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Ch. 2


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  • 1. Financial Statement and Cash Flow Analysis Chapter 2
  • 2. Financial Statements Accrual-based approach
    • Revenues are recorded at the point of sale and costs when they are incurred, not necessarily when a firm receives or pays out cash.
    Cash flow approach
    • Used by financial professionals to focus attention on current and prospective inflows and outflows of cash.
  • 3. Financial Statements
      • Financial Statements
    Statement of Retained Earnings Balance Sheet Income Statement Statement of Cash Flows Notes to Financial Statements
  • 4. Balance Sheet
    • A firm’s balance sheet presents a “snapshot” view of the company’s financial position at a specific point in time.
    assets = liabilities + stockholders’ equity
  • 5. Balance Sheet for Global Petroleum Corporation
  • 6. Income Statement
    • Income is also called profit, earnings, or margin.
    Income = revenue  expenses Measures of Income
    • Gross profit
    • Operating profit
    • Other income
    • Earnings before interest and taxes
    • Pretax income
    • Net income / net profit after taxes
  • 7. Income Statement for Global Petroleum Corporation
  • 8. Statement of Retained Earnings
    • The statement of retained earnings reconciles
    • the net income earned during a given year, and any cash dividends paid,
    • with the change in retained earnings between the start and end of that year.
  • 9. Statement of Retained Earnings for Global Petroleum Corporation
  • 10. Financial Statements Statement of Cash Flows
    • Reconciles
    • the firm’s operating, investment, and financing cash flows
    • with changes in its cash and marketable securities
    • during the year.
    Notes to Financial Statements
    • Explanatory notes
    • that provide detailed information on the accounting policies, calculations, and transactions
    • underlying entries in the financial statements.
  • 11. Cash Flow Analysis
    • Although financial managers are interested in the information contained in the firm’s accrual-based financial statements, their primary focus is on cash flows.
    • Without adequate cash to pay obligations on time, to fund operations and growth, and to compensate owners, the firm will fail.
  • 12. The Firm’s Cash Flows
  • 13. Free Cash Flow
    • Operating cash flow
      • = earnings before interest and taxes
      •  taxes
      • + depreciation
    • Free cash flow
      • = operating cash flow
      •  change in gross fixed assets
      •  change in current assets
      • + change in account payables
      • + change in accrued liabilities
  • 14. Inflows and Outflows of Cash
  • 15. Statement of Cash Flows for Global Petroleum Corporation
  • 16. Analyzing Financial Performance Using Ratio Analysis Liquidity Ratios
    • Measure a firm’s ability to satisfy its short-term obligations as they come due.
    Activity Ratios
    • Measure the speed at which a firm converts various accounts into sales or cash.
    Debt Ratios
    • Measure the proportion of total assets financed by a firm’s creditors.
    Profitability Ratios
    • Relate a firm’s earnings to its sales, assets, or equity.
    Market Ratios
    • Relate a firm’s market value to certain accounting values.
  • 17. Using Financial Ratios Benchmark 1
    • Analysts compare the current year’s financial ratios with previous years’ ratios
    • to identify trends that help them evaluate the firm’s prospects.
    Benchmark 2
    • Analysts compare the ratios of one company with those of other firms in the same industry.
  • 18. Liquidity Ratios
  • 19. Activity Ratios
  • 20. Debt Ratios
  • 21. Profitability Ratios
  • 22. Profitability Ratios
  • 23. Profitability Ratios
    • DuPont System of Analysis
  • 24. Market Ratios
  • 25. Corporate Taxes Corporate taxes represent a significant cash outflow. Ordinary corporate income
    • Progressive tax rate schedule
    • Average tax rate: tax divided by the pretax income
    • More relevant for financial decision making: marginal tax rate
    Corporate capital gains
    • Under existing tax laws, ordinary income tax rates apply
  • 26. Financial Statement and Cash Flow Analysis
    • Balance Sheet
    • Income Statement
    • Cash Flow Analysis
    • Liquidity Ratios
    • Activity Ratios
    • Debt Ratios
    • Profitability Ratios
    • Market Ratios