Chapter 02 Financial Statements Analysis

FINANCIAL
STATEMENT
ANALYSIS
LEARNING OUTCOMES
At the end of this chapter, you should be able to:

• Explain the purpose and importance of each type of
financial statements
• Explain the relevance of financial information and
importance of financial analysis
• Apply some financial analysis tools to evaluate a firm’s
performance
• Explain the limitations of financial statements and ratio
analysis
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© Oxford Publishing (Malaysia) Sdn. Bhd. (1175094-D), 2018 1– 3
2.1 Firms’ Disclosure of Financial
Information

Information
 Financial Statements
– Firm-issued accounting reports with past
performance information
– Filed with regulatory authorities
– Must also send an annual report with financial
statements to shareholders

Information (cont'd)
 Preparation of Financial Statements
– Generally Accepted Accounting Principles
(GAAP)
– International financial reporting standards (IFRS)
– Auditor
• Neutral third party that checks a firm’s financial
statements

Information (cont'd)
 Types of Financial Statements
– Balance Sheet/ Statement of financial position
– Income Statement
– Statement of Cash Flows
– Statement of Stockholders’ Equity

2.2 BALANCE SHEET / STATEMENT
OF FINANCIAL POSITION

2.2 Balance Sheet
• A snapshot in time of the firm’s financial position
• Dated as of a specific date
• Reports firm’s resources (assets), obligations

(liabilities and equity capital)
• Assets = Liabilities + Shareholders’ equity

2.2 STATEMENT OF
FINANCIAL POSITION
Statement of Financial Position (In Millions)
31 December 2017
ASSETS
Current as s ets $208,926
Property, plant and equipm ent 80,295
Intangible as s ets 120,555
Total as s ets $409,776
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities $85,032
Long-term liabilities 182,777
Total liabilities 267,809
Noncontrolling interes t 4,874
Total s hareholders ' equity 137,093
Total liabilities and s hareholders ' equity $409,776

2.2 Balance Sheet (con’t)
 The Balance Sheet Identity:

– Explains what is owned by the business and how
it is financed
Assets  Liabilities  Stockholders' Equity
Resources owned Rights claimed by

Rights claimed by
by business owners
loan providers
2.2 Balance Sheet (cont'd)
 Assets
– What the company owns
 Liabilities
– What the company owes (to others)
 Stockholder’s Equity
– What the company owes (to owners)
– The difference between the value of the firm’s
assets and liabilities

 Assets
– Current Assets: Cash or expected to be turned
into cash in the next year
• Cash
• Marketable Securities
• Accounts Receivable
• Inventories
• Other Current Assets
– Example: Pre-paid expenses (due to applying accrual
base)
 Assets
– Long-Term Assets
• Net Property, Plant, & Equipment
– Depreciation (and Accumulated Depreciation)
– Book Value = Acquisition cost – Accumulated
depreciation
• Goodwill and intangible assets
– Amortization
• Other Long-Term Assets
– Example: Investments in Long-term Securities

Table 2.1 Global Conglomerate Corporation
Balance Sheet for 2012 and 2011

 Liabilities
– Current Liabilities: Due to be paid within the next
year
• Accounts Payable
• Short-Term Debt/Notes Payable
• Current Maturities of Long-Term Debt
• Other Current Liabilities
– Taxes Payable
– Wages Payable

 Net Working Capital

= (Current Assets – Current Liabilities)

 Liabilities
Long-Term Liabilities
• Long-Term Debt
• Capital Leases
• Deferred Taxes

Table 2.1 (cont'd) Global Conglomerate
Corporation Balance Sheet for 2012 and 2011

 Stockholder’s Equity
– Book Value of Equity
• Book Value of Assets – Book Value of Liabilities

 Market Value Versus Book Value

– Market Value of Equity (Market Capitalization)
• Market Price per Share x Number of Shares
Outstanding
– Cannot be negative
– Often differs substantially from book value

 Market Value Versus Book Value

– Market-to-Book Ratio
• Price-to-Book Ratio
Market Value of Equity
Market-to-Book Ratio 
Book Value of Equity
• Value Stocks
– Low M/B ratios
• Growth stocks
– High M/B ratios
 Enterprise Value
– Total Enterprise Value (TEV)
Enterprise Value  Market Value of Equity  Debt  Cash

Example 2.1
 Problem
– Rylan Enterprises has 5 million shares
outstanding.
– The market price per share is $22.
– The firm’s book value of equity is $50 million.
– What is Rylan’s market capitalization?
– How does the market capitalization compare
to Rylan’s book value of equity?
Example 2.1
 Solution
– Rylan’s market capitalization is $110 million
• 5 million shares × $22 share = $110 million.
• The market capitalization is significantly higher
than Rylan’s book value of equity of $50 million.
• Thus investors are willing to pay 2.2 times over the
book value equity, an indication of what the equity
is ‘worth’ to investors.


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FINANCIAL

At the end of this chapter, you should be able to:

CORPORATE FINANCE All Rights Reserved

CORPORATE FINANCE All Rights Reserved

CORPORATE FINANCE All Rights Reserved

– International financial reporting standards (IFRS)

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– Statement of Cash Flows

– Statement of Stockholders’ Equity

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CORPORATE FINANCE All Rights Reserved

• A snapshot in time of the firm’s financial position

• Dated as of a specific date

• Reports firm’s resources (assets), obligations

• Assets = Liabilities + Shareholders’ equity

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CORPORATE FINANCE All Rights Reserved

 The Balance Sheet Identity:

Assets  Liabilities  Stockholders' Equity

Resources owned Rights claimed by

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CORPORATE FINANCE All Rights Reserved

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 Net Working Capital

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 Market Value Versus Book Value

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 Market Value Versus Book Value

Enterprise Value  Market Value of Equity  Debt  Cash

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