Introduction to Financial Statement Analysis P.V.

Transcript:Introduction to Financial Statement Analysis P.V.:
Introduction to Financial Statement Analysis P.V. Viswanath P.V. Viswanath 2 Functions of Financial Statements They provide information to the owners and creditors of the firm about the company’s current status and past financial performance Financial statements provide a convenient way for owners and creditors to set performance targets and to impose restrictions on the managers of the firm. Financial statements provide convenient templates for financial planning. P.V. Viswanath 3 The Balance Sheet The balance sheet is a snapshot of the firm’s assets and liabilities at a given point in time Assets are listed in order of liquidity, i.e. ease of conversion to cash without significant loss of value Liabilities are listed in order of time to maturity Assets Assets are divided into current assets and long-term assets. Current assets are: Cash and marketable securities Accounts receivable Inventories Other current assets, such as prepaid expenses Long-term assets include net property, plant and equipment (net PP&E). This consists of the original cost of PP&E reduced each year by an amount called depreciation that is intended to account for wear-and-tear and obsolescence. P.V. Viswanath 4 Assets When a firm acquires another firm, it will acquire a set of assets that must be listed on its balance sheet. Often it will pay more for these assets than their book value on the acquired firm’s balance sheet. The difference is listed as goodwill. Trade-marks, patents and other such assets, along with goodwill are called intangible assets. If their value decreases over time, they will be reduced by an amortization charge. Amortization, like depreciation is not a cash expense. P.V. Viswanath 5 Liabilities Liabilities are divided into current and long-term liabilities. Liabilities that will be satisfied in one year are known as current, and include: Accounts payable, Notes payable, short-term debt and all repayments of debt that will occur within the year. Items such as salary or taxes that are owed but have not yet been paid. The difference between current assets and current liabilities is known as (net) working capital. P.V. Viswanath 6 Long-term liabilities Long-term debt is any loan or debt obligation with a maturity of more than one year. Capital leases are long-term lease contracts that obligate the firm to make regular payments in exchange for the use of an asset. Deferred taxes are taxes that are owed but not yet paid. Firms keep two sets of books – one for financial reporting