FINANCIAL ANALYSIS

FI 403 E
QUESTIONS & EXERCISES : SESSION 1 & 2

Adam BELMEKKI code étudiant 114482 groupe F2

I- Multiple choice

1. Which financial statement reports…

a. whether the company was profitable or not? (BS / IS / CF)
b. whether assets are primarily financed with debt or equity? (BS / IS / CF)
c. cash received from customers during the accounting period? (BS / IS / CF)
d. the revenues of a corporation? (BS / IS / CF)
e. the liabilities of a corporation? (BS / IS / CF)

2. Circle whether the account is classified as an (A)sset, (L)iability, or part of

Stockholders' Equity (SE) on the balance sheet.
a. Cash (A / L / SE) g. Building (A / L / SE)
b. Accounts receivable (A / L / SE) h. Retained earnings (A / L / SE)
c. Accounts payable (A / L / SE) i. Inventory (A / L / SE)
d. Common stock (A / L / SE) j. Mortgage payable (A / L / SE)
e. Equipment (A / L / SE) k. Bonds payable (A / L / SE)
f. Notes payable (A / L / SE) l. Land (A / L / SE)

3. Circle whether the account is classified as a (Rev)enue, (Exp)ense, or (Not) reported

on the income statement.
a. Wage expense (Rev / Exp / Not) d. Building (Rev / Exp / Not)
b. Inventory (Rev / Exp / Not) e. Rent expense (Rev / Exp / Not)
c. Cost of goods sold(Rev / Exp / Not) f. Service revenue (Rev / Exp / Not)

4. Identify the following items as operating (O), investing (I), or financing (F) activities.
a. Property, plant and equipment (I) f. Short-term debt (F)
b. Current maturities of long-term debt (I) g. Accounts payable (O)
c. Inventories (O) h. Net income (I)
d. Accounts receivable (O) i. Accumulated depreciation
e. Common stock (I) j. Dividends (F)

II- Concepts review & critical thinking questions

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 1. Is cash flow a measure of an increase in wealth or an increase in cash?

First of all, the cash-flow statement is an essential document for implementing or understanding the
financial management of a company because it traces all the origins and uses of cash for a period. It
traces all cash flows, receipts and disbursements, for a period.
Cash flow is the amount of money coming in and going out of a company's account. These flows are
analyzed in accounting and finance to determine whether or not a company needs cash.

2. In a specific fiscal year, the free cash flow of a company turns negative. Has the
company destroyed or created wealth?

If cash-flow is negative, business expenses outweigh revenue. We are then in a deficit situation.
Having a negative cash-flow (or negative cash-flow) means that the final balance is lower than the
initial balance, which can be due to the payment of wages, the purchase of property, investment…
However, a positive cash-flow demonstrates that a business generates more cash in than cash out over
a period. It means that the ending balance is greater than the opening balance, which is often the result
of a return on investment, a sale of products or services, or even inventory, lower costs, better
interests…

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 III- Exercises

Exercise N°1:

PEPSICO (PEP*) 12/27/2008 BALANCE SHEET ($ in millions)

ASSETS STOCKHOLDERS' EQUITY
Goodwill 5124 Contributed capital 381
Other intangible assets 1860 Retained earnings 30,638
Property, plant, and equipment, net 11,663 Treasury stock and other equity (18,913)
Long-term investments 3883 STOCKHOLDERS' EQUITY
Other noncurrent assets 2658 Long-term debt 7,858
Inventories 2522 Other noncurrent liabilities 7,243
Accounts receivable, net 4683 LIABILITIES

Other current assets 1324 Accounts payable 2,846

Short-term investments 213 Other current liabilities 5,572
Cash and cash equivalents 2064 Short-term debt 369
Total Assets $35,994 Total SE & L $35,994

* Stock market symbols are shown in parentheses.

1. Identify the accounting equation amounts for PepsiCo Corporation.

Assets $ 35,994 million= Liabilities $ 23,888 Million +Stockholders’ Equity $12,106million

2. Will the accounting equation hold true for every corporation? Why?

Yes, because assets are always funded by liabilities (debt) or equity. All assets are either
freely and explicitly owned by the owner (equity) or funded by creditors (debt).

