Chapter 2

 The Balance Sheet ( 재무제표 )

 The Income Statement ( 손익계산서 )

 Cash Flow ( 현금흐름 )

Balance Sheet
 Balance sheet showing a “point in time”
representation of the firm’s assets ( 자산 ), liabilities (
부채 ) and equity ( 자본 ).
 That is, what the firm owns (assets; left-hand side)
and how the assets were financed (liab. and equity:
right-hand side)
 It reflects the decisions managers have made about
investments ( 투자 ) and financing ( 자본조달 ).
 Assets: what the firm owns

1) Current Assets ( 유동자산 ): assets that can be converted

to cash within 12 months
ex) cash, inventory ( 재고 ), accounts receivable ( 외상매출금
), marketable securities ( 시장성유가증권 ), etc.
2) Fixed assets ( 고정자산 ): more than one year
Tangible assets ( 유형자산 ): building, land and plant..
Intangible assets( 무형자산 ): brand, patent..
Liabilities & Owner’s Equity:what the firm owes
 Liabilities ( 부채 )

1) Current liabilities ( 유동부채 ): the firm has to pay back

within a year
ex) accounts payable ( 외상매입금 ) (money the firm owes to
its suppliers), Notes payable ( 지급어음 )
2) Long-term liabilities ( 고정부채 ): more than one year
ex) bank loan ( 은행부채 ) or bond ( 채권 ) with maturity (
상환기간 ) more than one year
 Owner’s Equity (shareholder’s equity) ( 자기자본 )

common stock ( 보통주 ), preferred stock ( 우선주 ), capital

surplus ( 자본잉여금 : $ amounts sold to shareholders in
excess of the par value) , and retained earnings ( 유보이윤 :
whole or part of the net income).
 The balance sheet identity

ASSETS = LIABILITIES + EQUITY, or

Assets - Liabilities = Equity
Equity is a claim against the firm’s assets that is
residual
 Net Working Capital ( 순운전자본 )

Current assets (CA) minus current liabilities (CL)

+ when CA > CL: enough CA to pay back CL
- when CA < CL
T2.2 The Balance Sheet (Figure 2.1)
Total Value of Liabilities
Total Value of Assets and Shareholders’ Equity

Current assets Net

Current Liabilities
Working
(cash, A/R, Capital
(A/P,N/P)
inventory)

Long-Term Debt

Fixed Assets

1. Tangible fixed
assets
2. Intangible Shareholders’ Equity
fixed assets
 EX) Find shareholders’ equity and net working capital.

Asset Liability + Equity

Current Asset: 2500 Current Liab.: 1000
Fixed Asset: 6350 Long Term Debt:4800
Total Liab: 5800
Equity:
Total Asset: Total Liab.+ Equity:
88508850
Equity = Total Assets - Total Liab.= 8850 - 5800 = 3050
 Net Working Capital = Current Assets – Current Liab.
= 2500 – 1000 =1500
Market Value ( 시장가치 ) vs. Book Value ( 장부가치 )
 The balance sheet provides the book value of the
assets, liabilities and equity.
 Market value is the price at which the assets,
liabilities or equity can actually be bought or sold.
 Which is more important to the decision-making
process?
          The simplest answer is that market value
represents the cash price people are willing and
able to pay. After all, it is cash that must ultimately
be paid or received for investments, interest ( 이자 ),
principal ( 원금 ), dividends ( 배당 ) and so forth.
Income Statement :measures performance over a specific period of time
Sales 매출 (annual or quarterly)
- Cost of goods sold 매출원가
- Selling, general, administrative expenses 판매 및
일반비용
- Depreciation 감가상각
EBIT (Earnings Before Interest and Taxes) 영업이익
- Interest expense 이자비용
EBT (Earnings Before Taxes) 세전이익
- Taxes 법인세
Net Income 순이익 (dividends and/or retained
earnings)
The Concept of Cash Flow
 Cash flow is one of the most important
pieces of information that a financial
manager can derive from financial
statements
The difference between the number of money
that came in and the number came out
CASH FLOW

 The cash flow identity

Cash flow from assets

= Cash flow to creditors ( 채권자 ) + Cash flow to
stockholders ( 주주 )
 Cash flow from assets =

Operating cash flow ( 영업현금흐름 )

