Professor Megginson BAD 5283

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Chapter 2
Financial Statements And Cash Flow Analysis
Professor Megginson BAD 5283
Spring 2006
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Financial Statements
Balance Sheets
Income Statements

• Financial Managers and analysts use financial
• statements to conduct
• - Cash Flow Analysis
• - Performance (Ratio) Analysis

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Four Key Financial Statements

• Balance sheet

2. Income statement
3. Statement of retained earnings
4. Statement of cash flows
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Staples Balance Sheet( Thousands)
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Staples Liabilities Stockholders Equity (
Thousands)
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Staples Income Statement ( Thousands)
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Sources and Uses of Corporate Cash
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Staples Statement Of Cash Flows ( Thousands)
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Staples Statement Of Cash Flows (Thousands)
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Accounting Profit vs. Cash Flow
Accounting Profit based on accrual
accountingfocus on past periods
Finance emphasizes the importance of timing You
cant 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
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Types Of Financial Ratios
Liquidity Ratios
Activity Ratios
Debt Ratios
Profitability Ratios
Market Ratios
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Financial Ratios Trends and Benchmarking
Benchmarking comparison of a companys ratio
values to industry competitors ratios
Firms financial ratios compared at the same
point in time
Trend analysis - performance evaluation over time
Developing trends can be seen using multi-year
comparisons.
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Liquidity Ratios
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Activity Ratios
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Activity Ratios (Continued)
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Debt Ratios
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Debt Ratios (Continued)
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Profitability Ratios
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Profitability Ratios (Continued)
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Profitability Ratios (Continued)
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Market Ratios
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Market Ratios
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Corporate Taxes
Significant cash outflow
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Financial Statements and Financial Ratios

• Balance Statement
• Income Statement
• Liquidity Ratios
• Activity Ratios
• Debt Ratios
• Profitability Ratios
• Market Ratios

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Demonstrating Translation Exposure

• Translation exposure is a purely accounting
  concept
• It measures the potential change in a
  consolidated financial statement from a change in
  exchange rates
• Key measure is the difference between exposed
  assets and exposed liabilities
• Exp assets those whose value will change if ER
  changes
• Exp liabilities those whose value will change
  if ER changes
• values of non-exposed assets do not change if
  ER changes
• Assume a US Firm has a UK subsidiary and that ER
  initially 2.00/, but then changes to 1.50/
  (pound depreciates)
• Under Current Rate method, all assets and liab
  translated at new (current) ER of 1.50/
• Equity accounts translated at old ER of 2.00/

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Translation Gains Losses For US Firm With UK
Subsidiary After Depreciation
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Accounting For Translation Gains And Losses

• In our example, US parent company suffered
  5,000,000 translation loss
• value assets declined by 7.5 mm (30 mm -
  22.5 mm)
• value liab declined by only 2.5 mn (30
  mm-27.5 mm)
• value of equity accounts remain unchanged
  translated at historical ER
• Translation loss accounted for in a Cumulative
  Translation Adjustment equity account
• Debit (loss) balance increased by translation
  losses, reduced by translation gains
• Not actually realized (run through income
  statement) unless subsidiary sold or closed down.