1. Chapter 3

2. Understanding Financial Statements and Cash Flows

3. Income Statement SALES SALES - EXPENSES - EXPENSES = PROFIT = PROFIT Cost of Goods SoldCost of Goods Sold Operating ExpensesOperating Expenses (marketing, administrative) (marketing, administrative) Financing CostsFinancing Costs

4. Income Statement SALES SALES - EXPENSES - EXPENSES = PROFIT = PROFIT Cost of Goods SoldCost of Goods Sold Operating ExpensesOperating Expenses (marketing, administrative) (marketing, administrative) Financing CostsFinancing Costs TaxesTaxes

5. Assemble an Income Statement n Oper. Income (EBIT) n Sales n Interest n Earnings before taxes (EBT) n Gross Profit n Net Income n Net income available to Common Stockholders n COGS n Preferred Stock Dividends n Operating Expenses n Income Taxes

6. SALES SALES - Cost of Goods Sold GROSS PROFIT GROSS PROFIT - Operating Expenses OPERATING INCOME (EBIT) OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) EARNINGS BEFORE TAXES (EBT) - Income Taxes NET INCOME NET INCOME - Preferred Stock Dividends - NET INCOME AVAILABLE TO COMMON STOCKHOLDERS TO COMMON STOCKHOLDERS Income Statement

7. SALES SALES - Cost of Goods Sold GROSS PROFIT GROSS PROFIT - Operating Expenses OPERATING INCOME (EBIT) OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) EARNINGS BEFORE TAXES (EBT) - Income Taxes NET INCOME NET INCOME - Preferred Stock Dividends - NET INCOME AVAILABLE TO COMMON STOCKHOLDERS TO COMMON STOCKHOLDERS Income Statement

8. SALES SALES - Cost of Goods Sold GROSS PROFIT GROSS PROFIT - Operating Expenses OPERATING INCOME (EBIT) OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) EARNINGS BEFORE TAXES (EBT) - Income Taxes NET INCOME NET INCOME - Preferred Stock Dividends - NET INCOME AVAILABLE TO COMMON STOCKHOLDERS TO COMMON STOCKHOLDERS Income Statement

9. Balance Sheet Total Assets = Total Assets = OutstandingDebt+Shareholders’Equity

10. Balance Sheet Assets Liabilities (Debt) & Equity

11. Assemble a Balance Sheet n Machinery Marketable Securities n Notes Payable S.T. Accounts Receivable n Retained Earnings Accounts Payable n Accrued Expenses Bldgs & Land n Common stock (par Patents (intangibles) n Prepaid Expenses Long Term Notes n Inventories Cash n Mortgages Paid in Capital n Preferred Stock Investments

12. Balance Sheet Assets Liabilities (Debt) & Equity Current Assets Current Assets Cash Cash Marketable Securities Marketable Securities Accounts Receivable Accounts Receivable Inventories Inventories Prepaid Expenses Fixed Assets Machinery & Equipment Machinery & Equipment Buildings and Land Buildings and Land Other Assets Investments & patents Current Liabilities Accounts Payable Accounts Payable Accrued Expenses Accrued Expenses Short-term notes Long-Term Liabilities Long-term notes MortgagesEquity Preferred Stock Common Stock (Par value) Paid in Capital Paid in Capital Retained Earnings Retained Earnings

13. Statement of Cash Flows: Even if a company reports a large net income during a year, the amount of cash reported on its year-end balance sheet may be the same or even lower than its beginning cash. To solve for the reasons why cash has changed you look at the Income Statement for the period and the change in the balance sheet over that same year.

14. Calculating the Cash Flow Stmt n Shows the actual cash flows generated by the firm for the year broken down into three areas. THREE AREAS 1.Cash Flow from Operations 2.Cash Flow from Investments (acquired or sold) 3.Cash Flow from Financing receipts or payments