- Net Capital spending ( 순자본소비 )
- Change in net working capital ( 순운전자본의 변동 )
1) Operating Cash Flow (OCF)
cash generated from a firm’s normal business
activities such as producing and selling
OCF = EBIT + Depreciation - Taxes
add dep. because it’s not a cash outflow
deduct taxes because it’s cash outflow
2) Net Capital Spending
= Ending net fixed assets - Beginning net
fixed assets + Depreciation
If +, more money spent on fixed assets during
a particular year
If -, the firm sold off more assets than it
purchased
3) Change in Net Working Capital
= Ending NWC - Beginning NWC
If +, the firm has positive net investments in NWC for a
particular year
Again, Cash flow from assets = OCF - Net capital
spending - change in NWC
Big picture
Cash flow from assets
= Cash flow to creditors + Cash flow to stockholders
 Cash flow to creditors =

interest payments to creditors - net new borrowings

(difference between ending and beginning long term
debt)
 Cash flow to stockholders =

dividends paid - net new equity raised (difference

between ending and beginning common stock and
paid-in surplus 주식발행초과금 )
Cash Flow Example

Balance Sheet
Beg End Beg End
Cash $100 $150 A/P $100 $150
A/R 200 250 N/P 200 200
Inv 300 300 C/L 300 350
C/A $600 $700 LTD $400 $420
NFA 400 500 C/S 50 60
R/E 250 370
$300 $430
Total $1000 $1200 Total $1000 $1200
T2.6 Cash Flow Example (continued)

Income Statement

Sales $2000
Costs 1400
Depreciation 100
EBIT 500
Interest 100
Taxes 200
Net Income $200

Addition to R/E $120

Dividends $ 80
T2.6 Cash Flow Example (concluded)

A. Cash flow from assets

1. Operating cash flow = EBIT + Depreciation – Taxes
= $500 + 100 – 200
= $400
2. Change in NWC = Ending NWC – Beginning NWC
= $350 – $300
= $50
3. Net capital spending = Ending NFA + Dep – Beginning NFA
= $500 + 100 – 400
= $200
4. Cash flow from assets = OCF – NWC sp. – Cap. sp.
= $400 – 50 – 200 = $150
B. Cash flow to creditors and stockholders

1. Cash flow to creditors

=Int. paid – Net New Borrowing

= $100 – $20
= $80
2. Cash flow to stockholders

= Div. paid – Net New Equity

= $80 – $10
= $70
Check: $150 from assets = $80 to bondholders + $70 to
stockholders
T2.7 Cash Flow Summary
 I. The cash flow identity

Cash flow from assets =

Cash flow to creditors (bondholders) + Cash flow to stockholders

(owners)

 II. Cash flow from assets

Cash flow from assets =

Operating cash flow

– Net capital spending
– Changes in net working capital (NWC)
 where:
Operating cash flow =

Earnings before interest and taxes (EBIT) + Depreciation – Taxes

Net capital spending =

Ending net fixed assets – Beginning net fixed assets +

Depreciation

Change in NWC = Ending NWC – Beginning NWC

 III. Cash flow to creditors (bondholders) =
Interest paid – Net new borrowing

 IV. Cash flow to stockholders =

Dividends paid – Net new equity raised
T2.8 Hermetic, Inc., Balance Sheet

As of December 31
($ in thousands)

Assets 20102011
Current assets
Cash $ 45$ 50
Accounts receivable 260310
Inventory 320385
Total $ 625$ 745
Fixed assets
Net plant and equipment 9851100
Total assets $1610$1845
T2.8 Hermetic, Inc., Balance Sheet (concluded)

Liabilities and equity 20102011

Accounts payable $ 210$ 260

Notes payable 110175
Total $ 320$
435
Long-term debt 205225
Stockholders’ equity
Common stock and
paid-in surplus 290290
Retained earnings 795895
Total $1085$1185
Total liabilities and equity $1610$1845
T2.9 Hermetic, Inc., Income Statement

($ in thousands)
Net sales $710.00
Cost of goods sold 480.00
Depreciation 30.00
Earnings before interest
and taxes $200.00
Interest 20.00
Taxable income 180.00
Taxes 53.45
Net income $126.55

Retained earnings $100.00

Dividends 26.55