Accounting statements and Cash flows

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Lecture 2

• Accounting statements and Cash flows
• Balance Sheet
• Income Statement
• Financial Cash Flow

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Balance Sheet
Snapshot of firms accounting value at a
particular date
Components of balance sheet
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Balance Sheet (continue)
Assets are listed in the order of accounting
liquidity
Liabilities and equity are listed in the order in
which they must be repaid
Debt service is contracted payments of principle
and interest on debt - put the firm in default
if not paid
Accounting value (historical cost of assets) does
not reflect market value of assets
Many valuable assets do not appear in the balance
sheet - good management practice, good
reputation, etc.
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Table 1 Balance Sheet of US Composite Corp.
19x2 and 19x1 (million)
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Table 1 Balance Sheet (continue)
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Income Statement
Measures performance of the firm over a specific
period
Accounting definition of income
Income Revenue - Expenses
Revenue is recorded upon an exchange of goods or
services not count unrealized appreciation of
tangible assets. GAAP
Expenses include some non-cash items
- Depreciation change in value of existing assets
and allowances for asset replacement or repair
- Deferred taxes results from differences between
accounting income and taxable income
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Income Statement (continue)
Costs are classified into
product costs total production cost raw material,
labor, manufacturing overhead reported as cost of
goods sold
period costs allocated to a time period, for
example, salaries reported as selling, general
and administrative expenses
Do not distinguish between variable (long run)
costs and fixed (short run) costs
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Table 2 Income Statement of US Composite Corp.
(million)
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Financial Cash Flow
Firm current assets fixed assets
Financial Markets short term debt long term
debt equity shares
Government
Total value of firm to investors in financial
markets
Total value of assets
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Financial Cash Flow (continue)
total cash flow cash flow to debt
cash flow to equity cash flow to debt debt
service costs - new debt
( interest principle repaid ) - new
debt cash flow to equity dividends stock
repurchased - new stock issues
Value created if total cash flow gt money
raised
Cash flow is not equal to working capital
working capital current assets - current
liabilities
- If you use cash to increase inventories,
then cash decreases but working capital increases
- Depreciation allowances deferred tax do not
reduce cash
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Table 3 Financial Cash Flow of US Composite
Corp. 19x2 (million)
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Table 4 Statement of Cash Flows of US Composite
Corp. 19x2
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Financial Cash Flow (continue)
Interest expense on income statement
Total financial cash flow Total cash flow from
financing activities 42 (Table 3) 7
(Table 4) 49 (Table 2)
Net investment in current assets
(-10) change in accounts receivable
(24) change in inventories
(-11) change in accounts payable
(-16) change in accrued expenses
(-18) change in notes payable
(3) change in other
(8)