Professional Documents
Culture Documents
CPChap 2
CPChap 2
N TI O
AL W
D N R
R O
C G E
AT R
O FR C
IO K
M A AS
S
PA M TI
N E N
Y’ W G
S O
A R
C K
TI
VI
TI
I. II. III IV V
ES
I. FIN. STATEMENTS VS
ACTIVITIES
Production-Investment Cycles
Assets 1566
Liabilities 1147
Contributed Capital 257
Retained Earnings 162
II. FINANCIAL REPORTING
FRAMEWORK
The Relationship between BS and IS
1566 = 1147 + 257 + 162
∆Assets = ∆Liabilities + ∆Con. Capital+ ∆Ret. Earn.
Or:
∆Assets = ∆Sources of Capital
And:
346 = 184 + 162
Net Income= Dividends + ∆ Ret. Earnings.
II. FINANCIAL REPORTING
FRAMEWORK
The Relationship between BS and IS
Example: Mai Linh Inc. records an expense related
to research and development. How does this
action affect the balance sheet?
A. Increases assets.
B. Decreases liabilities.
C.Reduce revenue.
D.Increases equity.
II. FINANCIAL REPORTING
FRAMEWORK
Balance Sheet
A statement of financial condition/position at a
point in time.
Used to assess a firm’s liquidity, solvency, and
ability to make distributions to shareholders.
Three elements: assets, liabilities, equity.
Assets Liabilities Stockholders' Equity
Assets and liabilities are classified as current and
non-current.
II. FINANCIAL REPORTING
FRAMEWORK
The Balance Sheet: An Example
II. FINANCIAL REPORTING
FRAMEWORK
The Balance Sheet
Example: What would happen to Mai Linh Corp.’s
balance sheet when it tightens sales policy,
specifically, it stops allowing sales on credit?
A. A decrease in receivables.
B. A decrease in payables.
C.An increase in sales revenue.
D.An increase in net income.
II. FINANCIAL REPORTING
FRAMEWORK
The Balance Sheet
Example: Tuan Bach, CEO of Tuan Bach Corp. has
found an excellent method of inventories
management that will help to coordinate
production and selling process more efficiently
and significantly reduce the levels inventories the
firm must maintain to guarantee smooth operation.
How will this invention affect the balance sheet of
the company?
=> reduce inventory levels/ improve CF/ lower costs
II. FINANCIAL REPORTING
FRAMEWORK
The Balance Sheet
Example: Mai Linh Commercial is a chain of retail
supermarkets. Tuan Bach Corp. is a real estate
company which owns, trades and rents buildings,
offices, apartments, houses… How would you
expect their balance sheet to be different?
II. FINANCIAL REPORTING
FRAMEWORK
Income Statement
Reports the revenues and expenses of the firm
over a period.
The Income Statement: An example.
II. FINANCIAL REPORTING
FRAMEWORK
Balance Sheet: Some Notes
WC= CA– CL.
Strictly speaking, WC does not include current
financial assets and liabilities (for instance, excess
cash, short-term debts,…).
Operating (current) liabilities should not be viewed
as parts of firm’s financial activities.
Cash is usually viewed as negative debt. (Although
some economists would not agree. See Acharya et. al (2007), “Is cash a
negative debt? A hedging perspective on corporate financial policies”,
Journal of Financial Intermediation)
II. FINANCIAL REPORTING
FRAMEWORK
Income Statement: General Format
Revenue
- Cost of goods sold
Gross profit
+ Other recurring income
- Other recurring expense
Income from continuing operations
+/- Other non-recurring income/expense
Income before tax
- Taxes
Net income
II. FINANCIAL REPORTING
FRAMEWORK
Example: Tuấn Bách Company:
Revenue 4 bil
CoGS 3 bil
Other operating expense 0.5 bil
Interest expense 0.1 bil
Provision for income tax 0.12 bil
Gross profit = ?
Operating income = ?
EBIT = ?
