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    Chapter 2 Financial Statement and Cash Flow Analysis

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    FarooqChaudhary
    The document discusses key financial statements including the balance sheet, income statement, statement of retained earnings, and statement of cash flows. It also covers cash flow analysis, different types of financial ratios to analyze liquidity, activity, debt, profitability, and market performance, and how corporate taxes impact cash flows.

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    © All Rights Reserved
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    Chapter 2 Financial Statement and Cash Flow Analysis

    Uploaded by

    FarooqChaudhary
    149 views26 pages
    The document discusses key financial statements including the balance sheet, income statement, statement of retained earnings, and statement of cash flows. It also covers cash flow analysis, different types of financial ratios to analyze liquidity, activity, debt, profitability, and market performance, and how corporate taxes impact cash flows.

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    financial statements and cash flow

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    The document discusses key financial statements including the balance sheet, income statement, statement of retained earnings, and statement of cash flows. It also covers cash flow analysis, different types of financial ratios to analyze liquidity, activity, debt, profitability, and market performance, and how corporate taxes impact cash flows.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    149 views26 pages

    Chapter 2 Financial Statement and Cash Flow Analysis

    Uploaded by

    FarooqChaudhary
    The document discusses key financial statements including the balance sheet, income statement, statement of retained earnings, and statement of cash flows. It also covers cash flow analysis, different types of financial ratios to analyze liquidity, activity, debt, profitability, and market performance, and how corporate taxes impact cash flows.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 26
    At a glance
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    The key takeaways are that the document discusses the main financial statements (balance sheet, income statement, statement of cash flows, statement of retained earnings) and how they are used to analyze a company's financial performance using ratios.

    The main financial statements discussed are the balance sheet, income statement, statement of cash flows, and statement of retained earnings.

    The balance sheet provides a snapshot of a company's financial position at a specific point in time by presenting the assets, liabilities, and stockholders' equity of the company.

    Financial Statement and

    Cash Flow Analysis


    Chapter 2
    Prepared by Dr. IKRAM UL HAQ
    CHOUDHARY CPA, PhD
    2009 Cengage Learning/SouthWestern

    Financial Statements
    Accrualbased
    approach
    Cash flow
    approach

    Revenues are recorded at the point


    of sale and costs when they are
    incurred, not necessarily when a
    firm receives or pays out cash.
    Used by financial professionals to
    focus attention on current and
    prospective inflows and outflows of
    cash.

    Financial Statements
    Balance Sheet

    Income Statement

    Financial
    Statemen
    ts

    Statement of
    Retained Earnings
    Statement of
    Cash Flows

    Notes to
    Financial Statements

    Balance Sheet
    A firms balance sheet presents a
    snapshot view of the companys financial
    position at a specific point in time.

    assets = liabilities + stockholders equity

    Balance Sheet for Global Petroleum


    Corporation

    Income Statement
    Income is also called profit, earnings, or margin.

    Income = revenue expenses

    Measures of
    Income

    Gross profit
    Operating profit
    Other income
    Earnings before interest and taxes
    Pretax income
    Net income / net profit after taxes

    Income Statement for Global Petroleum


    Corporation

    Statement of Retained Earnings


    The statement of retained earnings
    reconciles
    the net income earned during a given
    year, and any cash dividends paid,
    with the change in retained earnings
    between the start and end of that year.

    Statement of Retained Earnings


    for Global Petroleum Corporation

    Financial Statements
    Statement
    of Cash
    Flows

    Notes to
    Financial
    Statements

    10

    Reconciles
    the firms operating, investment,
    and financing cash flows
    with changes in its cash and
    marketable securities
    during the year.

    Explanatory notes
    that provide detailed information
    on the accounting policies,
    calculations, and transactions
    underlying entries in the
    financial statements.

    Cash Flow Analysis


    Although financial managers are
    interested in the information contained in
    the firms accrual-based financial
    statements, their primary focus is on cash
    flows.
    Without adequate cash to pay obligations
    on time, to fund operations and growth,
    and to compensate owners, the firm will
    fail.
    11

    The Firms Cash Flows

    12

    Free Cash Flow


    Operating cash flow
    = earnings before interest and taxes
    taxes
    + depreciation
    Free cash flow
    = operating cash flow
    change in gross fixed assets
    change in current assets
    + change in account payables
    + change in accrued liabilities
    13

    Inflows and Outflows of Cash

    14

    Statement of Cash Flows


    for Global Petroleum Corporation

    15

    Analyzing Financial Performance


    Using Ratio Analysis
    Liquidity
    Ratios
    Activity
    Ratios

    16

    Measure a firms ability to satisfy its shortterm obligations as they come due.

    Measure the speed at which a firm


    converts various accounts into sales
    or cash.

    Debt Ratios

    Measure the proportion of total assets


    financed by a firms creditors.

    Profitability
    Ratios

    Relate a firms earnings to its sales,


    assets, or equity.

    Market
    Ratios

    Relate a firms market value to


    certain accounting values.

    Using Financial Ratios

    17

    Benchmar
    k1

    Analysts compare the current years


    financial ratios with previous years ratios
    to identify trends that help them evaluate
    the firms prospects.

    Benchmar
    k2

    Analysts compare the ratios of one


    company with those of other firms in
    the same industry.

    Liquidity Ratios

    18

    Activity Ratios

    19

    Debt Ratios

    20

    Profitability Ratios

    21

    Profitability Ratios

    22

    Profitability Ratios
    DuPont System of Analysis

    23

    Market Ratios

    24

    Corporate Taxes
    Corporate taxes represent a significant cash
    outflow.

    Ordinary
    corporate
    income

    25

    Corporate
    capital
    gains

    Progressive tax rate schedule


    Average tax rate: tax divided
    by the pretax income
    More relevant for financial
    decision making: marginal tax
    rate
    Under existing tax laws,
    ordinary income tax rates
    apply

    Financial Statement and Cash Flow


    Analysis
    Balance Sheet
    Income Statement
    Cash Flow Analysis
    Liquidity Ratios
    Activity Ratios
    Debt Ratios
    Profitability Ratios
    Market Ratios
    26

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