3. How is this company financed? Primarily with (liabilities / equity). How can you tell?

Total liabilities ($23,888) are greater than total stockholders’ equity ( $12,106)

4. Use PepsiCo’s balance sheet to answer the following questions:

a. What amount of cash does this company expect to receive from customers
within the next few months?

$ 4,683 million

b. How much does this company currently owe suppliers?

$ 2,846 million

c. Since the company started business,

• what is the total amount shareholders have paid for their shares of stock?

$ 381 million

• Since the company started business, how much net income was earned and
not yet distributed as dividends?

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 $30,638million
Exercise N°2:
During the year N, High Wave Inc. had sales and cost of goods sold of €600 and €300
respectively. Depreciation was €150 and interest paid was €30. Taxes were calculated at a
straight rate of 34%. Dividend were €30.
Beginning net fixed assets were €500 and ending net assets were €750. High Wave Inc.
started the year with €2,130 in current assets and €1,620 in current liabilities, and the
corresponding ending figures were €2,260 and €1,710. All figures are in millions of €.

Required

1. Prepare an income statement for High Wave Inc. Has this company created or
destroyed wealth?
2. What was the cash flow of High Wave Inc. (using both Bottom-up and Top-down
approach) ? Why is this different from net income?
3. What was the change in net working capital during the year? What was the cash flow
from operating activities?
4. What was the net capital spending for the year?
5. Suppose now that the company distributed 20% of its net income and that the amount
of new and repaid borrowings during the year N was €175 and €90, respectively. What
was the cash flow from financing activities?
6. Calculate the increase (decrease) in cash.

1-

Sales 600
Cost of goods 300
Cross margin 300
EBITDA 300
Depreciation 150
Operating income 150
Interest expenses 30
Earnings before taxe 120
Taxes 40,80
Net Income 79,20

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2 – cash:

Both Bottom = 79,2 + 150 = 229,2

Top Down = 300 – 30 – 40,2 = 229,20

BB= 79,2 + 150 = 229,20

TD = 300 - 30 - 40,20 = 229,20

3- Working Capital:

WC = 2140 – 1620 = 520

WC = 2260 – 1710 = 550

Change net capital 550 – 520 = 30

Cash flow free operations

CFO = 79,2 + 150 – 30 = 199,20

4- Net capital spending

750 - 500 + 150 = 400

5- cash flow from financing

175 - 90 - (79,20 x 20%) = 69,16

6- Increase / Decrease in cash

199,20 + 69,16 + 1 = 269,36

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 QUESTIONS: SESSION 3

Work in groups of four to answer the following questions:

1. What is the objective of financial statement analysis from the standpoint of a creditor?

Financial analysis is the method of evaluating companies, businesses, budgets, and

other finance-related transactions to determine their execution and adequacy. Regular
household audits to analyze whether substances are stable, soluble, liquid or useful
enough to warrant money-related investments. A financial review describes a
company's financial position at a particular point in time and provides knowledge about
its operations, operations, cash flow and general condition. Shareholders need
monetary expression to make informed decisions about their valued businesses,
especially when voting on corporate affairs. Shareholders can form these value
judgments in a number of ways. In order to make better decisions, it is critical for them
to analyze their stocks using a set of estimates rather than quite a few.
Some of the accessible metrics include Productivity Percentage, Liquidity Percentage,
Commitment Percentage, Efficiency Indicators, and Price Indicators.

2. What sources of information are available to creditors when analyzing a firm?

The use of financial statement facilitates creditors to examine the financial health of a business. For an
effective business evaluation, it requires financial information such as a use of a balance sheet (is a summary of
what business owns and what it owes and the difference between the two), cashflow statement (is a log of cash
inflows and cash outflows and tracks the cash position of the business on a monthly basis), and an income
statement (summarizes the income and expenses of the dairy farm business and covers periods from one month
to one year. When it’s comes to analyzing a firm for creditors, it’s also about establishing all the factors such as
salaries, existing debt obligations, profit. Creditors determine whether the business show off a credit risk and
also if the company is capable to repay a debt.

