General Accounting & International Business PDF

General Accounting & International Business Marc Desban, Ph.D.†,‡,∆,δ,φ † Associate Professor of Finance, ‡ Maı̂tre de Conférences en Sciences de Gestion et du Management, spécialise...

General Accounting & International Business Marc Desban, Ph.D.†,‡,∆,δ,φ † Associate Professor of Finance, ‡ Maı̂tre de Conférences en Sciences de Gestion et du Management, spécialisé en Finance de Marché ∆ University Paris-Est Créteil (UPEC), UFR d’AEI International School 61, avenue du Général de Gaulle 94010 Créteil Cedex France δ Research Unit : IRG (EA 2354) φ e-mail : [email protected]  Introduction to Financial Statements Construction of Financial Statements The Financial Leverage The Debt Market 2.5.4 Interest Coverage Ratios X 1 Introduction to Financial Statements 2.5.5 Leverage Ratios 1.1 Origins and early history of the IASB 2.5.6 Valuation Ratios 1.2 Preparation of Financial Statements 2.5.7 Operating Returns 1.3 Process of IFRS standard setting 3 The Financial Leverage 2 Construction of Financial Statements 3.1 Definition of financial leverage 3.1.1 Context 2.1 The Balance Sheet 3.1.2 Definition of financial leverage 2.1.1 The Balance Sheet Identity 3.1.3 The Leverage computation 2.1.2 Assets 3.2 Principle of leverage 2.1.3 Liabilities 3.2.1 Application 2.1.4 Net Working Capital 3.3 Leverage Limits 2.1.5 Stockholders’ Equity 2.2 Income Statement 4 The Debt Market 2.2.1 Income vs. Expenses 4.1 Bond Terminology (Cours du 17/10) 2.2.2 Earnings Calculations 4.1.1 Introduction 2.3 The Statement of Cash Flows 4.1.2 Zero-Coupon Bonds 2.3.1 Operating Activities 4.1.3 The Yield to Maturity 2.3.2 Investment Activities 4.2 Coupon Bonds 2.3.3 Financing Activities 4.2.1 The Cash Flows of a Coupon 2.3.4 Application Bond 2.4 Other Financial Statement Information 4.2.2 Computing the IRR-YTM 2.5 Financial Statement Analysis 4.3 Corporate Bonds X 2.5.1 Profitability Ratios 2.5.2 Liquidity Ratios 2.5.3 Working Capital Ratios 4.3.1 Corporate Bond Yield 4.3.2 Yield to Maturity and Bond Price Fluctuations Marc Desban, Ph.D. General Accounting & International Business 2 / 171  Introduction to Financial Statements Origins and early history of the IASB Construction of Financial Statements Preparation of Financial Statements The Financial Leverage Process of IFRS standard setting The Debt Market 2.5.4 Interest Coverage Ratios 1 Introduction to Financial Statements 2.5.5 Leverage Ratios 1.1 Origins and early history of the IASB 2.5.6 Valuation Ratios 1.2 Preparation of Financial Statements 2.5.7 Operating Returns 1.3 Process of IFRS standard setting 3 The Financial Leverage 2 Construction of Financial Statements 3.1 Definition of financial leverage 3.1.1 Context 2.1 The Balance Sheet 3.1.2 Definition of financial leverage 2.1.1 The Balance Sheet Identity 3.1.3 The Leverage computation 2.1.2 Assets 3.2 Principle of leverage 2.1.3 Liabilities 3.2.1 Application 2.1.4 Net Working Capital 3.3 Leverage Limits 2.1.5 Stockholders’ Equity 2.2 Income Statement 4 The Debt Market 2.2.1 Income vs. Expenses 4.1 Bond Terminology 2.2.2 Earnings Calculations 4.1.1 Introduction 2.3 The Statement of Cash Flows 4.1.2 Zero-Coupon Bonds 2.3.1 Operating Activities 4.1.3 The Yield to Maturity 2.3.2 Investment Activities 4.2 Coupon Bonds 2.3.3 Financing Activities 4.2.1 The Cash Flows of a Coupon 2.3.4 Application Bond 2.4 Other Financial Statement Information 4.2.2 Computing the IRR-YTM 2.5 Financial Statement Analysis 4.3 Corporate Bonds 2.5.1 Profitability Ratios 4.3.1 Corporate Bond Yield 2.5.2 Liquidity Ratios 4.3.2 Yield to Maturity and Bond Price 2.5.3 Working Capital Ratios Fluctuations Marc Desban, Ph.D. General Accounting & International Business 3 / 171  Introduction to Financial Statements Origins and early history of the IASB Construction of Financial Statements Preparation of Financial Statements The Financial Leverage Process of IFRS standard setting The Debt Market Firms’ Disclosure of Financial Information Introduction to Financial Statement Analysis Financial statements are accounting reports with past performance information that a firm issues periodically (usually quarterly and annually). Financial statements are important tools through which investors, financial analysts, and other interested outside parties (such as creditors) obtain information about a corporation. They are also useful for managers within the firm as a source of information for corporate financial decisions. Marc Desban, Ph.D. General Accounting & International Business 4 / 171  Introduction to Financial Statements Origins