Review of Accounting
Income statements, Balance Sheets and Cash Flow Statements
Financial Statements
•
Income
statement measures profit
•
Price
Earnings ratio
•
Balance
sheet assets and financing of those assets
•
Cash Flow
statement
•
Depreciation
and tax
Income statement
•
Revenue – Expenses
= Profit
•
COGS = Open + purchases – Closing
•
Revenue – COGS =
Gross Profit
•
Gross Profit – Expenses
= Net Profit
•
Gross Profit –
Operating Expenses = Operating Profit (EBIT)
•
EBIT – Interest
Expenses = EBT
•
EBT – taxes =
EAT
•
EAT – Stock
dividends = Earnings available to common stockholders.
Earnings per share
•
How much is left after paying
expenses bond holders, and preferred stock.
•
Divide this by the number of shares to get the earnings per share figure.
•
Dividends are / can be paid out of retained earnings.
•
Price-earnings ratio (p/e), indicates future expectations for the firm.
•
Income statement has limitations because of external economic effects and
because Accounting is only based on recording historical transactions.
Balance Sheet
•
Assets –
liabilities = Capital
•
Gives a measure of the firm’s worth.
•
Assets are presented on order of liquidity.
•
Shows financing and ownership effects.
•
Can calculate net worth (book value).
•
Companies have great differences in book values per share due to
variations in industry, quality of management, and risk return..
Statement of Cash Flows
•
Cash flows
from Operating Activities
•
Cash Flows
from Investing Activities
•
Cash Flows
from Financing Activities
Cash Flows from Operating
Activities
•
Start with
Net Profit (Income)
•
Add back
depreciation
•
Subtract any
increase in Current assets
•
Add any
increase in current liabilities
Cash flow from Investments
•
Subtract any
increase in investments
•
Subtract any
increase in plant and equipment
Cash Flows due to Financing
•
Add increase in bonds payable
•
Subtract any dividends paid.
•
Add all three sources and uses of funds together to give the net increase
or decrease in cash flows.
•
An alternative is the Free Cash flow
– Take out capital expenditures and
dividends
– This give free cash flow
available for special financing like buy outs.
Taxes
•
Many
expenses are tax deductible
•
Giving a tax
sheild.