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Analysis of Financial statements of ABC Inc
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Analysis of Financial statements of ABC Inc

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  • 1.  
  • 2.
    • A financial statement is a quantitative way of showing how a company is doing.
    • Information reported in the Financial Statements:
    1. How well the company perform during the year? Income Statement
    • Revenues
    • Expenses
    • Net Income (or Net Loss)
    2. Why did the company’s retained earnings change during the year? Statement of Retained earnings Beginning Retained Earnings + Net Income (or – Net Loss) - Dividends Ending Retained Earnings 3. What is the company’s financial position at December 31? Balance Sheet Assets = Liabilities + Owners’ Equity 4. How much cash did the company generate and spend during the year? Statement of Cash Flows Operating cash flows ± Investing cash flows ± Financing cash flows Increase (decrease) in cash
  • 3.
    • Measures operating performance over a particular period of time
    Operating Revenues − Operating Expenses = Operating Income + Other Revenues − Other Expenses = Net Income before Taxes − Income Taxes = Net Income after Taxes / Number of Shares = Income per Share
  • 4.
    • Sales
    • Interest from firm’s investments (e.g., a company savings account)
    • Royalty and Licensing payments for appropriate use of firm’s intellectual property Another source of cash inflow, but not a revenue is the cash the firm receives from borrowing money.
  • 5.
    • There are two types of expenses:
    • Fixed Costs
    • Variable Costs
  • 6.
    • Rent payments
    • Salaried employees
    • Capital Investments and maintenance
    • Utilities (phone, water, electric, etc)
    • Insurance
    • Taxes (on property, plant, and equipment)
    • Advertising
  • 7.
    • Materials Cost
    • Supplies
    • Production Wages
    • Outside / Contracted labor
    • Advertising
    • Sales Commissions / Distribution Costs
    • Equipment Maintenance
  • 8. ABC, Inc. Income Statement Years Ended December 31, 2008 and 2007 2008 2007 Net Sales $ 3000.0 $2850.0 Operating costs excluding depreciation and amortization 2616.2 2497.0 Earnings before interest, taxes, depreciation, and amortization (EBITDA) $ 383.8 $353.0 Depreciation $ 100.0 $90.0 Amortization 0.0 0.0 Depreciation and Amortization $100.0 $90.0 Earnings before interest and taxes (EBIT or operating income) $283.8 $263.0 Less Interest 88.0 60.0 Earnings before taxes (EBT) $195.8 $203.0 Taxes (40%) 78.3 81.2.0 Net Income $117.5 $121.8.0
  • 9.
    • Tells us how much of the net income has been retained by the company
    • and how much has been paid out to the shareholders.
    • Companies retain profits to finance operations and capital expenditures and to pay off debt.
    • The rest is usually returned to the shareholders in the form of dividends.
    • Retained earnings is a cumulative measure of the amount of company assets that comes from profitable operations rather than fund raising (debt or equity).
    Beginning retained earnings balance + Net Income − Dividends = Ending retained earnings balance
  • 10. ABC, Inc. Statement of Retained Earnings Years Ended December 31, 2008 Balance of Retained earnings, Dec 31, 2007 $ 710.0 Add: Net Income, 2008 113.5 Less: Dividends (57.5) Balance of Retained earnings, Dec 31, 2008 $766.0
  • 11.
    • The balance sheet provides a picture of the company’s financial situation at one point in time. It is based on the fundamental accounting equation:
    • Assets = Liabilities + Equity
    • The shareholders own the company.
    • It’s net worth is (Assets – Liabilities) = Equity.
    • Assets: Items and right acquired through objectively measurable transactions that can be used in the future to generate economic benefits.
    • Liabilities: Primarily a firm’s debt and payables. The total amount of liabilities is the portion of assets that a firm has borrowed and must repay.
    • Stockholders’ Equity Consists of contributed capital and retained earnings.
  • 12.
