Chapter 2 Financial Statements

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					Chapter 2      Financial Statements, Cash Flows, and Taxes

           Balance sheet – snapshot during point in time
               o Assets are listed in order of liquidity- time it takes to convert
                  them into cash at FMV
                        Current assets will be converted into profit within the year
                              Short-term investments, accounts receivables,
                              inventories, some marketable securities are cash
                               Inventories FIFO/LIFO
                               FIFO and inflation
                                     1. Balance sheet inventories are higher
                                     2. Cost of good sold lower than LIFO because
                                         of rising prices
                                     3. Reported profits higher
               o Liabilities listed in order in which must be paid. Stockholders
                  listed last
                        Current liabilities are expected to be paid within the year.
                              Accounts payable, notes payable, and accruals.
                              Accrued expenses are daily tax amounts owed.
                        Long-term bonds
                        Preferred stock- fixed dividends
                        Common equity/Net Worth – common stock and retained
                               Proceeds from sale of shares is common stock
                               Earnings not paid out as dividends is retained

           Income Statement – performance during period
               o EBITDA – earnings before interest, taxes, depreciation, and
                      Better measure of financial strength than net income b/c
                        depreciation and amortization are not paid in cash
               o Net income – net income available to common shareholders
                      Revenues – expenses, taxes, and preferred dividends
               o EPS - earnings per share or The Bottom Line
                      Net Income / Number of shares outstanding

      Statement of Stockholders’ Equity
          o Retained earnings
 Net Cash Flows – revenues and expenses on income statement are not
  received or paid as cash during year
 Net Cash Flow = Net income – noncash revenues + noncash charges
          Noncash charges – depreciation, amortization, deferred tax
Net Cash Flow = net income + depreciation and amortization
          most other noncash charges = 0

   Statement of Cash Flows

                o Net cash flow provided by operating activities is most
                   important figure in evaluating company
                1. Net income before preferred dividend
                2. Noncash adjustments to net income
                3. Changes in working capital
                      a. Increases in current assets decrease cash
                      b. Increase in payables saves cash but decrease
                          means cash used to pay off suppliers
                4. Investments – selling/purchasing fixed assets and short-
                   term investments
                5. Financing activities – short and long-term debt, issuing
                   stock, paying dividends, stock repurchases, principal

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