Lecture 3 - Analysis of financial statements The Firms...

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Analysis of financial statements The Firm’s Financial Statements Balance Sheet Income Statement Statement of Cash Flows Functions : providing current status and past performance information to owners and creditors a convenient way for owners and creditors to set performance targets & to impose restrictions on the managers of the firm a convenient template for financial planning Balance Sheet Assets ≡ Liabilities + Shareholder’s Equity Tabulates a company’s assets and liabilities at a specific point in time o Info on value of the assets and the capital structure Sorting of o Assets by liquidity o Liabilities by maturity Assets and liabilities are represented by historical costs o The original cost adjusted for improvements and aging = Book Value o Avoid using market value, since is too volatile and easily manipulated o Preference for under estimating value Strict categorization into E or L: the liability must satisfy o The obligation will lead to CF at some specified or determinable date o The firm cannot avoid the obligation o The transaction behind the obligation has already happened However, important liabilities may be under-stated or omitted Assets Current Assets (Оборотные средства): will convert into cash within a year o Cash o Accounts Receivable (Счета к получению) Recognizing not collectible ones: reserves (danger of manipulation!) o Inventory (ТМЗ): valued by FIFO, LIFO, wdt-avg LIFO increases costs and reduces taxes LIFO reserve: difference between LIFO and FIFO valuations Investments and Marketable Securities (Рыночные цб) o Minority passive / active investment (<20% / 20-50% of the ownership): BV or MV o If majority active investment (>50%): include in the consolidated balance sheet Intangible Assets (Нематериальные активы): amortized over expected life (say, 40 years)
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o Patents and trademarks: valuation depends on whether generated internally or acquired o Goodwill: the difference between BV and MV of the acquired firm (purchase accounting) Fixed Assets (Основные средства; Land, Plant and Equipment): BV with adjustment for aging o
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