Intro to Financial Management

Understanding Financial Statements and Cash Flows

Review

• Homework• What are spot and future markets?• What is a spread?• What are nominal rates?• What are real rates?• What types of risk are involved in interest rates?• How do you calculate real returns?• How do you calculate simple, one-period, future values?• What is liquidity?• What is the Yield Curve?

The Income StatementCalculates the firm’s profit

Amount

Sales $100

COGS 45 _

Gross profit 55

Sales, General & Admin. 28

R&D 7 _

Operating income (EBITDA) 20

Interest, taxes, depreciation 15 _ Net income 5

The Income StatementCalculates the firm’s profit

Amount Pct. of Sales

Sales $100 100%

COGS 45 45% _

Gross profit 55 55%

Sales, General & Admin. 28 28%

R&D 7 7% _

Operating income (EBITDA) 20 20%

Interest, taxes, depreciation 15 15% _ Net income 5 5%

The Income StatementCalculates the firm’s profit

Sales

COGS

Gross profit

Sales, General & Admin.

R&D

Operating income (EBITDA)

Interest

taxes

depreciation

Net income

Operations run by COO

Finance run by CFO

Income Statement

• Common-sized statement• Gross profit margin• Operating profit margin• Net profit margin• Earnings• Earnings per share

Balance SheetShows what a company is worth

AmountAssets

Current AssetsCash $20Accounts Receivable 45Inventory 135

Long-term Assets (Fixed)Plant & Equipment 1,000

Liabilities & Owners EquityCurrent liabilities

Short-term loans 15Accounts Payable 35

Long-term LiabilitiesLong-term debt 500

Stockholders’ EquityCapital 150Retained Earnings 500

Balance SheetShows what a company is worth

Amount Pct. of AssetsAssets

Current AssetsCash $20 2%Accounts Receivable 45 4%Inventory 135 11%

Long-term Assets (Fixed)Plant & Equipment 1,000 83%

Liabilities & Owners EquityCurrent liabilities

Short-term loans 15 1%Accounts Payable 35 3%

Long-term LiabilitiesLong-term debt 500 42%

Stockholders’ EquityCapital 150 12%Retained Earnings 500 42%

Balance Sheet

• Common-sized• Book value• Gross working capital = current assets• Net working capital = current assets – current liabilities• Debt ratio• Leverage ratio

Cash Flows

• Profits are not cash• Free cash flow = cash after operations• Cash flow statement• Cash flows

– From operations– From investing in fixed assets– From financing

• Borrowing (cash in)

• Selling stock (cash in)

• Dividends (cash out)

Cash Flow Statement

AmountNet earnings (from Income Statement) $5Adjustments from operations Depreciation 6

Cash from investing Investment in plant, property, & equipment 10 Cash from financing Debt issued 10 Dividends (9)

Net Change in Cash 22

Income Taxes and Finance

• Taxable income– Operating income– Capital gains

• Gain (loss) from sale of assets

• Tax deductions– Interest expense– Depreciation expense– Not dividend payments

• Marginal tax rates– Tax rate on the next dollar earned

In Class Excel Exercise

• Create a common sized income statement and balance sheet

• Change– Revenues– Some expense– Asset