Three basic accounting statements:

1. Three basic accounting statements: • Income statement – provides information on the revenues and expenses of the firm, and the resulting income made by the firm, during a period. • Balance sheet – summarizes the assets owned by a firm, the value of these assets, and the mix of financing used to finance these assets at a point in time. • Statement of cash flows – specifies the sources and uses of cash to the firm from operating, investing, and financing activities during a period.

2. Typical financial statements we encounter in the classroom

3. Usually part of CGS or SG&A. Make sure that if you break it out this way, that you subtract it from CGS or SG&A Make sure these are really non-recurring. If they always appear think about whether it should be included as part of operations.

4. Other measures of profitability (these ratios measure profitability of operating activities) • One way to generate these ratios is to construct common-size Income Statements. • Quick review: common-size financial statements are financial statements expressed in percentage terms. For example, common-size Income Statements would express line items as a percentage of sales; common-size Balance Sheets would express line items as a percentage of Total Assets

5. Typical financial statements we encounter in the classroom

6. Measures of Profitability • Return on Equity – examines profitability from the equity investor’s perspective • Return on capital – measures the profitability of the overall firm

7. Return on Assets – measures operating efficiency in generating profits from assets, before the effects of financing

8. Other useful ratios • We can use book values or market values when calculating the ratios above. In most instances, we will be using market values.

9. Sources: • Damodaran, Investment Valuation, 2nd ed. • Palepu and Healy, Business Analysis and Valuation Using Financial Statements, 4th ed.