2023 Financial Statements
2023 Financial Statements
2023 Financial Statements
Bodie, Chapter 3
Cornett, Chapters 2 & 3
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Content
1.Balance Sheet
2.Income Statement
3.Statement of Cash Flows
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• Song wants to invest in DPH Tree
Farm Inc. Song has a set of recent
Looking financial statements from DPH Tree
Farm’s annual report but is not sure
for a perfect how to read them or what are the
company meanings of all these numbers and
reports.
• What are the four financial statements?
• What information can she gets from
these statements?
Financial Statements 13 4
An annual report
• Four basic financial statements:
1. The balance sheet
2. The income statement
3. The statement of cash flows
4. The statement of retained earnings
• A financial statement provides an accounting-
based picture of a firm’s financial position.
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The balance sheet
• Assets = Liabilities + Equity
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7
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Financial Statements
Net working capital
Financial Statements 17
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Book vs Market Value
Financial Statements 19
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Computing Book vs Market Value
• D2K Inc. lists fixed assets and current assets
of $25 million and $10 million respectively on
its balance sheet. The firm’s fixed assets and
current assets were recently appraised at $32
and $ 11 million respectively.
• The current liabilities’ book and market values
stand at $6 million and the firm’s long-term
debt is $15 million.
• What are the book value and market value of
the firm’s shareholders equity? Construct the
book value and market value balance sheet for
D2K Inc.
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Computing Book Value
Lucas Inc. is a start-up computer software
development firm. It currently owns computer
equipment worth $30,000 and has cash on hand of
$20,000 contributed by firm’s owners.
For each of the following transactions, identify the real
and/or financial assets that trade hands.
Are any financial assets created or destroyed in the
transaction?
a. Firm takes out a bank loan. It receives $50,000 in
cash and signs a note promising to pay back
the loan over 3 years.
b. Firm uses the cash from the bank plus $20,000 of
its own funds to finance the development of new
financial planning software.
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Corporation
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Commercial bank
Income Statement
Financial Statements 11
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Some equations
1. EPS
2. DPS
3. BVPS
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Financial Statements
Corporate Income Taxes
• Corporate Tax Rates as of 2012
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Calulating the tax rate
• E.g: Antonio Inc. earned $17 mill taxable
income (EBT) in 2012. Use the tax schedule to
compute the firm’s 2012 tax liability, its average
tax rate and its marginal tax rate.
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Effect of Debt vs Equity Financing on Returns
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The Statement of Cash Flow
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The Statement of Cash Flow
Financial Statements 20
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Statement of Cash Flows
Financial Statements
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Free Cash Flow
• The cash that is actually available for
distribution to the investors in the firm after the
investments that are necessary sustain the
firm’s ongoing operations are made.
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Computing FCF
• What was DPH Tree Farm’s free cash flow for
2012?
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Statement of Retained Earnings
• Increases in retained earnings occur not just
because a firm has net income, but also
because the firm’s common shareholders
agree to let management reinvest net income
back into the firm rather than pay it out as
dividends.
• Reinvesting net income back into retained
earnings allows the firm to grow by providing
additional funds that can be spent on plant and
equipment, inventory, and other assets needed
to generate even more profit.
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Statement of Retained Earnings
Financial Statements
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