1. Intro to Financial Management
Understanding Financial Statements and Cash Flows

2. Review Homework What are spot and future markets? What is a spread?
What are nominal rates?
What are real rates?
What types of risk are involved in interest rates?
How do you calculate real returns?
How do you calculate simple, one-period, future values?
What is liquidity?
What is the Yield Curve?

3. The Income Statement Calculates the firm’s profit
Amount Sales $100 COGS 45 _ Gross profit 55 Sales, General & Admin. 28 R&D 7 _ Operating income (EBITDA) 20 Interest, taxes, depreciation 15 _ Net income 5

4. The Income Statement Calculates the firm’s profit
Amount Pct. of Sales
Sales $ %
COGS % _
Gross profit %
Sales, General & Admin %
R&D % _
Operating income (EBITDA) %
Interest, taxes, depreciation % _ Net income %

5. The Income Statement Calculates the firm’s profit
Sales
COGS
Gross profit
Sales, General & Admin.
R&D
Operating income (EBITDA)
Interest
taxes
depreciation
Net income
Operations
run by COO
Finance
run by CFO

6. Income Statement Common-sized statement Gross profit margin
Operating profit margin (EBIT)
Net profit margin
Earnings
Earnings per share

7. Balance Sheet Shows what a company is worth
Amount Assets Current Assets Cash $20 Accounts Receivable 45 Inventory 135 Long-term Assets (Fixed) Plant & Equipment 1,000 Liabilities & Owners Equity Current liabilities Short-term loans 15 Accounts Payable 35 Long-term Liabilities Long-term debt 500 Stockholders’ Equity Capital 150 Retained Earnings 500

8. Balance Sheet Shows what a company is worth
Amount Pct. of Assets Assets Current Assets Cash $20 2% Accounts Receivable 45 4% Inventory % Long-term Assets (Fixed) Plant & Equipment 1,000 83% Liabilities & Owners Equity Current liabilities Short-term loans 15 1% Accounts Payable 35 3% Long-term Liabilities Long-term debt % Stockholders’ Equity Capital % Retained Earnings %

9. Balance Sheet Common-sized Book value
Gross working capital = current assets
Net working capital = current assets – current liabilities
Debt ratio
Leverage ratio

10. Cash Flows Profits are not cash Free cash flow = cash after operations
Cash flow statement
Cash flows
From operations
= net income – chg in A/R – chg assets – chg inventory
From investing in fixed assets
From financing
Borrowing (cash in)
Selling stock (cash in)
Dividends (cash out)
Working capital = current assets – current liabilities

11. Cash Flow Statement
Amount Net income (from Income Statement) $5 Adjustments from operations Depreciation 6 Cash from investing Investment in plant, property, & equipment (10) Cash from financing Debt issued 10 Dividends (9) Net Change in Cash 2

12. Income Taxes and Finance
Taxable income
Operating income
Capital gains
Gain (loss) from sale of assets
Tax deductions
Interest expense
Depreciation expense
Not dividend payments
Marginal tax rates
Tax rate on the next dollar earned

13. Marginal vs. Average Rates
Example:
If tax rates are:
$0 - $9, %
$10,000 - $24,999 10%
$25,000 - $40,000 20%
You earn $28,000
How much tax do you pay?
What are your marginal and average tax rates?
ALWAYS use marginal rates for financial decisions.

14. In Class Excel Exercise
Create a common sized income statement and balance sheet
Change
Revenues
Some expense
Asset

15. Equity Types of equity Common stock Preferred stock Retained earnings
Free cash flow = cash after operations = net income
- change in A/R
- change in assets
- change in inventory
Can you do it? P. 68