Net income = ?
II. FINANCIAL REPORTING
FRAMEWORK
Income Statement
Example: In order to prepare for Tuan Bach Inc.’s share
offerings next year, Tuan Bach, CFO wants to inflate
earnings. The company is installing a new machine which
costs euro 5 million and have economic life of 5 years.
The accounting standards allow Tuan Bach some
discretion in the estimation of assets life. He could:
A. Lengthen the estimate of asset’s life to 7 years, record a
lower depreciation expense each year and record an
impairment loss after 5 years.
B. Shorten the estimate of asset’s life to 3 years, record a
lower depreciation expense each year and write-up the
asset after 5 years.
II. FINANCIAL REPORTING
FRAMEWORK
Income Statement
Net Income
EPS
Shares Outstanding
Empirical research shows that cash flows component of earnings are more persistent than
accrual component.
Net Cash Flow = Ending Cash – Beginning Cash.
Net Cash Flow = CFO + CFI + CFF.
II. FINANCIAL REPORTING
FRAMEWORK
Cash Flow Statement
Example:
Na Ri Hamico (KSS): Positive earnings 9 years in a
row but Negative CFOs. May 2015: arrest of
CEO, Chairman and Chief Accountant.
Machinco (SMA): Always had positive earnings but
negative cash flows in 2011-2013. Dividend
payment for 2011, 2012 and 2013 was postponed
for years until 2015 (2011’s dividend was
postponed 11 times).
II. FINANCIAL REPORTING
FRAMEWORK
Cash Flow Statement: An example
II. FINANCIAL REPORTING
FRAMEWORK
Cash Flow Statement
CFO calculation: direct methods
o Add/Subtract cash receipts and cash payments
from operation, or
o Readjust revenue and cost for:
Non-cash charges or income.
Non-operation cash-flow.
II. FINANCIAL REPORTING
FRAMEWORK
Cash Flow Statement
CFO indirect calculation: adjust net income (or
income before tax) for
o Non-cash income (-), non-cash charges (+).
o Non-operation income or charges.
II. FINANCIAL REPORTING
FRAMEWORK
Example: What type of cash flow are these:
A. Repurchase shares.
B. Pay interest.
C. Receive dividend.
D. Pay salary.
E. Buy materials on 3-month credit.
F. Convert bonds into stock.
G. Depreciation.
II. FINANCIAL REPORTING
FRAMEWORK
Example: Predict what happens to Tuan Bach Corp.’s financial statements in short-
term and in long-term in the following cases.
A. Tuan Bach Corp. makes it easier for customers to buy on credit. (longterm: may
make the provisions for uncollectible AR->increase provisions expense in IS)
=>must be answered in CF, IS, BL
B. Tuan Bach Corp. produces too much more products than it can sell.(shorterm:
higher earnings_temporary,
(longterm: inventory devalued, higher provisions, IS will be recored a loss)
II. FINANCIAL REPORTING
FRAMEWORK
Free Cash-Flow to the Firm (FCFF)
Receivables
Tax Interest
turnover
coverage
Fixed-assets
Common-size
turnover Debt payment
income statement
coverage…
Common-size
balance sheet
III. RATIO ANALYSIS
Total assets
Financial leverage=
(Equity multiplier) Total equity
III. RATIO ANALYSIS
Interest Coverage Ratios
EBIT
Interest coverage=
Interest payments
EBITDA
Debt Service =
Coverage ratio
Interest Pmt(1-tax)+Principal Pmt
III. RATIO ANALYSIS
Example: Following the previous example of Tuba Inc., producer of
TubaPhone. How will the recognition of inventory allowance affect the firm’s
leverage ratios and interest-coverage ratios?
Example: How does the following transaction affect debt-to-equity ratio?
Investment in new PP&E
=> equity decrease because the inventory write-down reduces retained
earnings (part of equity).
=> The inventory allowance reduces EBIT because it is an expense.
III. RATIO ANALYSIS