Finance School of management Chapter 3: Interpreting Financial statements Objective Contrast Economic and Accounting models Value of Accounting Information ue sTc
1 Finance School of Management Chapter 3: Interpreting Financial Statements Objective Contrast Economic and Accounting Models Value of Accounting Information
Finance School of management Chapter 3 Contents Review of financial The relation Among Statements Ratios Market values v book Limitations of ratio Values Analysis Accounting v economic Purpose and Process of Measures of income Financial planning Return on Shareholders V. Managing Working Return on equity Capita Analysis Using Financial Ratios uesTc
2 Finance School of Management Chapter 3 Contents ❖ Review of Financial Statements ❖ Market Values v. Book Values ❖ Accounting v. Economic Measures of Income ❖ Return on Shareholders v. Return on Equity ❖ Analysis Using Financial Ratios ❖ The Relation Among Ratios ❖ Limitations of Ratio Analysis ❖ Purpose and Process of Financial Planning ❖ Managing Working Capital
Finance School of management Review of financial statements Financial statements Provide information (clues) to the owners creditors of a firm about the current status and past performance. Provide a convenient way for owners creditors to set performance targets to impose restrictions on the managers of the firm. Provide a convenient templates for financial banning pl uesTc
3 Finance School of Management Review of Financial Statements ❖ Financial Statements – Provide information (clues) to the owners & creditors of a firm about the current status and past performance. – Provide a convenient way for owners & creditors to set performance targets & to impose restrictions on the managers of the firm. – Provide a convenient templates for financial planning
Finance School of management The Balance sheet Summarizing a firms assets(what it owns ), liabilities(what it owes), and net worth(owners equity) at a moment in time Amounts measured at historical values(acquisition cost)and historical exchange rates. Prepared according to gaaP(Generally accepted Accounting Principles) Exchange-listed companies must comply with seC (Securities and Exchange commission) rules uesTc
4 Finance School of Management The Balance Sheet ❖ Summarizing a firm’s assets (what it owns), liabilities (what it owes), and net worth (owners’ equity) at a moment in time. – Amounts measured at historical values (acquisition cost) and historical exchange rates. – Prepared according to GAAP (Generally Accepted Accounting Principles). – Exchange-listed companies must comply with SEC (Securities and Exchange Commission) rules
Finance School of management The Balance Sheet Major divisions Assets Current assets (less than a year) Long-term assets (longer than a year) Depreciation Liabilities and stockholder's equity Liabilities Current liabilities Net Working Capital= Current Assets-Liabilities Long-term debt equity uesTc
5 Finance School of Management ❖ Major Divisions – Assets ✓ Current assets (less than a year) ✓ Long-term assets (longer than a year) – Depreciation – Liabilities and Stockholder’s Equity ✓ Liabilities – Current Liabilities Net Working Capital = Current Assets - Liabilities – Long-term debt ✓ Equity The Balance Sheet
Finance GPC Balance Sheet at Dec 31.2Xx1 School of management 2XXO 2XX1 Change Assets Cash mkt ble secs 100.0 120.0 20.0 Receivables 50.0 60.0 10.0 Inventories 150.0 180.0 *Current assets 300.0 360.0 60.0 Market price Per share Pp&e 400.0 490.0 90.0 Acc depreciation (100.0)(130.0)(30.0 2XXO 2XX1 *Net pp&e 300.0 360.0 60.0 20001872 **Total Assets 600.0 720.0 120.0 Accounts payable 60.0 72.0 12.0 Short-term debt 90.0 184.6 94.6 *Current liabilities 150.0 256.6 106.6 Long-term debt 150.0 150.0 **Total liabilities 300.0 406.6 106.6 Paid-in capital 200.0 200.0 Retained earnings 100.0 113.4 13.4 Shareholders equ 300.0 313.4 13.4 uesTc Liab t shareholder 600.0 720.0 120.0
6 Finance GPC Balance Sheet at Dec 31, 2xx1 School of Management 2xx0 2xx1 200.0 187.2 Market Price Per Share 2xx0 Change Assets Cash & mkt'ble secs 100.0 120.0 20.0 Receivables 50.0 60.0 10.0 Inventories 150.0 180.0 30.0 *Current assets 300.0 360.0 60.0 Pp&e 400.0 490.0 90.0 Acc depreciation (100.0) (130.0) (30.0) *Net pp&e 300.0 360.0 60.0 **Total Assets 600.0 720.0 120.0 Liabilities & Equity Accounts payable 60.0 72.0 12.0 Short-term debt 90.0 184.6 94.6 *Current liabilities 150.0 256.6 106.6 Long-term debt 150.0 150.0 - **Total liabilities 300.0 406.6 106.6 Paid-in capital 200.0 200.0 - Retained earnings 100.0 113.4 13.4 *Shareholders equ 300.0 313.4 13.4 Liab + Shareholder 600.0 720.0 120.0 2xx1
Finance School of management The Income statement Summarizing the profitability of a company during a time period the difference of revenues and expenses also to be called the statement of the earnings or the statement ofprofit and loss uesTc
7 Finance School of Management The Income Statement ❖ Summarizing the profitability of a company during a time period. – the difference of revenues and expenses – also to be called the statement of the earnings or the statement of profit and loss
Finance School of management The Income statement Major Divisions Revenue cost of goods sold Gross margin General selling and administrative expenses (GS&a) Operating income Interest expense Taxable income Corporate Taxes Net income uesTc
8 Finance School of Management ❖ Major Divisions – Revenue & cost of goods sold ✓ Gross margin – General selling and administrative expenses (GS&A) ✓ Operating income – Interest expense ✓ Taxable income – Corporate Taxes ✓ Net income The Income Statement
Finance School of management GPC Income Statement for Year Ending 2XX1 Sales revenues 200.0 Cost of goods sold (110.0) Gross margin 90.0 Gen sell,& admin exp (30.0) Operating income 60.0 Interest expense (21.0) *taxable income 39.0 Income tax (156) Net income 23,4 Allocation to divs (10.0) *Chg retained earn 13.4 uesTc
9 Finance School of Management GPC Income Statement for Year Ending 2xx1 Sales revenues 200.0 Cost of goods sold (110.0) *Gross margin 90.0 Gen sell, & admin exp (30.0) *Operating income 60.0 Interest expense (21.0) *Taxable income 39.0 Income tax (15.6) *Net income 23.4 Allocation to divs (10.0) *Chg retained earn 13.4
Finance School of management The Income statement It is important to remember Retained earnings are not added to the cash balance of the firm but are added to shareholders equit Accounts show historical values. not market values uesTc 10
10 Finance School of Management ❖ It is important to remember – Retained earnings are not added to the cash balance of the firm, but are added to shareholder’s equity. – Accounts show historical values, not market values. The Income Statement