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02model 10/6/2009 8:15 12/2/2002 Chapter 2. Model for Financial Statements, Cash Flows, and Taxes THE ANNUAL REPORT The annual report contains a verbal section plus four key statements: the balance sheet, income statement, statement of retained earnings, and statement of cash flows. These statements contain a wealth of information that is used by bankers, stock and bond analysts, and managers. Hence, they are quite important. Spreadsheets are used both to create and to analyze these statements, as we demonstrate in this model. Regarding statement creation, firms' accounting information is maintained in computer files, which are adjusted as sales occur, materials are purchased, and so forth. The firm's accountants periodically--monthly, quarterly, and annually--extract information from the general files and compile the four statements. These statements-- in both printed and spreadsheet format --are made available to security analysts, and if the firm wants to borrow money, the same information is provided to potential lenders. The firm's financial staff also uses the data to analyze the firm's condition--its strengths and weaknesses--and this information is used in the quest to improve operations and increase the firm's value. In this model, we start with the same balance sheet and income statement that was used in the chapter, but in an Excel format, and then we show how Excel (and other spreadsheet packages) can be used to analyze the data. The analysis will be extended in Chapter 3, which go on to examine various ratios and other metrics used to appraise firms and to compare them with other companies. Notice that a spreadsheet model dealing with taxes is shown on the tab labeled "TAXES" found in the lower left section of the screen. Click on this tab to see the taxes model. Then, to return to the financial statement model, click on the tab for that model. The "Taxes" model is meant to accompany the Web Appendix 2A. In addition, note that in cells which summarize data in other cells, such as sums or differences, the spreadsheet uses formulas rather than fixed numbers. For example, the cell for Total Assets in 2002 (F65) contains the SUM formula rather than just $2,000. (The cell itself shows $2,000, but if you put the pointer on F65, then the formula line will show that the cell actually contains a formula.) That way, if the data for any input (cash, for instance) changes, the spreadsheet will automatically recalculate and provide the correct net value for Total Assets. As you will see as you go through our models, this automatic recalculation feature is one of the most useful and powerful aspects of Excel and other spreadsheets.
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