Zara Mahmood Roberts FE101 Introduction to Financial Statement Analysis FIRMS DISCLOSURE OF FINANCIAL INFORMATION Financial Statements Accounting reports issued by a firm quarterly annually that present past performance information and a snapshot of the firm s assets and the financing of those assets Public companies are required to file with SEC on quarterly 10Q or annual Must also send annual report with financial statements to their shareholders 10K basis each year Annual Report The yearly summary of business accompanying or including financial statements sent by US public companies to their stockholders Investors outside parties obtain information about the corporation Source of information for corporate financial decisions Preparation of Financial Statements US FASB establishes Generally Accepted Accounting Principles GAAP Common set of rules and standard format for company reports o Makes is easier to compare financial results of firms Investors need assurance that the statements are prepared accurately Corporations are required to hire a auditor to check annual statements Auditor A neutral third party that corporations hire to check a firm s annual financial statements to ensure they are prepared according to GAAP and provides evidence to support the reliability of the information Types of Financial Statements Every public company I required to produce 4 financial statements Balance sheet Income statement Statement of cash flows Statement of stockholders equity performance THE BALANCE SHEET o Provide investors and creditors with overview of firm s financial Balance Sheet A list of a firm s assets and liabilities that provides a snapshot of the firm s financial position at a given point in time Divided into two parts assets on left and liabilities on right Assets Cash inventory property plant and equipment and other investments a company has made Liabilities A firm s obligations to its creditors Also shown with liabilities is shareholder equity Zara Mahmood Roberts FE101 Shareholders equity An accounting measure of a firm s net worth that represents the difference between the firm s assets and its liabilities Balance Sheet Identity Assets Liabilities Stockholders Equity Common Stock and Paid in Surplus The amount that stockholders have directly invested in the firm through purchasing stock from the company Retained Earnings Profits made by the firm but retained within the firm and reinvested in assets or held as cash Assets Assets can be divided into current and long term assets Current Assets Current Assets Cash or assets that could be converted into cash within one year Cash and Marketable Securities Short term low risk investments that can Accounts Receivable be easily sold and converted to cash purchased goods or services on credit Inventories finished goods Other assets Amounts owed to a firm by customers who have A firm s raw material as well as its work in progress and o Catch all category that includes items such as prepaid expenses Long Term Assets Long Term Assets Assets that produce tangible benefits for more than one year Real estate or machinery Asset depreciated yearly as its value tends to wear out depreciation Depreciation A yearly deduction a firm makes for the value of its fixed assets other than land over time according to a depreciation schedule that depends on a asset s life span Done on a schedule that depends on assets life span Book Value The acquisition cost of an asset minus its accumulated depreciation Liabilities Liabilities can be divided into current and long term liabilities Current Liabilities Current Liability Liabilities that will be satisfied within one year the amounts owed to suppliers for products or services Accounts payable purchased with credit Notes payable short term debt loans that must be repaid in the next year o Any repayment of long term debt that will occur within the next year would also be listed here as current maturities of long term debt Accrual items salary taxes that are owed but have not yet been paid And deferred or unearned revenue which is revenue that has been received for products that have not yet been delivered Zara Mahmood Roberts FE101 Net working capital The difference between a firm s current assets and current liabilities that represents the capital available in the short term to run the business Notes payable sort term debt financing decisions of the firm Accounts payable accrual items operating decisions of the firm Net Working Capital Current Assets Current Liabilities Long Term Liabilities Liabilities that extend beyond one year When a firm needs to raise funds it can borrow through a long term loan o Would appear as a long term debt Long Term Debt Any loan or debt obligation with a maturity of more than a year Stockholders Equity Sum of current liabilities and long term liabilities in total liabilities Difference between assets and liabilities is stockholders equity book value of equity Book Value of Equity The difference between the book value of a firm s assets and its liabilities Represents the net worth of a firm from an accounting perspective o Common stock and paid in surplus o Retained earning Inaccurate assessment of the actual value of a firm s equity o Assets listed are valued from historical prices rather than current prices o Employees reputation management is not considered in assets listing Amount investors are willing to pay can differ substantially from book value Can be negative o Not necessarily an indication of poor performance o Creditors recognize the market value of the assets is far higher Market Capitalization The total market value of equity equals the market price per share times the number of shares Depends on what investors expect assets to produce in the future not historical costs THE INCOME STATEMENT Income Statement A list of a firm s revenues and expenses over a period of time Bottom line shows firm net income Net Income The last of bottom line of a firm s income statement that is a measure of the firm s income over a given period of time Earnings Calculations Income statement shows the flow of revenues and expenses generated by those assets and liabilities between two dates Gross Profit Zara Mahmood Roberts FE101 First two lines list revenues from sales of products and cost incurred to make and sell them Third line is gross profit the difference between sales revenues and the costs Operating Expenses Next group of items is operating expenses Expenses from the