    • Assets
    • Current assets
      • Cash
      • Short-term investments
      • Accounts receivable
      • Inventory
      • Prepaid expenses
    • Long-term investments
      • Notes receivable
      • Land
      • Debt securities
      • Equity securities
    • Property, plant equipment
    • Intangible assets
    • Liabilities
    • Current liabilities
      • Accounts payable
      • Other payables
      • Current maturities of long-term debt
      • Deferred revenues
    • Long-term liabilities
      • Notes payable
      • Bonds payables
      • Mortgage payable
    • Equity
    • Contributed capital
    • Retained earnings
  • 13. ABC, Inc. Balance Statement Years Ended December 31, 2008 and 2007 Assets 2008 2007 Cash and equivalents $10 $15 Short-term investments 0 65 Accounts Receivable 375 315 Inventories 615 415 Total current Assets $1000 $810 Net plant and equipment 1000 870 Total assets $2000 $1680 Liabilities and Equity 2008 2007 Accounts Payable $60 $30 Notes Payable 110 60 Accruals 140 130 Total current Liabilities $310 $220 Long-term bonds 754 580 Total Liabilities $1064 $800 Stock 170 170 Retained earnings 766 710 Total common equity $896 $840 Total liabilities and equity $2000 $1680
  • 14.
    • The statement of cash flows is a summary of the financial flows into and out of a company’s cash account. (Note that accounting flows are not necessarily cash flows)
    • Operating activities + Cash collection
    • − Cash paid
    • = Net cash increase (decrease) from operating activities (1)
    • Investing activities − Purchases of securities or property
    • + Sales of securities or property
    • = Net cash increase (decrease) from investing activities (2)
    • Financing activities + raised capital from issuing equity or entering debt
    • − Dividends or debt payments
    • = Net cash increase (decrease) from financing activities (3)
    • (1) + (2) + (3) = Increase (decrease) in cash balance
    • + Beginning cash balance
    • = Ending cash balance
  • 15. The three basic activities of businesses and the financial flows of the statement of cash flows: Operating revenues Operating costs Sale of assets Purchase of assets Operating activities Investing activities Financing activities Equity, debt Dividends, debt payments Financial boundaries of the company (Cash flows only) (Cash flows only) (Cash flows only) (Cash flows only) (Cash flows only) (Cash flows only)
  • 16. ABC, Inc. Balance Statement Years Ended December 31, 2008 and 2007 Operating Activities Net Income $117.5 Depreciation 100.0 Increase in Account receivable (60.0) Increase in Inventories (200.0) Increase in Account Payable 30.0 Increase in Accruals 10.0 Net Cash provided by Operating Activities $ (2.5) Investing Activities Cash used to acquire fixed assets $ (230.0) Sale of short-term investment 65.0 Net Cash provided by Investing Activities $ (165.0) Financing Activities Increase in Notes Payable $50.0 Increase in Bonds Outstanding 174.0 Payment of dividends (61.5) Net Cash provided by Financing Activities $ 162.5
  • 17. Balance Sheet–12/31/07 Assets Cash Other current assets Long-term investments Long-lived assets Intangible assets Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Contributed capital Retained earnings Balance Sheet–12/31/08 Assets Cash Other current assets Long-term investments Long-lived assets Intangible assets Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Contributed capital Retained earnings Statement of Cash Flows–1/1/08–12/31/08 Net cash flow from operating activities Net cash used by investing activities Net cash provided by financing activities Change in cash balance Beginning cash balance (12/31/7) Ending cash balance (12/31/08) Income Statement–1/1/08–12/31/08 Revenues − Expenses = Net income Statement of Retained Earnings 1/1/08–12/31/08 Beginning retained earnings balance + Net income − Dividends Ending retained earnings balance
  • 18.
    • Study of interrelationships among a firm’s sales, costs, and operating profit at various levels of output.
    • Break-even point can be calculated using two methods:
      • Graphical Approach
      • Algebraic Approach
  • 19.
    • Break-even point is the Q where TR = TC
    Total Cost Line Total Revenue Line Break-even point $ Quantity
  • 20.
    • Terms:
    • USP = Unit Selling Price
    • UVC = Unit Variable costs
    • FC = Fixed Costs
    • Q = Quantity of output units sold (and manufactured)
    • OI = Operating Income
    • TR = Total Revenue
    • TC = Total Cost
  • 21.
    • Basic Equation:
    • Revenues – Variable cost – Fixed cost = OI
    • (USP x Q) – (UVC x Q) – FC = OI
    • For example:
    • If John sells a product for $10 and it cost $5 to produce (UVC) and has fixed cost (FC) of $25,000 per year, how much will he need to sell to break-even?
    • Using:
    • (USP x Q) – (UVC x Q) – FC = OI
    • $10Q - $5Q – $25,000 = $ 0.00
    • $5Q = $25,000
    • Q = 5,000
  • 22.
    • Contribution Margin Equation:
    • (USP – UVC) x Q = FC + OI
    • For Example:
    • Q = FC + OI / UMC
    • Q = $(25,000 + 0) / $5
    • Q = 5,000
  • 23.
    • Questions?