LECTURE 2: FINANCIAL STATEMENTS

BALANCE SHEET (BALANCE DE SITUACIÓN)

EXAMPLE

BOOK VALIUE VS MARKET VALUE

BOOK VALUE (VALOR CONTABLE): Net worth (valor neto) of the firm according to the balance sheet.

MARKET-VALUE (VALOR DE MERCADO) BALANCE SHEET: Balance sheet showing market rather than book values
of assets, liabilities, and stockholders’ equity. (Balance que muestra los valores de mercado en lugar de los valores
contables de los activos, pasivos y fondos propios)

Book values are based on historical or original values.

Market values measure current values of assets and liabilities (los valores de mercado miden los valores actuales de
los activos y pasivos).

The difference between the market values of assets (activos) and liabilities (pasivos) is the market value of the
shareholders’ equity claim (demanda de fondos propios).

The stock price (precio de las acciones) is: the market value of shareholders’ equity (fondos propios) / the number
of outstanding shares (el número de acciones en circulación)

INCOME STATEMENT (CUENTA DE RESULTADOS) (CUENTA DE PÉRDIDAS Y GANACIAS)

INCOME STATEMENT: financial statement that shows the revenues, expenses, and net income of a firm over a
period of time. (estado financiero que muestra los ingresos, gastos y beneficios netos de una empresa durante un
periodo de tiempo)

Revenue (ingresos) – COGS (valor de los bienes vendidos) = Gross profit (beneficio bruto)

→ Gross margin (margen bruto) = GP/Revenue

GP – Operating expenses (OPEX) (gastos de explotación) = EBITDA (Earnings Before Interest, Taxes, Depreciation
and Amortization) (ganancias de las compañías antes de intereses, impuestos, depreciaciones y amortizaciones /
resultado bruto de explotación)

→ EBITDA margin = EBITDA / Revenue

EBITDA – depreciation = EBIT (Earnings Before Interest and Taxes)

EBIT -- % (Interest expense) = EBT (Earnings Before Taxes)

EBT – Taxes = Net profit/Income → Net Profit Margin = NP / Revenue

INCOME VS CASH FLOW
1. To calculate the cash (tesorería) produced by the business, it is necessary to add the depreciation charge
(which is not a cash payment) back to (a los) accounting profits and to subtract (restar) the expenditure on
new capital on new capital equipment (which is a cash payment).
2. Cash versus accrual accounting (contabilidad de caja vs contabilidad de ejercicio)

OPERATING AND CASH CYCLE

(1)

(2)
THE STATEMENT OF CASH FLOWS
Noncash investing and financing
activities do not flow (no monetarias)
through (a través de) the statement of
cash flows because (flujos de efectivo)
they do not require the use of cash.

Some examples:

• Retiring debt securities by issuing

equity securities of the lender. (retirar
títulos de deuda emitiendo títulos de
capital al prestamista)
• Convertig prefered stock to
common stock. (Conversión de acciones
preferentes en acciones comunes)
• Acquiring assets through a capital
lease. (Adquisición de activos mediante
arrendamiento financiero)
• Obtaining long-term assets by issuing notes payable to the seller. (emission de pagarés al vendedor)
• Exchanging one noncash asset for another noncash asset. (activo no monetario)
• The purchase of noncash assets by issuing equity or debt securities. (emission de títulos de capital o de
deuda)

CASH FLOW DETERMINATION

The cash flow statement contains 3 ACTIVITIES: OPERATING, INVESTING AND FINANCING.

1. CASH FLOW FROM OPERATIONS: represents changes in the working capital accounts (e.g. accounts
receivable, inventory, and accounts payable) and all items that flow through the income statement (e.g. cash
receipts from customers, payments for good sols, wages).
2. CASH FLOW FROM INVESTING: represents the purchase or sale of productive assets (e.g. physical assets and
investment) for cash. Investing cash flow essentially deals with the items appearing on the lower left-hand
portion of the balance sheet (e.g. fixed assets).
3. CASH FLOW FROM FINANCING: represents acquiring and dispensing ownership funds and borrowings
(émprestitos). Financing cash flow deals with the lower right-hand portion of the balance sheet (e.g. long-
term debt and equity).

The investing and financing sections are calculated similarly.

2 METHODS OF CALCULATION CASH FLOW FROM OPERATIONAL ACTIVITY are majorly used:

1. DIRECT METHOD: of cash flow operating activities includes the cash being received from the customers and
the cash paid to the suppliers, employees, and others. The cash can also be paid for income tax, interest,
and other variables. It starts with cash transactions such as cash received, and cash paid while ignoring the
non-cash transactions. → CASH FLOW = DEPOSITS – PAYMENTS
 2. INDIRECT METHOD: of cash flow uses net income as the base, adds non-cash expenses like depreciation,
deducts non-cash incomes like profit on the sale of scraps, and net adjustments between current assets and
liabilities to produce the overall cash flow statement.
→ CASH FLOW = NET INCOME- NON-CASH INCOME + NON-CASH EFFECTIVE EXPENSES

EFFECTS ON CASH FLOW

RELATIONSHIPS BETWEEN FINANCIAL STATEMENTS DIAGRAM

 THE REVENUE PRINCIPLE
Some revenues are unearned but cash collected – revenue or liability. (Algunos ingresos no se devengan (ganan)
pero se cobran en efectivo: ingresos o pasivos)

CASH COLLECTED over time it becomes (con el tiempo se convierten en) REVENUES

(goods or services due to consumers) (earned when goods or services provided)

Rent collected in advance Rent venue

Unearned air traffic revenue Air traffic revenue

Deferred subscription revenue Subscription revenue

In balance sheet Income statement

THE MATCHING PRINCIPLE

CASH PAID FOR as used over time becomes EXPENSE

Supplies inventory Supplies expense

Prepaid insurance Insurance expense

Buildings and equipment Depreciation expense

In balance sheet Income statement

FREE CASH FLOW

FREE CASH FLOW: cash available for distribution to inventors after firm pays for new investments or additions to
working capital.

NET INCOME + DEBT INTEREST = 6,345 + 830

CASH FLOW FROM OPERATIONS = (net income + interest) + depreciation – additions to net working capital =
(6,345 + 830) +1786 – 4 = 8,957

FREE CASH FLOW = cash flow from operations – capital expenditures = 8,957 – 1,258 = 7,699

What the free cash flow would have been if the company had been financed entirely by equity? TAX 35%

FCF = 7,699 – (830 X 0,35) = 7,408

 TAX ISSUES
EBIT: Earnings Before Interest and Taxes

Firms A and B both have EBIT of $100 million, but A pays out part of its profits as debt interest. This reduces the
corporate tax paid by A.

NOPAT: Net Operating Profit After Taxes – The profit a company would generate if it had no debt and held
only operating assets.
PROBLEMS