Bachelor en Gestion

2nd Class

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 Last Class
Chapter 1:
• Investing and Financing Decisions
• What is a Corporation
Chapter 2:
• Financial Markets
Chapter 3:
• Financial Statements (the language of business)
• Balance Sheet and Income Statement (more to follow)

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Review Quiz

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 Chapter 3

Accounting
Book Cover
10e
and Finance

Copyright © 2018
Copyright by The
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by The Companies,
McGraw-Hill Inc.
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rightsreserved
reserved
 Topics Covered

3.1 The Balance Sheet

3.2 The Income Statement
3.3 The Statement of Cash Flows
3.4 Accounting Practice and Malpractice

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 The Balance Sheet (1 of 5)

The Balance Sheet is:

Financial statement that shows the value of the
firm’s assets and liabilities at a particular time.
It has a date and contains “snapshot” values.

Accounting principles:
Reliability, Conservativeness.
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 The Balance Sheet (2 of 5)
The Main Balance Sheet Items

Current Assets Current Liabilities

• Cash & Securities • Payables
• Receivables • Short-term Debt
• Inventories
+
+ =
Long-term Liabilities
Fixed Assets
• Tangible Assets +
• Intangible Assets
Shareholders’ Equity

3- 8
 The Balance Sheet (3 of 5)
Home Depot’s Balance Sheet (on December 31, 2017) $ Millions

3- 9
The Basic Accounting Model

Revenues Expenses

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 The Balance Sheet (4 of 5)

 Common-Size Balance Sheet

– All items in the balance sheet are expressed as
a percentage of total assets

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 The Balance Sheet (5 of 5)
Home Depot Common Size Balance Sheet (December 31, 2017)
$ Millions

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Book Values and Market Values (1 of 3)

 Book Values
– Value of assets or liabilities according to the balance sheet
 Market Values
– The value of assets or liabilities were they to be resold in a
market.
 Equity and asset “market values” are often
(not always!) higher than their “book values” (why?)
 Generally Accepted Accounting Principles (GAAP)
– Procedures for preparing financial statements (U.S.).
 International Financial Reporting Standards (IFRS)
– Required in 140 other countries.

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Book Values and Market Values (2 of 3)
Example
According to GAAP, your firm has equity worth $6
billion, debt worth $4 billion, assets worth $10 billion.
The market values your firm’s 100 million shares at
$75 per share and the debt at $4 billion

Q: What is the market value of your assets?

A: Since (Assets = liabilities + equity), your assets
must have a market value of $11.5 billion

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Book Values and Market Values (3 of 3)
Example (continued)

Book Value Balance Sheet

Assets = $10 bil Debt = $4 bil
Equity = $6 bil

Market Value Balance Sheet

Assets
Assets= =$11.5
$11.5bilbil Debt = $4 bil
Equity = $7.5 bil

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 2. The Income Statement (1 of 3)

 Definition
– Financial statement that shows the revenues,
expenses, and net income of a firm over a period
of time. The Income Statement has flow-values
Accounting principles:
Reliability, Conservativeness,
“Time period principle” (flow-values need to correspond to the time period)
“Matching principle” (need to match with each other (i.e. Revenues with Costs))
“Accrual principle” (recognize changes in value, not just cashflows)

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 The Income Statement (2 of 3)
Home Depot’s Income Statement (year ending December 31, 2017)
$ Millions

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The Income Statement (3 of 3)

 Earnings Before Interest and Taxes (EBIT)

a.k.a. “Operating Profit”
= total revenues + other income - costs - deprecation
= 100,904 + 325 - (66,547 + 17,864) - 2,062
= $ 14,755 million

French: “Résultat Operationnel” or “Bénéfice d’exploitation”

German: “Operatives, Betriebs-, Geschäfts- Konzern-
-Ergebnis, -Erfolg, -Gewinn, -Ertrag”

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 Profits vs. Cash Flows

 Differences
– “Profits” subtract depreciation (a non-cash expense)
– “Profits” ignore cash expenditures on new capital
(these expenditures are “capitalized” not “expensed”)
– “Profits” record income and expenses at the time of
sales, not when the cash exchanges actually occur.
– “Profits” do not consider changes in inventory and
other working capital

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3. The Statement of Cash Flows (1 of 4)

The Cashflow Statement is:

Financial statement that shows the firm’s cash receipts
and cash payments over a period of time
Split into:
1) Cashflow from Operations
2) Cashflow from Investing
3) Cashflow from Financing
The sum of these is the change in the cash-balance
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The Statement of Cash Flows (2 of 4)
Home Depot Statement of Cash Flows (December 31, 2017)
$ Millions

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The Statement of Cash Flows (3 of 4)
Home Depot Statement of Cash Flows (December 31, 2017)
(continued) $ Millions

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The Statement of Cash Flows (4 of 4)

Home Depot Statement of Cash Flows (December 31, 2017)

(continued) $ Millions

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 Accounting Practice

Despite Accounting “Principles”

(reliability, conservativeness, matching, time-period, accrual),
firms (i.e. financial managers and their controllers)
have some discretion w.r.t. reporting.
 Revenue recognition
 Expensing vs. capitalizing
 Depreciation (quick or slow)
 Making reserves and provisions
 Off-balance sheet assets and liabilities
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 Quick Quiz

1. Which of the firm's financial statements most clearly recognizes the

payment for new equipment?
a) Balance Sheet
b) Income Statement
c) Cashflow Statement

2. When a firm pays its shareholders a dividend, it will show up as

a) A positive cashflow from operating activities
b) A negative cashflow from investing activities
c) A negative cashflow from financing activities

And two more easy questions in the poll

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