and early history of the IASB Construction of Financial Statements Preparation of Financial Statements The Financial Leverage Process of IFRS standard setting The Debt Market 2.5.4 Interest Coverage Ratios 1 Introduction to Financial Statements 2.5.5 Leverage Ratios 1.1 Origins and early history of the IASB 2.5.6 Valuation Ratios 1.2 Preparation of Financial Statements 2.5.7 Operating Returns 1.3 Process of IFRS standard setting 3 The Financial Leverage 2 Construction of Financial Statements 3.1 Definition of financial leverage 3.1.1 Context 2.1 The Balance Sheet 3.1.2 Definition of financial leverage 2.1.1 The Balance Sheet Identity 3.1.3 The Leverage computation 2.1.2 Assets 3.2 Principle of leverage 2.1.3 Liabilities 3.2.1 Application 2.1.4 Net Working Capital 3.3 Leverage Limits 2.1.5 Stockholders’ Equity 2.2 Income Statement 4 The Debt Market 2.2.1 Income vs. Expenses 4.1 Bond Terminology 2.2.2 Earnings Calculations 4.1.1 Introduction 2.3 The Statement of Cash Flows 4.1.2 Zero-Coupon Bonds 2.3.1 Operating Activities 4.1.3 The Yield to Maturity 2.3.2 Investment Activities 4.2 Coupon Bonds 2.3.3 Financing Activities 4.2.1 The Cash Flows of a Coupon 2.3.4 Application Bond 2.4 Other Financial Statement Information 4.2.2 Computing the IRR-YTM 2.5 Financial Statement Analysis 4.3 Corporate Bonds 2.5.1 Profitability Ratios 4.3.1 Corporate Bond Yield 2.5.2 Liquidity Ratios 4.3.2 Yield to Maturity and Bond Price 2.5.3 Working Capital Ratios Fluctuations Marc Desban, Ph.D. General Accounting & International Business 5 / 171  Introduction to Financial Statements Origins and early history of the IASB Construction of Financial Statements Preparation of Financial Statements The Financial Leverage Process of IFRS standard setting The Debt Market Preparation of Financial Statements GAAP? Reports about a company’s performance must be understandable and accurate. Generally Accepted Accounting Principles (GAAP) provide a common set of rules and a standard format for public companies to use when they prepare their reports. This standardization also makes it easier to compare the financial results of different firms. Investors also need some assurance that the financial statements are prepared accurately. Corporations are required to hire a neutral third party, known as an auditor, to check the annual financial statements, to ensure that the annual financial statements are reliable and prepared according to GAAP. Marc Desban, Ph.D. General Accounting & International Business 6 / 171  Introduction to Financial Statements Origins and early history of the IASB Construction of Financial Statements Preparation of Financial Statements The Financial Leverage Process of IFRS standard setting The Debt Market 2.5.4 Interest Coverage Ratios 1 Introduction to Financial Statements 2.5.5 Leverage Ratios 1.1 Origins and early history of the IASB 2.5.6 Valuation Ratios 1.2 Preparation of Financial Statements 2.5.7 Operating Returns 1.3 Process of IFRS standard setting 3 The Financial Leverage 2 Construction of Financial Statements 3.1 Definition of financial leverage 3.1.1 Context 2.1 The Balance Sheet 3.1.2 Definition of financial leverage 2.1.1 The Balance Sheet Identity 3.1.3 The Leverage computation 2.1.2 Assets 3.2 Principle of leverage 2.1.3 Liabilities 3.2.1 Application 2.1.4 Net Working Capital 3.3 Leverage Limits 2.1.5 Stockholders’ Equity 2.2 Income Statement 4 The Debt Market 2.2.1 Income vs. Expenses 4.1 Bond Terminology 2.2.2 Earnings Calculations 4.1.1 Introduction 2.3 The Statement of Cash Flows 4.1.2 Zero-Coupon Bonds 2.3.1 Operating Activities 4.1.3 The Yield to Maturity 2.3.2 Investment Activities 4.2 Coupon Bonds 2.3.3 Financing Activities 4.2.1 The Cash Flows of a Coupon 2.3.4 Application Bond 2.4 Other Financial Statement Information 4.2.2 Computing the IRR-YTM 2.5 Financial Statement Analysis 4.3 Corporate Bonds 2.5.1 Profitability Ratios 4.3.1 Corporate Bond Yield 2.5.2 Liquidity Ratios 4.3.2 Yield to Maturity and Bond Price 2.5.3 Working Capital Ratios Fluctuations Marc Desban, Ph.D. General Accounting & International Business 7 / 171  Introduction to Financial Statements Origins and early history of the IASB Construction of Financial Statements Preparation of Financial Statements The Financial Leverage Process of IFRS standard setting The Debt Market International Financial Reporting Standards You said International Financial Reporting Standards? The most important harmonization project began in 1973 when representatives of 10 countries (including the United States) established the International Accounting Standards