FIN 785 – Week 2

  • Watch Videos
    • Intro
      • Financial Statements
        • Key financial statements
          • Balance Sheet
          • Income Statement
          • Statement of Stockholders’ Equity
          • Statement of Cash Flows
        • Performance
    • Lecture
      • Annual Report
        • Balance sheet: provides a snapshot of a firm’s financial position at one point in time
        • Income statement: summarizes a firm’s revenues and expenses over a given period of time.
        • Statement of cash flows: reports the impact of a firm’s activities on cash flows over a given period of time.
        • Statement of stockholders’ equity: shows how much of the firm’s earnings were retained, rather than paid out as dividends.
      • Example: Overview of D’Leon Inc
        • Snack food company that underwent major expansion in 2015
        • So far expansion results have been unsatisfactory
          • Company’s cash position is weak
          • Suppliers are being paid late
          • Bank has threatened to cut off credit
        • Board of directors has ordered that changes must be made
  • Cont
    • Cont
      • Cont
        • Fixed assets are up, cash is down. Probably they bought a lot of machinery in the expansion
        • Unsettled accruals are high: people owe them money
        • Net cash is negative
        • They borrowed a lot of money to meet cash requirements
        • It was a bad year for them
      • Did their expansion create additional after-tax income?
        • AT operating income (after tax) = EBIT (Earnings before interest and taxes) * (1 – tax rate)
        • ATOI went down from $114k to -$78k
        • Net income went very negative as well
      • Businesses engage in three types of activities
        • Operating activities
          • Running the business
        • Finance activities
          • Funding the business
        • Investment activities
          • Investing revenues in future business
  • Cont
    • Cont
      • Performance measures for evaluating managers
        • Accounting statements are insufficient for evaluating managers because they do not reflect market values
        • Performance measures
          • MVA (market value added) = difference between market value and book value of a firm’s common equity.
          • (Price of stock * number of shares) – book value
  • Cont
    • Cont
      • Did they pay suppliers on time?
        • Probably not
  • They increased notes payable, creating lots of short-term debt and lots of long-term debt
    • They have a lot of debt now, and their expansion is not showing returns.