2. Chapter Financial Statement

• Balance sheet (statement of financial positions)

• income statement

• statement of cashflows

• statement of stockholders equity

• It lists the firms assets and liabilites (snapshot)

• at a given point in time

  
  

• cash

• inventory

• property

• plant

• equipment

• obligations to creditors

• stockholders equity

  
  

• The Stockholders euqity is thendifference of the firms asset and liabilities.

• Measure of the firms net worth

• Assets are what the Company owns

• cash

• assets converted into cash within one year

  
  

• marketable securities like low risk investments that can be easily sold

• accounts receivable

• Inventories (raw matierials, semi finishes products, finished goods)

• prepaid expenses

• net property

• plant

• equipment

  
  

Liabilities are what the company owes

Libilities that can be converted within one year

• Accounts payable

• Short term debt

• unearned revenue

• salary and taxes that are not paid yet

• 
  

Long term liabilites are liabilites that extend one year

• long term debt

• Capital lease

• deffered taxes

• 
  

• net working capital

• capital available in short term to run the business

• expertise of the firms employees

• firms reputation in the marketplace

• relationship with costumers and suplliers

• future development and innovations

• quaity of management

• No it is not because it does not refelct the market value

• The Market Value of equity is often reffered to as the Market Cap or Market Capitalization

• The Market cap reflects what investors expect from the company in the future

• It gives a hint about the trust investors have in the company

EXAMPLE: The market to book ratio of AIG is below 1. It means that investors think that the mortage bonds AIG holds are less worth than what the books say.

Yes there is an Correlation

• High market to book ratio are called growth stocks (Paypal)

• Low market to book ratio are called value stocks (Ford)

• The TEV meassures the value of the underlying business assets unencumbered by debt and seperate from Cash

• The TEV can be interpreted as the Cost to take over a company

• also called the statement of financial performance or P&L

• revenues - expenses over a period of time (in and outflow)

—> results in the net income

• revenues from sales - cost incurred to make and sell the goods

Not included are:

• administrative expenses

• research and development

• interest expenses

• administrative expenses

• salaries

• marketing

• R&D

• Earnings before interest and taxes

• deduct interest on outstanding debt for the pretax income

• deduct corporate taxes to determine the firms net income

No because:

• non cash entries in the income statement: depreciation, amortization

• usage of money: purchase of a building inventory expeniture are not reported

• The statement of Casflows utilizes the information from the income statement and the balance sheet to determine how much Cash the firm has generated

• how the cash was allocated

• operating activities

• investment activities

• financing activities

• investment activities

• capital expenditure

• represent a “potential” future liability for the firm that must be disclosed

• they do not appear on the balance sheet

• they appear on the MD&A management discussion and analysis

• further details: important accounting assumptions

• specific information: subsidaries, product lines

• stock based compensation plans for employees

• acquisition details

—> very important to interpret fully the firms financial statement

• compare the firm with itself (change over time)

• Compare the firm with similar firms

• The current ratio givs information about the Comparison of actual assets and liabilites

• the quick ratio only compares “cash” and “near cash” to current liabilities

• accounts receivable

• short term investments

• it implies less risk for the firm experiencing a shortfall in cash

• most stringent liquidity ratio because firms need money to payouff wages and so on

• it is utilized to see how fast a company turns sales into cash

• can fluctuate seasonally

• poor job in collecting money

• offering generous credit terms

• It explains, how often a company has sold it´s stock of inventory

Yes there are but only if you compare similar companies in similar markets:

• Compare airlines with distillers

• they compare how good a company is able to meet the obligations of lenders

• EBIT interest coverage of 5x is high quality

• Ebits interest coverage of below 1,5 is bullshit —> lender begin to question the ability of the firm to pay back its debts

• Depreciation and amortization expenses are no cash expenses

• it tells us on which extent the company relies on debt as a source of financing