1. Financial Statements (Ch 2 & 3) The Balance Sheet The Income Statement Taxes Free Cash Flow/Cash Flow From Assets Ratio Analysis Financial Statement (Ch2&3) – Fin301 1

2. 2 1. The Balance Sheet

3. Financial Statement (Ch 2&3) –Fin301 3 Balance Sheet Assets and Liabilities Net Working Capital liquidity Debt versus Equity Market Value versus Book Value

4. Financial Statement (Ch 2&3) –Fin301 4 GAAP General Accepted Accounting Principles: The Common Set of Standards and Procedures by which Audited Financial Statements are Prepared. show assets at historical costs

5. Financial Statement (Ch 2&3) –Fin301 5 2. Income Statement Income Statement actual cash flow versus realized revenues and expenses  accrual and matching  depreciation

6. Financial Statement (Ch 2&3) –Fin301 6 Marginal versus Average Corporate Tax Rates  What are marginal corporate tax rates?  What are average corporate tax rates at the top of each bracket? Marginal and average tax rates under the 1993 Omnibus Budget Reconciliation Act Taxable IncomeMarginal Tax Cumulative Average Tax RatesTax LiabilityRates $0 - 50,00015% 50,001 - 75,00025% 75,001 - 100,000 34% 100,001 - 335,00039% 335,001 - 10 mil34% 10 mil - 15 mil35% 15 mil - 18.33 mil38% 18.33 mil +35%

7. Financial Statement (Ch 2&3) –Fin301 7 4. Cash Flow  Cash flow from assets Cash flow from assets = Operating cash flow – Net capital spending – Additions to net working capital (NWC) where Operating cash flow = Earnings before interest and taxes (EBIT) + Depreciation – Taxes Net capital spending = Ending net fixed assets – Beginning net fixed assets + Depreciation Change in NWC = Ending NWC – Beginning NWC (NWC: net working capital)

8. Financial Statement (Ch 2&3) –Fin301 8 Balance Sheet BegEndBegEnd Cash$100$150A/P$100$150 A/R200250N/P200200 Inv300300C/L300350 C/A$600$700LTD$400$420 NFA400500C/S5060 R/E250370 $300$430 Total$1000$1200Total$1000$1200

9. Financial Statement (Ch 2&3) –Fin301 9 Income Statement Sales$2000 Costs1400 Depreciation100 EBIT500 Interest100 Taxable Income 400 Taxes200 Net Income$200 Dividends$_____ Addition to R/E _____

10. Financial Statement (Ch 2&3) –Fin301 10 Cash Flow from Assets (free Cash Flow Calculation) 1.Operating cash flow= EBIT + _____________ – Taxes = $500 + 100 – 200 = $_____ 2.Change in NWC= ___________ – ___________ = $350 – $_____ = $_____ 3.Net capital spending= $_____ + Dep – _____ = $500 + 100 – 400 = $_____ 4.Cash flow from assets=OCF – chg. NWC – Cap. sp. = $400 – 50 – 200 = $150

11. Financial Statement (Ch 2&3) –Fin301 11 5. Financial Ratios Short-Term Solvency, or Liquidity  Ability to pay bills in the short-run Long-Term Solvency, or Financial Leverage  Ability to meet long-term obligations Asset Management, or Turnover  Intensity and efficiency of asset use Profitability  The ability to control expenses Market Value  Going beyond financial statements

12. Financial Statement (Ch 2&3) –Fin301 12 A. Short-term Solvency, Liquidity Ratios Current assets Current ratio = Current liabilities Quick ratio = (Current assets - inventory) / Current liabilities Cash ratio = Cash / Current liabilities Current assets Interval measure = Average daily operating costs

13. Financial Statement (Ch 2&3) –Fin301 13 Du Pont Identity Return on Equity (ROE) Return on Assets (ROA)

14. Financial Statement (Ch 2&3) –Fin301 14 B. Long-term Solvency, or Financial Leverage Ratios Total assets - Total equity Total debt ratio = Total assets Debt/equity ratio = Total debt/Total equity Equity multiplier = Total assets/Total equity Long-term debt Long-term debt ratio = Long-term debt + Total equity EBIT Times interest earned ratio = Interest EBIT + depreciation Cash coverage ratio = Interest

15. Financial Statement (Ch 2&3) –Fin301 15 C. Asset Utilization, or Turnover Ratios Cost of goods sold Inventory turnover = Inventory 365 days Days’ sales in inventory = Inventory turnover Sales Receivables turnover = Accounts receivable 365 days Days’ sales in receivables = Receivables turnover Sales NWC turnover = NWC Sales Fixed asset turnover = Net fixed assets Sales Total asset turnover = Total assets

16. Financial Statement (Ch 2&3) –Fin301 16 D. Profitability Ratios Net income Profit margin = Sales Net income Return on assets (ROA) = Total assets Net income Return on equity (ROE) = Total equity

17. Financial Statement (Ch 2&3) –Fin301 17 E. Market Value Ratios Price per share Price-earnings ratio = Earnings per share Market value per share Market-to-book ratio = Book value per share