3. What is the objective of financial statement analysis from the standpoint of a investor?

Financial analysis makes it possible to pass judgment on the health of a company,

particularly in terms of solvency and profitability. Financial analysis is used in
particular in projects aimed at buying a company or when one wishes to open up its
share capital to new investors.
It allows you to understand many things about the functioning of the company and to
make the best decisions; whether it is related to the management of the company, to the
strategy and positioning of the company, to the investments made by the company
and/or to the very financing of these activities.
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4. What sources of information are available to investors when analyzing a firm?

The balance sheet, the income statement, the cash flow tables, and their annexes are all
documents that reflect the major characteristics of the company's activity and assets.
As well as the press, internal documentation, social networks, the studies, academic
sources, databases.

5. How does the objective of a financial statement analysis for management differ from an analysis
done by creditors and investors?

Financial statements are a set of documents showing the financial situation of a

company at a specific time. They include key data about the company's assets and
liabilities, as well as its income and expenses.

The objective of the analysis of financial statements for management is to understand

many things about the functioning of the company and to make the best decisions,
whether it is related to the management of the company, its strategy and its positioning.
, to the investments made by the company or to the very financing of its activities. It
makes it possible to assess whether the company's resources cover its jobs.

While the objective of the analysis made by the creditors and the investors of the
company constitutes a proof of the productivity and the solvency of this one.

6. Describe the steps of conducting a financial statement analysis.

Understanding how to properly assess a company's financial accounts is crucial for any
financial expert.
Three crucial areas must be understood in order to do this:
The way the financial statements are organized
The economic characteristics of the sector in which the company operates and the tactics used by the
company to set itself apart from its rivals.
Creating an effective study of financial accounts typically involves six phases.

1. IDENTIFY THE ECONOMIC CHARACTERISTICS OF THE INDUSTRY.

Establish the value chain analysis for the sector, or the sequence of processes that go into the
development, production, and distribution of the firm's goods and/or services.
This step frequently involves the use of tools like Porter's Five Forces analysis or economic attribute
analysis.

2. DETERMINE BUSINESS STRATEGIES.

The nature of the company's goods or services, including their originality, level of profit margins,
development of brand loyalty, and cost management, should then be considered.
It's also important to take into account variables like supply chain integration, geographic
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diversification, and sector diversification.

3. Evaluate the firm's financial statements for quality.

Examine the important financial statements in light of the applicable accounting principles.
The correct evaluation of balance sheet accounts depends on factors including recognition, valuation,
and classification.
The main inquiry should be if this balance sheet accurately depicts the firm's financial situation.The
fundamental goal of analyzing the income statement is to accurately evaluate the earnings quality as a
comprehensive picture of the firm's economic performance.
Understanding the influence of the firm's operations, investments, and financial activities on its
liquidity position over the period—basically, where the money came from, where it went, and how
that affected the firm's overall liquidity—requires an analysis of the statement of cash flows.

4. CONSIDER CURRENT RISK AND PROFITABILITY.

This is the stage of evaluating the company and its financial statements where financial experts can
actually bring value.
Key financial statement ratios for liquidity, asset management, profitability, debt
management/coverage, and risk/market value are among the most used analysis tools.There are two
main considerations to consider when evaluating a company's profitability: how successful are the
activities of the company in relation to its assets, regardless of how the company finances those assets,
and how profitable is the company from the standpoint of equity shareholders.
It's crucial to develop the ability to break down return metrics into their core impact variables.
The final step in any financial statement ratio analysis is to compare the present ratios to those from
previous periods, to those of other companies, or to industry averages

5. GET FINANCIAL STATEMENTS PROJECTED.

Financial professionals must, despite it being frequently difficult, make realistic predictions about the
company's (and its industry's) future and analyze how these predictions will affect funding and cash
flows.
Pro-forma financial statements, based on strategies like the percent of sales approach, are a common
way to do this.

6.Value the company. :

Although there are several valuation strategies, a sort of discounted cash flow methodology is the
most used.
These cash flows could take the shape of anticipated dividends or more intricate methods such free
cash flows to the equity holders or on an enterprise-wide basis.
Relative valuation or accounting-based metrics like economic value added are possible alternative
strategies.

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