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CHAPTER 3 FINANCIAL STATEMENTS, CASH FLOW  B A L A N C E S H E E T  I N C O M E STAT E M E N T  R E TA I N E D E A R N I N G S  STAT E M E N T O F C A S H F LOW S  F R E E C A S H F LOW S ( F C F ) 2-2 THE ANNUAL REPORT • Balance sheet – provides a snapshot of a firm’s financial position at one point in time. (assets= liabilities + equity) • Income statement – summarizes a firm’s revenues and expenses over a given period of time. • Statement of retained earnings – shows how much of the firm’s earnings were retained, rather than paid out as dividends. • Statement of cash flows – reports the impact of a firm’s activities on cash flows over a given period of time. 2-3 BALANCE SHEET Assets 2022 Liabilities 2022 Cash on hand 150,000 Account payables 80,000 Account receivables 100,000 Notes payables 70,000 Ending inventories 50,000 Accruals 50,000 Current assets 300,000 Current liabilities 200,000 Net fixed assets 700,000 Long term debts (LTD) 300,000 Total assets 1,000,000 Total liabilities 500,000 Paid in capital 100,000 Common stock 300,000 Retained earnings 100,000 Total equity 500,000 DEPRECIATION: THE USED UP OF TANGIBLE ASSETS BY USING SLM AMORTIZATION: THE USED UP OF IN TANGIBLES ASSETS (COPY WRIGHTS, BRANDS) FINANCIAL RESOURCES: LTD + CS + RE + PAID IN CAPITAL TOTAL CURRENT ASSETS = WORKING CAPITAL NET WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES = 350,000 – 200,000 = 150,000 2-4 BALANCE SHEET: ASSETS Cash Account recivables End Inventories Current assets Gross FA Less: Dep. Net FA Total Assets 2009 7,282 632,160 1,287,360 1,926,802 1,202,950 263,160 939,790 2,866,592 2010 85,632 878,000 1,716,480 2,680,112 1,197,160 380,120 817,040 3,497,152 2-5 BALANCE SHEET: LIABILITIES AND EQUITY Accts payable Notes payable Accruals Total CL Long-term debt Common stock Retained earnings Total Equity Total L & E 2010 436,800 300,000 408,000 1,144,800 400,000 1,721,176 231,176 1,952,352 3,497,152 2009 524,160 636,808 489,600 1,650,568 723,432 460,000 32,592 492,592 2,866,592 2-6 ASSETS = LIABILITIES + TOTAL EQUITY Assets: Current assets (CA) + net fixed assets (NFA) CA = Cash + Account receivables + Ending inventories Liabilities: Current liabilities (CL) + Long term debts (LTD) CL: Accounts payables + Notes payables + accruals Total owners equity : Common stock + Preferred stocks + retained earnings Example: assume ABC company has the following financial data: Total assets = LTD + A/P+ Common stock+ Retained earnings = 500,000+300,000+ 600,000+ 300,000 = 1,700,000 Total assets = CA + Net fixed assets = 1,700,000 – 1200,000 = 500,000 Item Value Current assets 1200000 Long term debts 500000 Accounts payable 300,000 Common stocks 600,000 Retained earnings 300,000 2-7 INCOME STATEMENT Items 2022 Sales revenues 4,000,000 Operating costs 2,000,000 EBITDA 2,000,000 D+A (non cash expenses) 100,000 EBIT (operating income) 1,900,000 I (interest expenses) 200,000 EBT (Earning before tax) 1,700,000 T (30%) taxable income 510,000 Net income 1,190,000 EBITDA = EARNINGS BEFORE INTEREST, TAX, DEPRECIATION AND AMORTIZATION NET INCOME = EBT*(1-T) = 1700,000* (1-30%) = 1,190,000 2-8 Dividends ratio = 60% Dividends = Net income* Ratio = 1,190,000 * 60% = 714,000 Retention ratio = 40% Retained earnings = 40% = 476,000 Net income = Dividends + Retained earnings = 714,000 + 476,000 = 1,190,000 2-9 INCOME STATEMENT Sales COGS Other expenses EBITDA Depr. & Amort. EBIT Interest Exp. EBT Taxes Net income 2010 7,035,600 5,875,992 550,000 609,608 116,960 492,648 70,008 422,640 169,056 253,584 2009 6,034,000 5,528,000 519,988 (13,988) 116,960 (130,948) 136,012 (266,960) (106,784) (373744) 2-10 INCOME STATEMENT 2022 2021 Sales revenues 2,000,000 1,500,000 Cost of good sold 1,700,000 1,300,000 Selling and administrative 100,000 50,000 EBITDA 200,000 150,000 D+A 20,000 20,000 EBIT) Operating income) 180,000 130,000 Interest expense (I) 30,000 25,000 EBT 150,000 105,000 Tax (20%) 30,000 21,000 Net income 120,000 84,000 EARNING BEFORE INTEREST, TAX, DEPRECIATION, AMORTIZATION (EBITDA)

CHAPTER 3
FINANCIAL STATEMENTS, CASH FLOW
 B A L A N C E S H E E T
 I N C O M E STAT E M E N T
 R E TA I N E D E A R N I N G S
 STAT E M E N T O F C A S H F LOW S
 F R E E C A S H F LOW S ( F C F )
2-2
THE ANNUAL REPORT
• Balance sheet – provides a snapshot of a firm’s financial
position at one point in time. (assets= liabilities + equity)
• Income statement – summarizes a firm’s revenues and
expenses over a given period of time.
