Financial Statement Analysis and LT Planning Flashcards
Statement of Financial Position
AKA Balance Sheet
Assets = Liabilities + Shareholders’ equity
Assets represent investments made by company
Liabilities and equity represent how investments are financed
Income Statement
Measures Performance over a specific period
Average Tax Rates
% of Income paid in taxes
=tax bill/taxable income
Marginal Tax Rate
the tax you would pay if you earn one more unit of currency
used when making financial decisions b/c it is the rate paid on any additional income earned.
Positive net working capital ensures
that enough cash will be available to pay off liabilities arising
Cash Flow
Most important thing to take from financial statements
Not the same as networking capital
Cash Flows from Assets =
Cash Flows to Creditors and Equity Investors
Total Cash Flow comes from
operating activities, investing activities, and financing activities.
Sources and Uses of Funds/Cash
Cash Inflow
Occurs when we sell something
Decrease in asset account (accounts receivable, inventory, and net fixed assets)
Increase in liability (accounts payable, other current liabilities, and common stock)
Uses of funds/cash
Cash Outflow
Occur when we buy something
increase in asset account
decrease in liability or equity account
Statement of Cash Flows
Statement that summarizes the sources and uses of cash
Changes divided into three major categories: Operating, Investment, and Financing
ROE is affected by
operating efficiency
asset use efficiency
financial leverage
Time trend analysis looks as
the same ratio over a number of years
peer group analysis compares
ratios within similar firms (companies within the same industry)
3 Issues with financial statement analysis
inappropriate peers - some companies operate in several industries with different accounting standards.
aspirant analysis - you may want to compare your firm with the best in the industry and choose similar firms at the top of the industry.
sources of info - financial websites and company accounts
Why is financial planning important
computation of external financing needed
ensuring feasibility and internal consistency of strategies
identifying the determinants of a firm’s grown
and understanding how capital structure policy and dividend policy affect a firm’s ability to grow.
Key Elements of Financial planning
Investment in new assets
degree of financial leverage
cash paid to shareholders
liquidity requirements
Financial Planning Models ignore….
cash flow, risk, and timing.
Financial Planning should not be a ___________ process.
mechanical
Financial Planning should be an __________________ process.
iterative
