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This comprehensive guide introduces fundamental concepts of financial management, emphasizing the significance of financial statements, including the Income Statement and Balance Sheet. Learn about cash flows, market types, interest rates, risk, and liquidity. The document covers core calculations like real returns and future values, enhancing your grasp of financial metrics and their applications. It also illustrates common-sized financial statements and key ratios to assess a firm's financial health, making it an essential resource for students and professionals eager to deepen their understanding of finance.
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Intro to Financial Management Understanding Financial Statements and Cash Flows
Review Homework What are spot and future markets? What is a spread? What are nominal rates? What are real rates? What types of risk are involved in interest rates? How do you calculate real returns? How do you calculate simple, one-period, future values? What is liquidity? What is the Yield Curve?
The Income StatementCalculates the firm’s profit Amount Sales $100 COGS 45 _ Gross profit 55 Sales, General & Admin. 28 R&D 7 _ Operating income (EBITDA) 20 Interest, taxes, depreciation 15 _ Net income 5
The Income StatementCalculates the firm’s profit AmountPct. of Sales Sales $100 100% COGS 45 45% _ Gross profit 55 55% Sales, General & Admin. 28 28% R&D 7 7% _ Operating income (EBITDA) 20 20% Interest, taxes, depreciation 15 15% _ Net income 5 5%
The Income StatementCalculates the firm’s profit Sales COGS Gross profit Sales, General & Admin. R&D Operating income (EBITDA) Interest taxes depreciation Net income Operations run by COO Finance run by CFO
Income Statement Common-sized statement Gross profit margin Operating profit margin Net profit margin Earnings Earnings per share
Balance SheetShows what a company is worth Amount Assets Current Assets Cash $20 Accounts Receivable 45 Inventory 135 Long-term Assets (Fixed) Plant & Equipment 1,000 Liabilities & Owners Equity Current liabilities Short-term loans 15 Accounts Payable 35 Long-term Liabilities Long-term debt 500 Stockholders’ Equity Capital 150 Retained Earnings 500
Balance SheetShows what a company is worth AmountPct. of Assets Assets Current Assets Cash $20 2% Accounts Receivable 45 4% Inventory 135 11% Long-term Assets (Fixed) Plant & Equipment 1,000 83% Liabilities & Owners Equity Current liabilities Short-term loans 15 1% Accounts Payable 35 3% Long-term Liabilities Long-term debt 500 42% Stockholders’ Equity Capital 150 12% Retained Earnings 500 42%
Balance Sheet Common-sized Book value Gross working capital = current assets Net working capital = current assets – current liabilities Debt ratio Leverage ratio
Cash Flows • Profits are not cash • Free cash flow = cash after operations • Cash flow statement • Cash flows • From operations • From investing in fixed assets • From financing • Borrowing (cash in) • Selling stock (cash in) • Dividends (cash out)
Cash Flow Statement Amount Net earnings (from Income Statement) $5 Adjustments from operations Depreciation 6 Cash from investing Investment in plant, property, & equipment 10 Cash from financing Debt issued 10 Dividends (9) Net Change in Cash 22
Income Taxes and Finance • Taxable income • Operating income • Capital gains • Gain (loss) from sale of assets • Tax deductions • Interest expense • Depreciation expense • Not dividend payments • Marginal tax rates • Tax rate on the next dollar earned
In Class Excel Exercise • Create a common sized income statement and balance sheet • Change • Revenues • Some expense • Asset
