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)