Your SlideShare is downloading. ×
Chapter 3: Interpreting Financial Statements
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Chapter 3: Interpreting Financial Statements

625
views

Published on

Published in: Economy & Finance, Business

0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
625
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
43
Comments
0
Likes
1
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide
  • Transcript

    • 1. Chapter 3: Interpreting Financial Statements Copyright © Prentice Hall Inc. 2000. Author: Nick Bagley, bdellaSoft, Inc. Objective Contrast Economic and Accounting Models <=> Value of Accounting Information
    • 2. Financial Statements Review
        • Financial Statements Provide:
          • current and historical information to owners and creditors
          • a convenient way for owners and creditors to set performance targets
          • a convenient standard template for financial planning
    • 3. Chapter 3 Contents
      • 3.1 Functions of Financial Statements
      • 3.2 International Differences in Accounting
      • 3.3 Market values v. Book Values
      • 3.4 Accounting v. Economic Measures of Income
      • 3.5 Return on Shareholders v. Return on Equity
      • 3.6 Analysis Using Financial Ratios
      • 3.7 The Financial Planning Process
      • 3.8 Constructing a Financial Planning Model
      • 3.9 Growth & the Need for External Financing
      • 3.10 Working Capital Mgnt.
      • 3.11 Liquidity & Cash Mgnt.
    • 4. 3.1 Functions of Financial Statements
      • Financial Statements:
        • Provide information 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 of the managers of the firm
        • Provide a convenient templates for financial planning
    • 5. 3.2 Review of Financial Statements
    • 6. The Balance Sheet
      • Summarizes a firms assets, liabilities, and owner’s equity at a moment in time
      • Amounts measured at historical values and historical exchange rates
      • Prepared according to GAAP, G enerally A ccepted A ccounting P rinciples
        • GAAP modified occasionally by the Financial Accounting Standards Board
      • Exchange-listed companies must comply with S ecurities and E xchange C ommission (SEC) rules
    • 7. 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
            • Long-term debt
          • Equity
    • 8.  
    • 9. The Income Statement
      • Summarizes the profitability of a company during a time period
      • Major Divisions:
        • Revenue & cost of goods sold
              • Gross margin
        • General administrative and selling expenses (GS&A)
              • Operating income
        • Debt service
              • Taxable income
        • Corporate Taxes
              • Net income
    • 10. The Income Statement
      • Important Reminders:
        • Retained earnings are not added to the cash balance in the balance sheet, but are added to shareholder’s equity
        • Accounts show historical values, not market values.
          • The shareholder’s equity may be much higher or lower than the market value of the firm.
            • The value of the firm’s land may have halved or doubled, but this would not be reported in the balance sheet
    • 11.  
    • 12. The Cash-Flow Statement
      • Show the cash that flowed into and from a firm in during a time period
        • Focuses attention on a firm’s cash situation
          • A firm may be profitable and short of cash
        • Unlike the balance sheet and income statement, cash flow statements are independent of accounting methods
          • The IRS uses accounting income to compute tax, so accounting rules have a second order effect on cash flows through taxes
    • 13.  
    • 14.  
    • 15. 3.4 Returns to Shareholders v. Return on Equity
      • Recall our definition in Chapter 2 of the holding period return, and compare this with the economic measure of income
      • This is the Total Shareholder Return
    • 16. Returns to Shareholders v. Return on Equity (Continued)
      • Traditionally, corporate performance has been measured by Return on Equity, ROE
    • 17. Profitability
    • 18. Asset Turnover
    • 19. Financial Leverage
    • 20. Liquidity
    • 21. Market Value
    • 22. Ratio Comparisons
      • Establish Your Perspective
          • Shareholder
          • employee, Management, or Union
          • Creditor
          • Predator, Customer, Supplier, Competitor, Trade Association
      • Benchmarks
          • Other companies ratios
          • The firm’s historical ratios
          • Data extracted from financial markets
      • Sources
          • Dun & Bradstreet, Robert Morris, Commerce Department's Quarterly Financial Report, Trade Associations
    • 23. Relationships Amongst Ratios
      • It is sometimes valuable to decompose ratios into sums, differences, products and quotients of other ratios. Many such schemes start with:
    • 24. Illustration
      • (Table 3.7 & 3.8 of textbook)
        • Consider two firms that are identical except that Nodebt is financed using $1,000,000 of equity and Halfdebt is financed using $500,000 of equity and $500,000 of debt
        • further assume that the EBIT of both firms is $120,000 and tax is 40%
    • 25. Case: Borrow at 10%
    • 26. Case: Borrow at 15%
    • 27. Case: Borrow at 10%: Effect of Business Cycle on ROE
    • 28.  
    • 29.  
    • 30.  
    • 31.  
    • 32.  
    • 33.  
    • 34.  
    • 35.  
    • 36. External Funds Needed
    • 37.  
    • 38. Observation:
        • Sometimes the new assets required to generate income are not a high as in this example, and the company may able to support a level of growth with no external funding (-0.00038 in our case)