Transcript Fin 4453 Financial Modeling

FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
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Income Statement
Common Size Income Statement
Balance Sheet
Common Size Balance Sheet
Statement of Cash Flows
Income Statement
• Summarizes the results of the firm’s
operations over a period of time
• Shows total revenues and expenses for
the time period
• Shows different measures of profit
• Prepared for different time periods:
Monthly, quarterly, and annually
Income Statement
• The order of the items that should be entered in
the income statement is as follows:
1. Sales: Total $ income incurred by sales
(revenue)
2. Cost of Goods Sold: This item includes raw
material, labor, etc...
3. Gross Profit: Profit from goods sold, not
including any expense other than cost of goods
Gross Profit = Sales - Cost of Goods Sold
Income Statement
4. Selling, G&A Expenses: Selling, General and
Administrative Expenses. Marketing, paperwork,
etc...
5. Fixed Expenses
6. Depreciation Expense: Depreciation of
machinery
7. EBIT: Earnings Before Interest and Taxes. This
is also called as operating income. This is the
income generated from the operations of firm
and excludes taxes and interest expenses
EBIT = Gross Profit - (Selling, G&A Expenses + Fixed
Expenses + Depreciation Expense)
Income Statement
8. Interest Expense: Interest paid on the firm’s
debt
9. Earnings Before Taxes: This item shows the
income generated without including taxes
Earnings Before Taxes = EBIT - Interest Expense
10. Taxes: Assume 40% tax rate. Enter as follows:
Taxes @ 40%, or Taxes (40%)
Taxes = 0.4*Earnings Before Taxes
11. Net Income:
Net Income = Earnings Before Taxes - Taxes
Common-Size Income
Statements
• Common-size income statements display
data not as $ amounts but as percentages
of firm’s total revenues (Sales)
• Benefits:
- Easy comparison between firms of
different sizes
- Show important trends which may not be
seen in $ amounts
Balance Sheet
• Balance sheet describes assets, liabilities,
and equity of the firm at a specific time
(like a snapshot)
• Assets: (Tangible/intangible):
- Things that a firm owns.
-Assets are entered on the top or on the
left of the balance sheet
Balance Sheet
• Liabilities:
- Debts of the firm
- Entered below Assets, or on the right of
the balance sheet
• Equity:
- Difference between what firm owns and
what it owes to others
- Entered below liabilities in the balance
sheet
Balance Sheet
• NOTE:
Balance sheet must balance:
Total Assets = Total Liabilities + Total Equity
should satisfy
Balance Sheet
A. ASSETS: (Top, or left of balance sheet)
1. Current Assets:
• Firm’s short term assets.
-Cash and Marketable Securities,
-Accounts Receivable,
-Inventories
2. Fixed Assets:
- Assets that have long life, like plant and equipment
3. Net Fixed Assets:
-You deduct the accumulated depreciation of the fixed
assets from the value of fixed assets to find Net Fixed
Assets
Net Fixed Assets=Fixed Assets - Accumulated Depreciation
Balance Sheet
B. LIABILITIES (Below Assets or on the right of Balance
Sheet)
1. Current Liabilities:
• Short term liabilities
• Typically, current liabilities are:
-Accounts payable
-Notes payable
-Accruals
2. Long-term Liabilities:
Bonds, bank loans, etc..
3. Total Liabilities:
Current Liabilities + Long-term Liabilities
Balance Sheet
C. SHAREHOLDER’S EQUITY (Below
Liabilities)
1. Preferred Stock:
2. Common Stock:
3. Retained Earnings:
4. Total Shareholder’s Equity:
Preferred Stock + Common Stock + Retained Earnings
Balance Sheet
D. TOTAL LIABILITIES AND EQUITY
(below Total Shareholder’s Equity)
Total Liabilities + Total Shareholder’s Equity
• NOTE:
Again remember that
Total Assets = Total Liabilities and Equity
Common-size Balance Sheet
• Preparing common-size balance sheet is
similar to the one we did for income
statement.
• Instead of Sales, for Balance Sheet, we
use Total Assets to form the percentages,
and
• Explain all data as a percentage of Total
Assets, i.e. Format cells as %, 0.00%
Statement of Cash Flows
• Financial Transactions of Firms:
1. Sources of Funds:
Cash inflows that increase cash balance
2. Uses of Funds:
Cash outflows that decrease cash balance
Statement of Cash Flows
• How Well Managers Perform?
- Analyze how management uses
shareholders’ money:
-Use Statement of Cash Flows
Statement of Cash Flows
• Statement of Cash Flows:
-Summarizes changes in firm’s cash
balance
Ending Cash Balance =
Beginning Cash Balance +
Cash Inflow (Sources) Cash outflow (Uses)
Statement of Cash Flows
• Most of the items in statement of cash flows
come from change in balance sheet items
• Therefore, we need balance sheets of two
years
• We also need income statement
• Operational Cash Flow (Net Income +
Depreciation) comes from Income
Statement
Statement of Cash Flows
• Statement of Cash Flows separates firm
activities into three parts:
1. Operating Activities
2. Investing Activities
3. Financing Activities
Statement of Cash Flows
1. Cash Flows from Operations:
Typically these are:
Net income, depreciation,
changes in -accounts receivable
-inventories
-accounts payable
-notes payable
-other current liabilities
Statement of Cash Flows
2. Cash Flows from Investing
Typically these are change in fixed assets
like change in plant and equipment
(investment in these assets or sale of
these assets)
Statement of Cash Flows
3. Cash Flows from Financing
Typically these are:
Dividends paid to shareholders, and
Change in -debt
-stock
Statement of Cash Flows
• Increase and Decrease in Cash Flows:
- Uses of funds decrease cash flows:
Increase in assets, Decrease in liabilities
- Sources of funds increase cash flows:
Decrease in assets, Increase in liabilities
• Therefore, for uses of funds, we should
use a - sign in the Excel sheet.