Transcript Introduction to Financial Statement

Net Revenue – Cost of Goods Sold = Gross
Margin
 Gross Margin – Operating Expenses = Earning
Before Interest and Taxes (Ebit)
 Earning Before Interest and Taxes - Interest
expenses + Interest Income = Income Before
Taxes
 Income Before Taxes + Extraordinary Items =
Net Income
 Net Income –Preferred Dividends = Net
Income available to Common Shareholders

•
Gross Profit Margins =
• Gross Profit
• Operating Income before Tax
• EBIT
Common Shareholders / Ordinary Shareholders
• Stock and Share
• Diluted Earning Per Share
• Other Comprehensive Income
•
• Change in Unrealized Gain on Investments, Net of tax
• Foreign Currency Translation Adjustment
• Net Unrealized Gain on Derivatives Instruments Net of
taxes
Derivatives Instruments
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A security whose price is dependent upon
or derived from one or more underlying
assets.The derivative itself is merely a
contract between two or more parties.
Its value is determined by fluctuations in the
underlying asset.The most common
underlying assets include stocks,
bonds, commodities, currencies, interest
rates and market indexes. Most derivatives
are characterized by high leverage.
Derivatives Instruments

Futures contracts, forward contracts, options
and swaps are the most common types of
derivatives. Derivatives are contracts and
can be used as an underlying asset. There are
even derivatives based on weather data, such
as the amount of rain or the number of sunny
days in a particular region.
Derivatives Instruments
Derivatives are generally used as an instrument
to hedge risk, but can also be used
for speculative purposes. For example, a
European investor purchasing shares of an
American company off of an American exchange
(using U.S. dollars to do so) would be exposed to
exchange-rate risk while holding that stock. To
hedge this risk, the investor could purchase
currency futures to lock in a specified exchange
rate for the future stock sale and currency
conversion back into Euros.
Net Payoff
 Dirty Surplus Accounting
 Clean Surplus Accounting
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Measurement in the financial statements
Value of Equity = Value of Firm – Value of Debt
 Intrinsic Premium = Intrinsic Value of Equity – BV of
Equity
 Market Premium = Market Price of Equity – Book
Value of Equity

Price to Book Ratio
 Market to Book Ratio
 Intrinsic Price to Book Ratio
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Measurement in the balance Sheet
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Mark to Market Accounting
 Cash & Cash Equivalent (Fair Value)
 Short Term Investment & Marketable Securities (Fair
Value)
 Receivables (Quasi Fair Value)
 Inventories (Lower of Cost or Market Value)
 Short Term payable & Long Term Borrowing (fair value)
 Other Intangible Assets – Knowledge Assets, Brand asset
(Not Recorded)
 Commitments & Contingencies FASB#5 (Many Not
Recorded) Law Suits, Product Warrantees, Guarantees,
Measurement in the balance Sheet

Historical Cost Accounting
◦ Long Term Tangible Assets (Historical Cost)
◦ Recorded Intangible Assets (Copy Right, Patent)
◦ Goodwill (Diff between purchase price FASB #
142)
◦ Long Term Debt Securities (Some at fair Value)
FASB #115
 Investment Held for actives trading (Fair Market value)
 Investment Available for sales (Fair market Value)
 Investment Held to maturity (Historical Cost)
◦ Equity Investments (Minority Interest)
MODELS BASED ON P/E RATIO

PRICE-EARNINGS RATIO MODEL
◦ Many investors prefer the earnings
multiplier approach since they feel they are
ultimately entitled to receive a firm’s
earnings
MODELS BASED ON P/E RATIO

PRICE-EARNINGS RATIO MODEL
◦ EARNINGS MULTIPLIER:
= PRICE - EARNINGS RATIO
=
Current Market Price
following 12 month earnings
P/E ratio
Widely used stock measure
 Definition: P/E = Price (in dollars /share) divided
by Earnings (in dollars/share)
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◦ Example: ExxonMobil (XOM) costs $84.26/share and
earned $6.80/share.
◦ P/E = $84.26/$6.80 = 12.4
◦ Often called “Price Multiple” or “Earnings Multiple”
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Used for valuing and comparing stocks
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Which P/E did you have in mind?
◦ There are lots of definitions, and they are different
◦ What share price to use? Which earnings to use?
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What’s a good P/E?
◦ How do I know if a P/E is too high, low, or just right?
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How do I use it?
Two Main Types of P/E
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P/E (Trailing Earnings)
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Definition: Current Price / Last 12 months of Earnings
Also called P/E TTM (Trailing Twelve Month)
Fairly objective: based on measured actual data
Ignores likely near-term events and performance
Tends to be higher (current price/previous earnings)
P/E (Forward Earnings)
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Definition: Current Price / Forecast next 12 months Earnings
Also called Future P/E, Estimated P/E, Forward P/E, etc.
Subjective: depends on analyst estimates
Incorporates likely near-term events and performance
Tends to be lower (current price/future earnings)
Using the P/E

P/E normalizes price and earnings,
allowing direct comparison
◦ Both Earnings and Price vary widely over time for a single stock
and between different stocks
◦ How would you like to price apples? Dollars per basket? Or
dollars per Kg?
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Compare a stock to…
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its history
its future
its close peers
its industry
the market
Compare the entire market to reality
Articulation of the Financial
Statements
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Financial statement interrelationships
◦ Articulation—logical relationships among
financial statements’ accounts as the four
financial statements work as an integrated
reporting system to convey financial
information
Articulation of Financial Statements
Financial statements are linked within and
across time – they articulate.
 Balance sheet and income statement are
linked via retained earnings.
 Absent of equity transactions such as
stock issuances and purchases and
dividend payments, the change in
stockholders’ equity equals the income or
loss for the period.

Articulation of Financial Statements
Income Statement
+Revenues
-Expenses
= Net Income
Statement of Shareholders’ Equity
Beginning Balance
+Capital Increased
+ Net Income
-Dividends Paid
+- Other Transactions
Ending Balance
Balance Sheet
Assets
=
Liabilities
+
Shareholders’ Equity
Cash Flows
+-Operating
+ -Investing
+- Financing
Change in Cash
Beginning Balance
Ending Balance