Lecture -2
Introduction to Business Finance (BA 5401) Prepared by: Sunilla Faisal Spring 08
http://ba5401.googlepages.com
Contents
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Importance of Financial Statements
• Internally
– Plan - Focus on assessing the current financial position and evaluating
potential firm opportunities.
• Externally
– Trade Creditors - Focus on the liquidity of the firm.
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Financial Statements – The System
1) Shareholders and lenders supply
capital (cash) to the company.
2) The capital suppliers have claims on
the company. The balance sheet is an
updated record of the capital invested
in the business. On the right-hand
side of the balance sheet, lenders
hold liabilities and shareholders hold
equity. The equity claim is "residual",
which means shareholders own
whatever assets remain after
deducting liabilities.
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Financial Statements – The System
3) The assets are deployed to create cash
flow in the current year .Selling equity
and issuing debt start the process by
raising cash. The company then "puts
the cash to use" by purchasing assets
in order to create (build or buy)
inventory. The inventory helps the
company make sales (generate
revenue), and most of the revenue is
used to pay operating costs, which
include salaries.
4) After paying costs (and taxes), the
company can do three things with its
cash profits. One, it can (or probably
must) pay interest on its debt. Two, it
can pay dividends to shareholders at
its discretion. And three, it can retain
or re-invest the remaining profits. The
retained profits increase the
shareholders' equity account (retained
earnings).
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8
Types of Financial Statements
• Balance Sheet
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Income Statement
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Income Statement
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Income Statement (a)
Net Sales b
$ 2,211 • a. Measures profitability over a
Cost of Goods Sold 1,599 time period.
Gross Profit $ 612 • b. Amount received, or
SG&A Expenses c 402
receivable, from customers.
EBITd $ • c. Sales comm., adv., officers’
210 Interest Expensee salaries, etc.
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EBT f $ 151 • d. Operating income.
Income Taxes 60 • e. Cost of borrowed funds.
EATg $ 91
• f. Taxable income.
Cash Dividends 38
• g. Amount earned for
Increase in RE $ 53 shareholders.
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Income Statement – another example
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Retained Earnings
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Balance Sheet
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Cash Flow Statement
• A cash flow statement or statement of cash flows is a financial
statement that shows a company's incoming and outgoing money
(sources and uses of cash) during a time period (often monthly or
quarterly). The statement shows how changes in balance sheet and
income accounts affected cash and cash equivalents, and breaks
the analysis down according to operating, investing, and financing
activities.
• As an analytical tool the statement of cash flows is useful in
determining the short-term viability of a company, particularly
its ability to pay bills.
• People and groups interested in cash flow statements include:
– accounting personnel, who need to know whether the organization will be able
to cover payroll and other immediate expenses
– potential lenders or creditors, who want a clear picture of a company's ability
to repay
– potential investors, who need to judge whether the company is financially
sound
– potential employees or contractors, who need to know whether the company
will be able to afford compensation
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Cash Flow Statement - Sample
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Balance Sheet
• A company balance sheet has three parts: assets, liabilities and
shareholders' equity. The main categories of assets are usually
listed first and are followed by the liabilities. The difference
between the assets and the liabilities is known as the net
assets or the net worth of the company. According to the
accounting equation, net worth must equal assets minus
liabilities.
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Balance Sheet (a) - contd
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Types of Balance Sheet
• Personal balance sheet - A personal balance sheet lists
current assets such as cash in checking accounts and savings
accounts, long-term assets such as common stock and real
estate, current liabilities such as loan debt and mortgage debt
due or overdue, and long-term liabilities such as mortgage and
other loan debt. Securities and real estate values are listed at
market value rather than at historical cost or cost basis.
Personal net worth is the difference between an individual's
total assets and total liabilities.
• Small business balance sheet - A small business balance
sheet lists current assets such as cash, accounts receivable,
and inventory, fixed assets such as land, buildings, and
equipment, intangible assets such as patents, and liabilities
such as accounts payable, accrued expenses, and long-term
debt. Contingent liabilities such as warranties are noted in the
footnotes to the balance sheet. The small business's equity is
the difference between total assets and total liabilities.
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Balance Sheet Structure
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Income Statement Vs Balance Sheet
• Always prepared for a period of time • Always prepared for a point in time
and the term “for the period ended” and the term “as at” included in the
is included in the title. title.
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Income Statement Vs Balance Sheet
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Common-Size Statements
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Common-Size Balance Sheet
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Common-Size Balance Sheet
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Common-Size Income Statement
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Book Values in Finance
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Thank you
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Backup Slides
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Financial Statements Tutorial
Microsoft
PowerPoint Presentation
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