Review of Financial Statements

1. Review of Financial Statements • Why Do We Need Financial Statements? • 3 Basic Financial Statements For Finance

2. Balance Sheet • Definition - • Properties of the Balance Sheet:

3. Balance Sheet Example HARRISON INTERNATIONAL (Ticker Symbol = HINT) Assets: Liabilities and Equity: Cash 10 Accounts Payable 60 Accounts Receivable 375 Notes Payable 110 Inventories 615 Accruals 140 Total Current Assets 1,000 Total Current Liabilities 310 Property, Plant, and Equipment 1,250 Long-term Bonds 754 less: Accumulated Depreciation 250 Total Debt 1,064 Total Fixed Assets 1,000 Preferred Stock 40 Total Assets 2,000 Common Stock 130 Retained Earnings 766 Total Common Equity 896 Total Liabilities and Equity 2,000

4. Income Statement • Definition - • Income Statement Performance Measures • Earnings per Share (EPS) • Dividends per Share (DPS) • Retained Earnings per Share (REPS)

5. Income Statement Harrison International’s Income Statement Nets Sales (Revenues) $3,000 Less: Cost of Goods Sold (COGS) 1,500 Gross Profit 1,500 Less: Selling and Administrative Expenses 1,150 Earnings Before Interest and Taxes 350 Less: Interest Expenses 85 Earnings Before Taxes 265 Less: Taxes 105 Net Income 160 Less: Preferred Stock Dividend 15 Income Available to Common Stockholders 145 Less: Common Stock Dividends 75 Addition to Retained Earnings 70

6. Accounting vs. Finance • Primary Differences: • Funds Recognition • Decision Making • Funds Recognition Accounting Uses an Accrual Basis - Finance Uses a Cashflow Basis - Example: Harrison Int’l. buys merchandise for $80,000 cash and sells it for $100,000 on credit. What does this transaction look like to accountants and financiers? • Decision Making Accounting - Finance -

7. Cash Flow Concepts • Net Cash Flow = Net Income - Noncash Revenues + Noncash Charges • What are Noncash Charges? • Depreciation - • Depletion - • Amortization - • Net Cash Flow = Net Income + Depreciation • Separating Operating and Financing Cash Flows Operating Cash Flow = (EBIT)(1-Tax Rate) + Depreciation Net Cash Flow = Operating Cash Flow - (Interest Expenses)(1-Tax Rate)

8. Cash Flow Statements Harrison International’s Cash Flow Statement Nets Sales (Revenues) $3,000 Less: Cost of Goods Sold (COGS) 1,500 Gross Profit 1,500 Less: Selling and Administrative Expenses 1,150 Earnings Before Interest and Taxes (EBIT) 350 Less: Interest Expenses 85 Earnings Before Taxes (EBT) 265 Less: Taxes 105 Net Income 160 Plus: Depreciation 20 Net Cash Flow 180

9. Harrison’s Operating CF Operating Cash Flow = (EBIT)(1-T) + Depreciation Operating Cash Flow = (350)(1-(105/265)) + 20 Operating Cash Flow = (350)(.6038) + 20 Operating Cash Flow = $231.33 Net Cash Flow = Operating CF - (Interest Exp.)(1-T) Net Cash Flow = $231.33 - (85)(1-(105/265)) Net Cash Flow = $231.33 - (85)(.6038) Net Cash Flow = $231.33 - 51.33 = $180

10. Market Value Added (MVA) • Market Value Added - • MVA = Market Value of Equity - Equity Capital Supplied By Investors • Ex. Suppose Harrison Int’l has 100 shares of common stock outstanding, each selling at $15.25. What is Harrison’s Market Value Added (MVA)?

11. Economic Value Added (EVA) • Economic Value Added - • EVA = After-tax Operating Profit - After-tax Cost of Capital • Ex. Suppose Harrison Int’ls after-tax cost of capital is 9%, and their corporate tax rate is 35%. What is Harrison’s Economic Value Added (EVA)?