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Financial Statements

Financial Statements. Main Source: BE Chapter 3. Basic forms of financial statements. Balance sheet Income statement Statement of retained earnings Statement of cash flows. Balance sheet. Represents “snapshots” of company’s financial position at a point of time.

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Financial Statements

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  1. Financial Statements Main Source: BE Chapter 3

  2. Basic forms of financial statements • Balance sheet • Income statement • Statement of retained earnings • Statement of cash flows

  3. Balance sheet • Represents “snapshots” of company’s financial position at a point of time. • The left side lists assets while the right side lists the claims to be paid. • See table 3-1 for an example

  4. Income statement • Informs company’s financial performance over a period of time. • Usually prepared monthly, quarterly, or annually. • See table 3-2 for an example.

  5. Statement of retained earnings • Shows the last cumulative balance of undistributed earnings. • See table 3-3 for an example

  6. MicroDrive: Statement of Retained Earnings for Year Ending December 31, 2004 (million of dollars)

  7. Statement of Cash Flows • Cash position (reported in the balance sheet) is affected by: • Net income before preferred dividends • Non cash adjustments to net income • Changes in working capital • Changes in fixed assets • Security transactions • Dividend payments, etc.

  8. Free cash flow: Cash flow actually available for distribution to investors after the company has made all investments in fixed assets and working capital necessary to sustain ongoing operations. • FCF = NOPAT-net investment in operating capital

  9. Note: • Even though two companies have the same EBIT, their net income (EAT) might be different due to different level of debt.  Thus, EAT does not always reflect true performance of company’s operations. • So, we need to calculate NOPAT (Net operating profit after tax), i.e. the amount of profit a company would generate if it had no debt and held no financial assets. • NOPAT = EBIT (1-T), while EAT=(EBIT-i)(1-T)

  10. Uses of FCF • Debt repayments • Dividend payments • Stock repurchase • Purchase of stock and other non operating assets

  11. Market Value Added (MVA) • Note: Shareholders’ wealth is maximized by maximizing market value added, i.e. the difference between the market value of stock and the amount of equity capital that was supplied by the shareholders. • MVA = (shares outstd)(stock price)-total common equity

  12. Economic Value Added (EVA) • Note: • MVA reflects the effects of managerial actions since the very inception of the company. • EVA shows managerial effectiveness in a given year. • EVA = NOPAT-after tax cost of capital used to support operation = EBIT(1-T)-(ttl net opcap)(WACC) • See table 3-4 for MVA and EVA

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