Chapter 2

Financial Statements And Cash

Flow Analysis

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Course Name / Number

© 2007 Thomson South-Western

Financial Statements

Balance Sheet

Income Statement

Managers and Analysts Use Financial Statements to Conduct:

- Cash Flow Analysis
- Performance (Ratio) Analysis

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Four Key Financial Statements

1. Balance sheet

2. Income statement

3. Statement of retained earnings

4. Statement of cash flows

3
Global Petroleum’s Balance Sheet

4
Global Petroleum’s Income Statement

5
 The Sources and Uses of Corporate Cash

Sources Uses

 Decrease in any asset  Increase in any asset

 Increase in any liability
 Net profits after taxes
 Depreciation and other
non-cash charges
 Sale of stock
 Decrease in any liability
 Net loss
 Dividends paid
 Repurchase or retirement
of stock

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Global Petroleum’s Statement of
Retained Earnings

7
Global Petroleum’s Statement Of Cash
Flows

8
 Accounting Profit vs. Cash Flow
Accounting Profit based on accrual
accounting—focus on past periods
Finance emphasizes the importance of timing
“You can’t deposit net income, only cash”
Timing of cash flow matters.
Accrual accounting may obscure timing.

What are key measures of cash flow?

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 Key Measures of Cash Flow

Cash Flow
from Total Cash Generated
Operations

Operating Cash Flow Before Repaying

Cash Flow Lenders

Free Cash Cash Flow Firm Could

Flow Distribute to Investors

10
 Types Of Financial Ratios

Current Ratio
Liquidity Ratios
Quick Ratio

Turnover Ratios
Activity Ratios
Collection/Payment Period

Debt-to-Equity Ratio
Debt Ratios
Times Interest Earned Ratio

Gross Margin
Profitability Ratios
EPS

P/E Ratio
Market Ratios
Market-to-Book Ratio
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Liquidity Ratios

current assets
Current ratio =
current liabilities
current assets- inventory
Quick ratio =
current liabilities

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Activity Ratios

cost of goods sold

Inventory turnover =
inventory
sales
Fixed asset turn over =
net fixed assets

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Profitability Ratios

Gross profits
Gross profit margin =
sales
Earnings before interest & taxes
Operating profit margin =
sales

Net income
Net profit margin =
sales

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Profitability Ratios

Earnings per share =

Net income
number of shares of common stock outstandin g

Net income
Return on total assets =
Total assets
Net income
Return on common equity =
Stockholde rs' equity

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Market Ratios

Price/earn ings (P/E) ratio =

market price per share of common stock
earnings per share

Book value per share =

common stock equity
number of shares of common stock outstandin g

Market/book (M/B) ratio 

Market value per share of common stock
Book value per share of common stock
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Financial Ratios For Cross-Sectional and
Trend Analysis

 Cross-Sectional Analysis: Comparing Different

Firms’ Financial Ratios at the Same Point in
Time
 Compared to firms in same industry
 Benchmarking - compares a company’s ratio
values to those of competitors that company
wishes to emulate
 Trend Analysis - Performance Evaluation
Over Time
 Developing trends can be seen using multiyear
comparison
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Financial Statements and Financial
Ratios

Balance Sheet

Income Statement

Liquidity Ratios
Activity Ratios
Debt Ratios
Profitability Ratios
Market Ratios 18