FINAN303 Principles of Finance Spring Financial Statements Part B

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Beverly Young
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1 Financial Statements Part B 1. Recall: Home Depot s Most Recent 10-k (Annual Report) a. Balance Sheet b. Income Statement c. Statement of Cash Flows 2. Balance Sheet: Assets a. Assets: Probable future economic benefits obtained or controlled by the firm as a result of past transactions or events i. Current Assets ii. Long-Term Assets b. Current Assets: Cash and assets that will be (or are expected to be) converted into cash during the operating cycle or within a year i. Presented in order of liquidity ii. Major Items (Examples) 1. Cash and Equivalents a. Checking accounts, savings account, money market funds, etc. 2. Marketable Securities a. Debt or equity of other firms/governments 3. Accounts Receivable a. Amounts due from sales or services 4. Inventories a. Goods on hand b. Raw materials c. Work in process d. Finished goods c. Long-Term Assets i. Tangible Long-Term Assets 1. Major Items a. Land b. Buildings c. Machinery d. Accumulated depreciation ii. Long-Term Investments 1. Debt or equity securities a. Held-to-maturity iii. Intangible Assets 1. Major Items a. Goodwill b. Patents c. Trademarks d. Franchises e. Copyrights Office: MBEB garrettmcbrayer@boisestate.edu

2 3. Balance Sheet: Liabilities a. Liabilities: Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events i. Current Liabilities ii. Long-Term Liabilities b. Current Liabilities: Obligations whose liquidation is reasonably expected to require the use of existing current assets or the creation of other current liabilities within one year or the operating cycle, whichever is longer i. Presented in order due ii. Major Items 1. Accruals a. Expenses incurred but not paid 2. Payables a. Short-term obligations created by the acquisition of goods or services 3. Unearned Income a. Payments collected in advance of the performance of services or delivery of goods 4. Current portion of long-term debt c. Long-Term Liabilities: Due in a period beyond one year or operating cycle i. Related to 1. Financing arrangements 2. Operational obligations 4. Balance Sheet: Shareholder s Equity a. Equity: the amount of funds contributed by the owner plus retained earnings b. Major Categories i. Preferred Equity 1. Senior claim to the firm s assets 2. Most is non-voting 3. Not all firms have preferred stock ii. Common Equity 1. Residual claimants and legal owners 2. Voting rights 3. Types: a. Par b. Paid in surplus c. Retained Earnings d. Treasury Stock c. What affects Equity? Office: MBEB garrettmcbrayer@boisestate.edu

3 Item Net income Cash dividends Repurchase of shares Sale of new shares Exercise of executive and employee stock options Impact on Equity Decrease Decrease 5. Income Statement: Revenue a. The amount money a firm receives during a given period b. Requirements of GAAP i. The selling company has completed most of the activities associated with producing and selling the product. ii. The selling company has incurred the costs associated with producing and selling the product or can reasonably measure those costs. iii. The company can measure the amount of revenue it has earned. iv. The company can reasonably be sure that it is going to collect cash from the sale. 6. Income Statement: Expenses a. Cost-of-Goods-Sold (COGS) i. Cost of the product being sold ii. Depends on the type of firm as to what s included 1. E.g., manufacturers may include wages, whereas airlines may have no COGS. iii. Gross Profit = Revenue COGS b. Operating Expenses i. Include selling, administrative, and general expenses ii. EBITDA = Gross Profit Operating Expenses 1. EBITDA = Earnings before interest, taxes, depreciation, and amortization c. Depreciation and Amortization i. Non-cash expense ii. The spreading-out of capital expenditures over time 1. Match revenues with expenses d. Interest Expense (Income) i. The expense the firm pays (receives) on its debt obligations (investments) e. Other Income (Expense) i. One-time items which affect the firms revenues or expenses ii. Usually not a large number Office: MBEB garrettmcbrayer@boisestate.edu

4 iii. EBT = EBITDA Depreciation Net Interest Expense Other expenses 1. EBT = Earnings before taxes f. Taxes i. Uncle Sam needs to get paid! g. Net Income = EBT Taxes i. Extraordinary income (charges) are added (subtracted) from net income ii. You may encounter net income from continuing operations and net income from discontinued operations iii. Cash dividends are subtracted from net income; the difference is added to (or subtracted from) retained earnings from the prior period s balance sheet h. Free Cash Flow (FCF) i. Statements are designed for use by creditors and tax collectors. Numbers can be misleading. 1. For example, net income numbers are muddy. They include: a. Non-cash expenses b. The effects of financing decisions 2. Free cash flow: the amount of cash that could be withdrawn without harming the firm s ability to operate and produce future cash flows FCF = [EBIT(1 T) + Dep. & Amor. ] [Capex + ΔNOWC] a. EBIT = earnings before interest and taxes b. T = tax rate c. Dep. & Amor. = Depreciation and amortization d. Capex = capital expenditures e. NOWC = change in net operating working capital i. ΔNOWC = ΔCurrent Assets (ΔCurrent Liabilities ΔNotes Payable) i. Earnings per Share i. Net income divided by number of outstanding shares 1. Number of outstanding shares is not necessarily the actual number of shares outstanding at the end of the fiscal period; it s more of a weighted average of the shares outstanding during the period 2. Historical per share figures should be calculated using the most recent figure for outstanding shares 3. In the example below, the firm splits its stock 2 for 1 in 2010 Office: MBEB garrettmcbrayer@boisestate.edu

5 Year Earnings Number of Shares Earnings per Share (original) Earnings per Share (adjusted) 2010 $150 m 100 m $1.50 $ $125 m 50 m $2.50 $ $100 m 50 m $2.00 $1.00 Office: MBEB garrettmcbrayer@boisestate.edu

Ratio Analysis. A) Liquidity Ratio : - 1) Current ratio = Current asset Current Liability

Ratio Analysis. A) Liquidity Ratio : - 1) Current ratio = Current asset Current Liability A) Liquidity Ratio : - Ratio Analysis 1) Current ratio = Current asset Current Liability 2) Quick ratio or Acid Test ratio = Quick Asset Quick liability Quick Asset = Current Asset Stock Quick Liability