Lecture 2_Statement Analysis

Lecture 2_Statement Analysis - Lecture 2 Statement Analysis...

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1 Lecture 2: Statement Analysis Financial Management 3320 Fall 2010 Indraneel Chakraborty SMU Cox School of Business 2 Last class: overview of Corporate Finance Investment Decision: Which projects should the firm invest in? Debt Equity Financing Decision: How should the firm finance the chosen projects? Pay Dividends Reinvest the Profits in Firm Dividend Decision: How much of the profits should be paid out? Basic Business Decisions These decisions are not independent of each other Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty
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2 3 Roadmap of this class We want to learn how to evaluate and finance investments/projects What is the money a firm generates / spends? Where do we find this information? Outline: What are cash flows ? Revenues, expenses, taxes Financial statements: balance sheet and income statement How to get from accounting income to cash-flows Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty 4 What are cash flows? What do owners want to know? How many $$ have they put in? How many $$ are they getting back? This difference over a period of time is the Cash Flow How to obtain information about Cash Flows? Financial statements of a firm But there is no statement that gives the needed information straight away . .. so we have to work! Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty
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3 5 What are financial statements? Documents collecting financial information of a corporation over a certain period of time Why do they exist? Legal requirements Security Exchange Commission ( SEC ), Stock Exchanges Why are they needed? To provide information on the state of a firm’s business and financial health to Lenders, shareholders Who certifies their accuracy? Accounting firms and FASB rules Do they tell the truth? What if a company lies? Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty 6 Two major financial statements Balance sheet : a snapshot of the financial condition of a firm at a particular time (usually year’s end) It is a list of the firm’s assets (owe) and liabilities (own) The difference is the net worth of the firm, and is known as stockholders’ equity : Equity = Assets Liabilities Income statement : a summary of the profitability of the firm over a period of time (usually a year) It presents revenues, expenses, and the resulting net earnings (or profits or net income ) Net Income = Revenues Expenses Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty
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4 7 The balance sheet Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty 8 The balance sheet Current assets : relatively highly liquid Cash, account receivables & inventory (which we hope to convert in cash within the next 12 months) Fixed assets : relatively less liquid
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Lecture 2_Statement Analysis - Lecture 2 Statement Analysis...

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