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M1: Financial Statements

M1: Financial Statements. BS/IS/CF—know accounts that go on each Regulatory environment Return on Equity/Return on net operating assets Assets = Liabilities + Owners’ Equity. M2: Financial Statements and Transactions. Balance Sheets Financial statements are stratified into sections

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M1: Financial Statements

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  1. M1: Financial Statements • BS/IS/CF—know accounts that go on each • Regulatory environment • Return on Equity/Return on net operating assets • Assets = Liabilities + Owners’ Equity

  2. M2: Financial Statements and Transactions • Balance Sheets Financial statements are stratified into sections • CA/LT Assets • CL/LT Liabilities +Contrib Cap + Ret. Earnings • Operating assets/Financial Investments • Income Statement: Revenues/Expenses • Revenues—recognized when earned & realizable • Expenses—recognized when incurred • Cash Flow Statement: • Cash flow from Operations==Income+non-cash expenses+change in current operating assets and liabilities • Cash flow from investing—purchase/sale of non-current assets/investments • Cash flow from financing—debts and stock • Add beginning cash to get ending cash • Retained earnings=beginning RE+income-dividends • Know how to work with basic transactions

  3. M4: Analyzing Financial Statements page 4-11 formulae • ROE=NI/OE= • ROE=Operating Return + non-operating Return=RNOA+NOR • Operating Income =Revenues-operating expenses • Take this after tax to get NOPAT • NOA=Net Operating Assets=Operating assets – operating liab. • RNOA=NOPAT/NOA • Find NNEP as residual = ROE-RNOA • Liquidity—CR, QR • Solvency—L/OE or L/TE, Times Interest Earned

  4. M5: Operating Income • Revenues—earned & realizable (8 cases p. 5-8) • Research & Development • Restructuring—severance pay, asset write downs • Income taxes—differences in timing • Extraordinary items—unusual & infrequent

  5. M6: Operating Assets • Accounts Receivable –after allowance • % of Sales/Aging • Direct writeoff for tax • Inventories—four methods in USA • FIFO, LIFO, WTD AVE, SPEC ID • Lower of cost or market • Fixed assets—depreciation, SL, DDB

  6. M7: Investments • Passive (<20%)—market value if known • Trading—gains/losses to income statement • Available for sale—“Other Cons. Income”, Equity • Operating (>20% & <50%)—Equity Method • Add share of income less share of dividends • Majority (>50%)—Consolidate—add together as if one company • Goodwill—payment for future earnings and control • Purchase price minus FMV of Assets • Written down if FMV < BV • Discontinued Operations—reported separately

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