1. 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 )

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

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

9. 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.

10. 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

11. 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.

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

13. 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.

14. 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.

15. 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.

16. 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.

17. 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

18. 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.

19. 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.

20. 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.

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. Financial Statement : Financial Cash Flow
Cash Flow to Creditors
Interest $49
Retirement of debt
Debt service 122
Proceeds from new debt sales
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

34. 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
Cash to Stockholders 49
Proceeds from new stock issue
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

35. 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

36. 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

37. 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

38. 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.

39. 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.

40. THE END