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Financial Statement Basics


Financial Statement Basics Fin 341 Prepared by Keldon Bauer Financial Statement Fundamentals Publicly traded companies must file an annual (10-K) report with the SEC. – PowerPoint PPT presentation

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Title: Financial Statement Basics

Financial Statement Basics
  • Fin 341
  • Prepared by Keldon Bauer

Financial Statement Fundamentals
  • Publicly traded companies must file an annual
    (10-K) report with the SEC.
  • The purpose of the 10-K is to report to owners on
    the status of their investment.
  • The 10-K report contains both verbal and
    quantitative information about the performance of
    the firm.

Financial Statement Fundamentals
Financial Sections Include
  • Income Statement (usually 3 years)
  • Balance Sheet (usually 2 years)
  • Statement of Retained Earnings
  • Statement of Cash Flows
  • Key operating statistics for 5-10 years
  • The purpose is both informative and marketing

Financial Misrepresentation
  • Some firms go far in misrepresenting their
    financial statements.
  • If they become fiction, then shareholders can
  • Stanford Law School maintains a clearinghouse
    website for securities class actions, most of
    which involve managers allegedly misrepresenting
    their financial statements.

Financial Misrepresentation
  • Trust is a very important asset in the financial
  • Those playing games with their financial
    credibility may never regain market value that
    they once had.
  • Typically, new leadership is required to
    reestablish it the CEO must go!

Importing Financial Statements
  • The Securities and Exchange Commission (SEC)
    posts firms financial filings online on EDGAR.
  • To access these filings go to this link and type
    in the companys name.
  • Then click find companies.
  • Filings are listed chronologically from most
    recent to most ancient.

Importing Financial Statements
  • Annual income statements are usually found in the
    firms 10-k report (annual report).
  • The report type is listed on the left side of the
  • Most of these files have follow-up links.
  • Use the link to 10-k, annual report, or sometimes
    exhibit 13.

Importing Financial Statements
  • Once the annual report is loaded in the browser,
    the quickest way to the financials is usually
    under Edit and Find (or ctl-f).
  • Then type in the words balance sheet.
  • Balance sheet is a better term because it is
    found next to the income statement and not all
    firms call the income statement the same thing.
  • You may have to hit find a couple of times to get
    to the actual balance sheet.

Importing Financial Statements
  • Click and drag over the whole income statement.
  • Copy to the clip-board.
  • Go to Excel and put the cell-pointer in the
    upper-left corner of where you want to put the
  • Then paste.

Importing Financial Statements
  • There are two general types of EDGAR filings.
  • Those in HTML format.
  • Those in text format.
  • If the numbers are mostly in their own cells,
    then you probably have one in HTML format.
  • You will still have to clean it up.
  • Reformat it to look nice.
  • Watch for negatives where only one bracket is in
    the right cell!

Importing Financial Statements
  • If it was a text file, then Excel put all data
    from each line in the first column, and you need
    to break them into individual columns.
  • Highlight all lines (just the column with the
  • Data
  • Text to Columns
  • Use the fixed widths option, and use the arrows
    to point to where the breaks should be.
  • Double click an arrow to make it go away.

The Balance Sheet
  • The balance sheet gives a conservative estimate
    of the current status of sources and uses of
    investment funds.
  • Each side of the balance sheet is organized in
    order of decreasing liquidity.
  • The further a line is from the top, the less
    liquid, and the less likely it represents the
    current market value.
  • Liabilities do equal the current outstanding

Income Statement
  • The income statement show the basis whereby
    equity is adjusted on the balance sheet over
  • This is its primary function.
  • The bottom-line income is then used to declare a
    dividend, or increase the equity on the balance
    sheet (retained earnings).

Creating Common Size Statements
  • The key to creating common size financial
    statements is the use of relative versus absolute
  • Excel interprets an address as relative (in
    position) to another address in a formula, unless
    you specify otherwise.
  • A1 is a relative address.
  • To specify an absolute address you simply use a
    in front of the absolute portion.
  • A1 means always A1.
  • The F4 key allows you to cycle through all

Creating Common Size Statements
  • The item that is the basis for the common size,
    then typically gets an absolute address.
  • For example if sales are in C4, then creating a
    common size income statement would require you to
    punch in
  • C4/C4.
  • Then copying that formula down will create the
    common size income statement.

Creating Custom Views
  • You might want to, (but you dont have to) use
    the custom view to create the common size
  • To use a custom view, first get the spreadsheet
    to display what you want it to display.
  • Then choose View and Custom Views.
  • Then just add the new view.

Cash Flow Statements
  • There are two types of cash flow statements
  • Indirect
  • Starts with net income a reconciles the change in
    cash position of the company by making
  • Direct
  • Looks like an income statement, but deals only
    with cash items, and ends up showing the change
    in cash position of the company.

Cash Flow Statements
  • Companies may disclose either type of cash flow
    statement as long as they disclose and indirect
  • If they choose to use a direct statement, they
    must also use an indirect.
  • Therefore, only indirect statements are used.

Indirect Cash Flow Statement
  • The indirect cash flow statement starts with net
    income disclosed on the income statement.
  • Cash adjustments are then made for operating
    revenues and expenses.
  • Then cash adjustments are made for assets and

Indirect Cash Flow Statement
  • Then categories are covered that dont exist on
    the income statement.
  • First, the cash income is adjusted for investing
  • Buying/selling subsidiaries, assets, etc.
  • Second, the cash income is adjusted for financing
  • Both activities that bring in funds, or cost

What is free cash flow (FCF)? Why is it
  • FCF is the amount of cash available from
    operations for distribution to all investors
    (including stockholders and debtholders) after
    making the necessary investments to support
  • A companys value depends upon the amount of FCF
    it can generate.

What are the five uses of FCF?
  • 1. Pay interest on debt.
  • 2. Pay back principal on debt.
  • 3. Pay dividends.
  • 4. Buy back stock.
  • 5. Buy nonoperating assets (e.g., marketable
    securities, investments in other companies, etc.)

What are operating current assets?
  • Operating current assets (OCA) are the current
    assets needed to support operations.
  • Operating current assets include cash,
    inventory, receivables.
  • Operating current assets exclude short-term
    investments, because these are not a part of

What are operating current liabilities?
  • Operating current liabilities (OCL) are the
    current liabilities resulting as a normal part of
  • Operating current liabilities include accounts
    payable and accruals.
  • Operating current liabilities exclude notes
    payable, because this is a source of financing,
    not a part of operations.

Important Operating Measures
  • Net Operating Working Capital (NOWC)
  • Total Net Operating Capital (TNOC)
  • TNOC NOWC Net Fixed Assets
  • Net Operating Profit After Tax (NOPAT)
  • NOPAT EBIT(1-Tax Rate)
  • EBIT Earnings Before Interest and Taxes

Important Operating Measures
  • Free Cash Flow (FCF)
  • FCF NOPAT - Net investment in
    operating capital
  • Return on Invested Capital (ROIC)
  • Economic Value Added (EVA)

Market Value Added
  • Market Value Added (MVA)
  • Market Value of Firm - Book Value of Firm
  • If the market value of debt is close to the book
    value of debt, then MVA is
  • MVA Market value of equity book value of