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Financial StatementsAnnual Report- A report containing financial statements and management’s summary ofthe current status of the firm and its future prospects.The financial statements are:1. Balance Sheet- A statement of the firm’s accounting value at a specific point in time.2. Income Statement- A statement of the firm’s revenues and expenses over the quarteror year.3. Statement of Retained Earnings- A statement showing how much of the firm’searnings were retained in the business rather than paid out as dividends.4. Statement of Cash Flows- A statement of the firm’s operating, investing andfinancing activities on cash flows over the quarter or year.The Balance Sheet- Assets firm has on left.Liabilities on the assets on right.The assetsare listed in order of decreasing liquidity.The liabilitiesare listed in order of when they must be paid.Assets1. Current Assets- Assets with a life of one year or less, i.e., can be liquid in 12 monthsor less.e.g.: cash, short-term securities, accounts receivable, inventory.2. Fixed Assets- Assets with a long life.a. Tangible - Buildings, machines, etc.b. Intangible - Patents, trademarks, R & D, brand loyalty, etc.But to get these assets the firm had to buy them usually w/ financing. This is usuallydone by issuing stock (equity) or debt (bonds), i.e., Liabilities.Liabilities1. Current Liabilities- Liabilities to be paid within the year.e.g.: accounts payable, notes payable, accruals (wages, taxes,Social Security, workers’ comp)2. Long-term Liabilities- Debt not repaid in a year.e.g.: Bonds, loans, deferred taxes, etc.Stockholder Equity- Residual claim on the firm’s assets, i.e., what is left over if allassets were sold and liabilities paid off.By definition: Total Equity = Total Assets - Total Liabilities. Also called Net WorthEquity is of two types:Common Equity- Common stock issued by the company whose price and dividendschange.Preferred Equity- A hybrid security like both stock and debt, i.e., the price changes butthe dividend is fixed.1
Therefore: Assets - Liabilities - Preferred Stock = Common Equity.Let’s look at an example of Allied Food Inc.’sBalance Sheet & an Income Statement:Balance Sheet December 31, 2007AssetsCurrent AssetsCash & Mktble SecuritiesAccounts ReceivableInventoryTotalFixed AssetsNet Plant & EquipmentTotal Assets2007$10375615$ 1000$ 1000$ 20002006$80315415$810$870$1680Liabilities & Stockholder’s EquityCurrent LiabilitiesAccounts PayableNotes PayableAccrualsTotalLong-Term BondsTotal DebtPreferred Stock (400K shares)Common Stock(50 million shares)Retained EarningsTotal Common EquityTotal Liabilities & Equity2007$ 6011014031075410644013076689620002006$30601302205808004013071084016802
Income Statement December 31, 2007Net SalesCost of Goods SoldDepreciationTotal Operating CostsEarnings Before Interest &Tax (EBIT)Less InterestEarningsBeforeTax(EBT)Taxes (40%)Net Income BeforePreferredPreferred DividendsNet Income Availableto CommonStockholdersCommon DividendsAdditions to RetainedEarningsPer Share DataCommon Stock PriceEarnings Per ShareDividends Per ShareBook Value Per Share2007$30002616.2+ 100 - 2716.2283.8- 88195.8- 78.3117.54.