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Chapter 3

Chapter 3 Understanding Financial Statements and Cash Flows Income Statement Cost of Goods Sold Operating Expenses (marketing, administrative) Financing Costs SALES - EXPENSES = PROFIT Income Statement Cost of Goods Sold Operating Expenses (marketing, administrative)

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Chapter 3

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  1. Chapter 3

  2. Understanding Financial Statements and Cash Flows

  3. Income Statement • Cost of Goods Sold • Operating Expenses • (marketing, administrative) • Financing Costs SALES - EXPENSES = PROFIT

  4. Income Statement • Cost of Goods Sold • Operating Expenses • (marketing, administrative) • Financing Costs • Taxes SALES - EXPENSES = PROFIT

  5. Assemble an Income Statement • Oper. Income (EBIT) • Sales • Interest • Earnings before taxes (EBT) • Gross Profit • Net Income • Net income available to Common Stockholders • COGS • Preferred Stock Dividends • Operating Expenses • Income Taxes

  6. Income Statement SALES - Cost of Goods Sold GROSS PROFIT - Operating Expenses OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) - Income Taxes NET INCOME - Preferred Stock Dividends - NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

  7. Operating Activities Income Statement SALES - Cost of Goods Sold GROSS PROFIT - Operating Expenses OPERATING INCOME(EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) - Income Taxes NET INCOME - Preferred Stock Dividends - NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

  8. Income Statement SALES - Cost of Goods Sold GROSS PROFIT - Operating Expenses OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) - Income Taxes NET INCOME - Preferred Stock Dividends - NET INCOME AVAILABLE TO COMMON STOCKHOLDERS Financing Activities

  9. Balance Sheet Outstanding Debt + Shareholders’ Equity Total Assets =

  10. Balance Sheet Assets Liabilities (Debt) & Equity

  11. Assemble a Balance Sheet • Machinery Marketable Securities • Notes Payable S.T. Accounts Receivable • Retained Earnings Accounts Payable • Accrued Expenses Bldgs & Land • Common stock (par Patents (intangibles) • Prepaid Expenses Long Term Notes • Inventories Cash • Mortgages Paid in Capital • Preferred Stock Investments

  12. Balance Sheet Assets Liabilities (Debt) & Equity Current Liabilities Accounts Payable Accrued Expenses Short-term notes Long-Term Liabilities Long-term notes Mortgages Equity Preferred Stock Common Stock (Par value) Paid in Capital Retained Earnings Current Assets Cash Marketable Securities Accounts Receivable Inventories Prepaid Expenses Fixed Assets Machinery & Equipment Buildings and Land Other Assets Investments & patents

  13. Statement of Cash Flows: Even if a company reports a large net income during a year, the amount of cash reported on its year-end balance sheet may be the same or even lower than its beginning cash. To solve for the reasons why cash has changed you look at the Income Statement for the period and the change in the balance sheet over that same year.

  14. Calculating the Cash Flow Stmt • Shows the actual cash flows generated by the firm for the year broken down into three areas. THREE AREAS • Cash Flow from Operations • Cash Flow from Investments (acquired or sold) • Cash Flow from Financing receipts or payments

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