• Statement of retained earnings – shows how much of the
firm’s earnings were retained, rather than paid out as
dividends.
• Statement of cash flows – reports the impact of a firm’s
activities on cash flows over a given period of time.
2-3
BALANCE SHEET
Assets 2022 Liabilities 2022
Cash on hand 150,000 Account payables 80,000
Account receivables 100,000 Notes payables 70,000
Ending inventories 50,000 Accruals 50,000
Current assets 300,000 Current liabilities 200,000
Net fixed assets 700,000 Long term debts (LTD) 300,000
Total assets 1,000,000 Total liabilities 500,000
Paid in capital 100,000
Common stock 300,000
Retained earnings 100,000
Total equity 500,000
DEPRECIATION: THE USED UP OF TANGIBLE ASSETS BY USING SLM
AMORTIZATION: THE USED UP OF IN TANGIBLES ASSETS (COPY WRIGHTS, BRANDS)
FINANCIAL RESOURCES: LTD + CS + RE + PAID IN CAPITAL
TOTAL CURRENT ASSETS = WORKING CAPITAL
NET WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES = 350,000 – 200,000 = 150,000
2-4
BALANCE SHEET: ASSETS
Cash
Account recivables
End Inventories
Current assets
Gross FA
Less: Dep.
Net FA
Total Assets
2009
7,282
632,160
1,287,360
1,926,802
1,202,950
263,160
939,790
2,866,592
2010
85,632
878,000
1,716,480
2,680,112
1,197,160
380,120
817,040
3,497,152
2-5
BALANCE SHEET: LIABILITIES AND EQUITY
Accts payable
Notes payable
Accruals
Total CL
Long-term debt
Common stock
Retained earnings
Total Equity
Total L & E
2010
436,800
300,000
408,000
1,144,800
400,000
1,721,176
231,176
1,952,352
3,497,152
2009
524,160
636,808
489,600
1,650,568
723,432
460,000
32,592
492,592
2,866,592
2-6
ASSETS = LIABILITIES + TOTAL EQUITY
Assets: Current assets (CA) + net fixed assets (NFA)
CA = Cash + Account receivables + Ending inventories
Liabilities: Current liabilities (CL) + Long term debts (LTD)
CL: Accounts payables + Notes payables + accruals
Total owners equity : Common stock + Preferred stocks + retained earnings
Example: assume ABC company has the following financial data:
Total assets = LTD + A/P+ Common stock+ Retained earnings
= 500,000+300,000+ 600,000+ 300,000 = 1,700,000
Total assets = CA + Net fixed assets = 1,700,000 – 1200,000 = 500,000
Item Value
Current assets 1200000
Long term debts 500000
Accounts payable 300,000
Common stocks 600,000
Retained earnings 300,000
2-7
INCOME STATEMENT
Items 2022
Sales revenues 4,000,000
Operating costs 2,000,000
EBITDA 2,000,000
D+A (non cash expenses) 100,000
EBIT (operating income) 1,900,000
I (interest expenses) 200,000
EBT (Earning before tax) 1,700,000
T (30%) taxable income 510,000
Net income 1,190,000
EBITDA = EARNINGS BEFORE INTEREST, TAX, DEPRECIATION AND AMORTIZATION
NET INCOME = EBT*(1-T) =
1700,000* (1-30%) = 1,190,000
2-8
Dividends ratio = 60%
Dividends = Net income* Ratio = 1,190,000 * 60% = 714,000
Retention ratio = 40%
Retained earnings = 40% = 476,000
Net income = Dividends + Retained earnings
= 714,000 + 476,000 = 1,190,000
2-9
INCOME STATEMENT
Sales
COGS
Other expenses
EBITDA
Depr. & Amort.
EBIT
Interest Exp.
EBT
Taxes
Net income
2010
7,035,600
5,875,992
550,000
609,608
116,960
492,648
70,008
422,640
169,056
253,584
2009
6,034,000
5,528,000
519,988
(13,988)
116,960
(130,948)
136,012
(266,960)
(106,784)
(373744)
2-10
INCOME STATEMENT
2022 2021
Sales revenues 2,000,000 1,500,000
Cost of good sold 1,700,000 1,300,000
Selling and administrative 100,000 50,000
EBITDA 200,000 150,000
D+A 20,000 20,000
EBIT) Operating income) 180,000 130,000
Interest expense (I) 30,000 25,000
EBT 150,000 105,000
Tax (20%) 30,000 21,000
Net income 120,000 84,000
EARNING BEFORE INTEREST, TAX, DEPRECIATION,
AMORTIZATION (EBITDA)