Financial statements Flashcards
financial statements
firm issued accounting reports with last performance information
filed with the SEC (US securities and exchange commission)
10Q - quarterly
10K - annually
must also send an annual report with financial statements to shareholders
Generally accepted accounting principles (GAAP)
common set of rules and standard format for public companies to use when they prepare their reports
different countries have their own GAAPs
International financial reporting standards (IFRS) is an international effort to harmonise accounting standards
Auditor
Neutral 3rd party that checks a firms financial statements
in reality, auditing firms have their own interests and may be far from neutral
Types of financial statements
Balance sheets (stock)
income statement (flows)
statements of cash flows
statement of stockholders equity
Stock vs. Flow
a stock is measured at a specific time and represents a quantity existing at that point in time
a flow is measured over an interval of time
Balance sheet
snapshot in time of the firms financial position
looks at stocks
The balance sheet identity
Equity + total assets - total liabilities
assets = what the company owns liabilities = what the company owes
Assets
Current assets: cash or asset expected to turn into cash in the next year
Marketable securities (eg gov. debt that matures in a year)
accounts receivable (what customers owe)
inventories
other current assets: eg prepaid expenses
Long-term assets
- Net property, plant and equipment
subject to depreciation
- book value = acquisition cost - accumulated depreciation
- Goodwill and intangible assets
subject to amortisation
- other long-term assets e.g investments in long term securities
Liabilities
- Current liabilities: due to be paid within the next year
- accounts payable
- short-term debt/notes payable
- current maturities of long-term debt
- other current liabilities (taxes and wages payable)
Net working capital
current assets - current liabilities
Long-term liabilities
long-term debt
capital leases
deferred taxes
Book value of equity
could possibly be negative and many of the firms valuable assets may not be captured on the balance sheet
Market value of equity (market capitalisation)
= market price per share x no. of shares outstanding
cannot be negative
Market-to-book ration (also price-to-book)
= market value of equity/book value of equity
Enterprise value
market value of the business
a good measure to value a firm for a potential takeover
enterprise value = market value of equity + debt - cash
Income statement
lists firms revenues and expenses over a period of time
looking at flow
all about net income which measures a firms profit after tax and interest expenses
Net income formula
= (total sales - cost of sales)
- (selling, general, admin expenses + R&D + depreciation and amortisation)
+ (other income - other expenses)
+(interest income - interest expenses)
- taxes
= pre-tax income - taxes
Gross profit formula
= total sales - cost of sales
Operating expenses
= selling, general, admin expenses + R&D + depreciation and amortisation
Operating income
= gross profit - operating expenses
Earnings before interest & taxes (EBIT)
= operating income + (other income - other expenses)
Pre-tax income
= EBIT + (interest income - interest expenses)
what can net income be used for?
pay dividends to the shareholders
retained in the firm (can be used for reinvestment)
earnings per share (EPS)
= net income/shares outstanding
EPS may go down due to stock options or convertible bonds
to take into account of possible dilution, we can look at diluted EPS
Statement of cash flows
net income typically doesn’t equal the amount of cash the firm has earned
net income is accounting profit, but no change of cash
where does the difference between net income and change of cash come from?
- Non-cash items
expenses that are listed in the income statement that do not involve cash payment
e.g depreciation and amortisation
- use of cash not on the income statement
investment in property, plant and equipment
payment of the principal amount of debt
3 sections of statement of cash flows
operating activity
investment activity
financing activity
Operating activity
adjusts net income by all non-cash items related to operating activities and changes in net working capital
Cash from operating activities
= net income
+ depreciation, amortisation and other non-cash items
- change in accounts receivable
+ change in accounts payable
- change in inventories
Investment activity
capital expenditures
buying or selling marketable securities
Financing activity
- payment of dividends (retained earnings = net income - dividends)
- change in borrowings (interest expenses already deducted when calculating net income
Cash from financing activities
= (sales of stock - purchasing of stock)
- dividends paid
+ increasing in borrowing
Cash from investments activities
= capital expenditure
acquisitions and other investment activities
change in cash & cash equivalents
= cash from operating activities
+ cash from investment activities
+ cash from financing activities
Change in stockholders’ Equity
= addition to retained earnings + net sales of stock
= (net income - dividends) + (sales of stock - repurchases of stock)
other financial statement information
management discussion and analysis (off-balance sheet transactions)
notes to the financial statements
Gross Margin
= gross profit/sales
operating margin
= operating income/sales
EBIT margin
= EBIT/sales
Net profit margin
= net income/total sales
Current ratio
= current assets/current liabilities
quick ratio
= (cash + short-term investments + accounts receivable)
/current liabilities
cash ratio
= cash/ current liabilities
accounts receivable days
= accounts receivable/ average daily sales
accounts payable days
= accounts payable/ average daily cost of sales
inventory days
= inventory/average daily cost of sales
accounts receivable turnover
= annual sales/accounts receivable
accounts payable turnover
= annual cost of sales/accounts payable
inventory turnover
= annual cost of sales/inventory
interest coverage ratios
EBIT/interest
EBITDA/interest (EBIT + depreciation and amortisation)
debt-equity ratio
= total debt/total equity
debt-to-capital ratio
= total debt/(total equity + total debt)
Net debt
= total debt - excess cash & short-term investments
debt-to-enterprise value ratio
= net debt/market value of equity + net debt
equity multiplier
= total assets/book value of equity
= 1 + debt-equity ratio
P/E ratio
= market capitalisation/net income
= share price/EPS
enterprise value to EBIT
= market value of equity +debt - cash/EBIT
enterprise value to sales
= (market value of equity + debt - cash)/sales
enterprise value to EBITDA
= (market value of equity + debt - cash)/EBITDA
return on equity
= net income/book value of equity
return on assets
= net income + interest expense/ total assets
return on invested capital
= EBIT(1 - tax rate)/book value of equity + net debt
The DuPont identity
ROE = returns on equity
= (net income/sales) x (sales/total assets) x (total assets/book value of equity)
= net profit margin x asset turnover x equity multiplier
