850.0
2497.0
353.0
Depreciation
Earning before interest and taxes
100.0
283.8
90.0
263.0
Less interest
Earning before taxes
88.0
195.0
60.0
203.0
Taxes
78.3
81.2
Net Income
117.5
121.8
Common dividend
57.5
53.0
Addition to retained earnings
68.8
Per-share Data:
Common stock price
Earning per-share(EPS)
Dividends per share (DPS)
23.0
2.35
1.15
26.0
2.44
1.06
Operating income increased
Net Income decline
EPS decrease
Most important to stock holder
Also known as `bottom line’
Dividend increased

20. US Corporation Income Statement

21. Income Statement Different company have
different financial structures
Different tax situation
Different amounts of non-operating assets
Income statement reports on operation over a period of time
Example: during 2005, company 2005 sales were RM3billion, Net income was RM117.5 mill
Income statement can cover any period of time, most companies prepared them monthly, quarterly and annually
Quarter and annual statement are released to investors
Monthly statement are used internally for
planning and control purpose,
comparing actual results with forecasted (budgeted) results
If revenues drop below or cost rise above the forecasted levels, company should find out WHY? And take corrective action before problem become serious.

22. Cash Flow

23. Cash Flow
A statement summarizing the firm’s revenues and expenses over an accounting period, generally a quarter or a year.
Accounting profits vs. Actual Cash Flows

24. Statement of Cash Flows
Statement that summarizes the sources and uses of cash
Changes divided into 3 major categories
Operating Activity – includes net income and changes in most current accounts
Investment Activity – includes changes in fixed assets
Financing Activity – includes changes in notes payable, long-term debt and equity accounts as well as dividends

25. Sources and Uses Sources Uses
Cash inflow – occurs when we “sell” something
Decrease in asset account
Accounts receivable, inventory, and net fixed assets
Increase in liability or equity account
Accounts payable, other current liabilities, and common stock
Uses
Cash outflow – occurs when we “buy” something
Increase in asset account
Cash and other current assets
Decrease in liability or equity account
Notes payable and long-term debt

26. The Concept of Cash Flow
Cash flow is one of the most important pieces of information that a financial manager can derive from financial statements
Show how cash is generated from utilizing assets and how it is paid to those that finance the purchase of the assets

27. Cash Flow
Pro Forma (projected) financial Statement
To Be Continued…..

28. - Roger Ward Babson, (1875–1967) American financial statistician
“More people should learn to tell their dollars where to go instead of asking them where they went.”
- Roger Ward Babson, (1875–1967) American financial statistician
March 2006

29. Reference
Brigham E.F. and Houston, J.F. (2007), ‘Essentials of Financial Management’, 1st edition, Cengage Learning.