1. LECTURE “0” (SELF STUDY) Introduction to Financial Satement Analysis Berk, De Marzo Chapter 2

2. Types of Financial Statements 1. Balance Sheet: A snapshot in time of the firm’s financial position. Assets= liabilities +equity Current Assets: Cash or expected to be turned into cash in the next year-Cash, Marketable Securities, Accounts Receivable, Inventories, Other Current Assets, Example: Pre-paid expenses. Long-Term Assets: Net Property, Plant, & Equipment: Depreciation (and Accumulated Depreciation) Book Value = Acquisition cost – Accumulated depreciation Goodwill and intangible assets: Amortization Other Long-Term Assets: Example: Investments in Long-term Securities Liabilities Current Liabilities: Due to be paid within the next year Accounts Payable, Short-Term Debt/Notes Payable, Current Maturities of Long-Term Debt, Other Current Liabilities, Taxes Payable, Wages Payable Long-Term Liabilities: Long-Term Debt, Capital Leases, Deferred Taxes 2

3. Global Conglomerat e Corporation Balance Sheet for 2012 and 2011 3

4. 4

5. Financial Satement Analysis Stockholder’s Equity Book Value of Equity Book Value of Assets – Book Value of Liabilities Could possibly be negative Many of the firm’s valuable assets may not be captured on the balance sheet Market Value of Equity (Market Capitalization) Market Price per Share x Number of Shares Outstanding Cannot be negative Often differs substantially from book value Market Value Versus Book Value 5

6. Financial Satement Analysis 2. Income Statement: Total Sales/Revenues - Cost of Sales= Gross Profit Gross Profit-Operating Expenses (Selling, General, and Administrative Expenses, R&D, Depreciation & amortization)=Operating Income Operating Income +/- Other Income/Other Expenses= Earnings Before Interest and Taxes (EBIT) EBIT-/+Interest Income/Interest Expense=Pre-Tax Income-Taxes=Net Income. EPS= Earnings Per Share 6

7. Global Conglomerate Corporation Income Statement Sheet for 2012 and 2011 7

8. Financial Satement Analysis Statement of Cash Flows: applies the information from the income statement and balance sheet to determine how much cash the firm has generated and allocated during a set period. Three Sections Operating Activities: Adjusts net income by all non-cash items related to operating activities and changes in net working capital Investment Activities: Capital Expenditures and Buying or Selling Marketable Securities Financing Activities: Payment of Dividends Retained Earnings = Net Income – Dividends 8

9. Global Conglomerate Corporation Statement of Cash Flows for 2012 and 2011 9

10. Financial Statement Analysis Profitability Ratios 10

11. Financial Statement Analysis Liquidity Ratios Current Ratio Current Assets / Current Liabilities Cash Ratio Cash / Current Liabilities 11

12. Financial Statement Analysis Working Capital Ratios Accounts Receivable Days Accounts Payable Days Inventory Days 12

13. Financial Statement Analysis Working Capital Ratios Accounts Receivable Turnover Accounts Payable Turnover Inventory Turnover 13

14. Financial Statement Analysis Interest Coverage Ratios EBIT/Interest EBITDA/Interest EBITDA = EBIT + Depreciation and Amortization 14

15. Financial Statement Analysis Leverage Ratios Debt-Equity Ratio Debt-to-Capital Ratio 15

16. Financial Statement Analysis Leverage Ratios Net Debt Total Debt + Excess Cash & Short-Term Investments Debt-to-Enterprise Value Equity Multiplier Total Assets / Book Value of Equity 16

17. Financial Statement Analysis Valuation Ratios –P/E Ratio –Enterprise Value to EBIT –Enterprise Value to Sales 17