Committee. This effort led to the creation of the International Accounting Standards Board (IASB) in 2001, with headquarters in London. Now the IASB has issued a set of International Financial Reporting Standards (IFRS). Marc Desban, Ph.D. General Accounting & International Business 8 / 171  Introduction to Financial Statements Origins and early history of the IASB Construction of Financial Statements Preparation of Financial Statements The Financial Leverage Process of IFRS standard setting The Debt Market International Financial Reporting Standards X And now? The IFRS are taking root throughout the world. The European Union (EU) approved an accounting regulation in 2002 requiring all publicly traded EU companies to follow IFRS in their consolidated financial statements starting in 2005. As of 2012, over 120 jurisdictions either require or permit the use of IFRS, including the EU, Australia, Brazil, Canada, Russia, Hong Kong, Taiwan, and Singapore. China, India and Japan will soon follow suit. Indeed, currently all major stock exchanges around the world accept IFRS except the United States and Japan, which maintain their local GAAP. Marc Desban, Ph.D. General Accounting & International Business 9 / 171  Introduction to Financial Statements Origins and early history of the IASB Construction of Financial Statements Preparation of Financial Statements The Financial Leverage Process of IFRS standard setting The Debt Market Types of Financial Statements Financial statements? Every public company is required to produce financial statements: The Balance Sheet The Income Statement The Statement of Cash Flows The Statement of Change in Equity Note to Financial Statement Marc Desban, Ph.D. General Accounting & International Business 10 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis 2.5.4 Interest Coverage Ratios 1 Introduction to Financial Statements 2.5.5 Leverage Ratios 1.1 Origins and early history of the IASB 2.5.6 Valuation Ratios 1.2 Preparation of Financial Statements 2.5.7 Operating Returns 1.3 Process of IFRS standard setting 3 The Financial Leverage 2 Construction of Financial Statements 3.1 Definition of financial leverage 3.1.1 Context 2.1 The Balance Sheet 3.1.2 Definition of financial leverage 2.1.1 The Balance Sheet Identity 3.1.3 The Leverage computation 2.1.2 Assets 3.2 Principle of leverage 2.1.3 Liabilities 3.2.1 Application 2.1.4 Net Working Capital 3.3 Leverage Limits 2.1.5 Stockholders’ Equity 2.2 Income Statement 4 The Debt Market 2.2.1 Income vs. Expenses 4.1 Bond Terminology 2.2.2 Earnings Calculations 4.1.1 Introduction 2.3 The Statement of Cash Flows 4.1.2 Zero-Coupon Bonds 2.3.1 Operating Activities 4.1.3 The Yield to Maturity 2.3.2 Investment Activities 4.2 Coupon Bonds 2.3.3 Financing Activities 4.2.1 The Cash Flows of a Coupon 2.3.4 Application Bond 2.4 Other Financial Statement Information 4.2.2 Computing the IRR-YTM 2.5 Financial Statement Analysis 4.3 Corporate Bonds 2.5.1 Profitability Ratios 4.3.1 Corporate Bond Yield 2.5.2 Liquidity Ratios 4.3.2 Yield to Maturity and Bond Price 2.5.3 Working Capital Ratios Fluctuations Marc Desban, Ph.D. General Accounting & International Business 11 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis The Balance Sheet What is a Balance Sheet? The balance sheet, or statement of financial position, lists the firm’s assets and liabilities, providing a snapshot of the firm’s financial position at a given point in time. Notice that the balance sheet is divided into two parts (“sides”), with the assets on the left side and the liabilities on the right. Marc Desban, Ph.D. General Accounting & International Business 12 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis The Balance Sheet Structure of a Balance Sheet The assets list the cash, inventory, property, plant, and equipment, and other investments the company has made. The liabilities show the firm’s obligations to creditors. Also shown with liabilities on the right side of the balance sheet is the stockholders’ equity. Stockholders’ equity, the difference between the firm’s assets and liabilities, is an accounting measure of the firm’s net worth. equity: % des parts d'une entrep. Marc Desban, Ph.D. General Accounting & International Business 13 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis The Balance Sheet The Balance Sheet Identity Assets = Liabilities + Stockholders’ Equity Marc Desban, Ph.D. General Accounting & International Business 14 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Global Conglomerate Corporation Balance Sheet Marc Desban, Ph.D. General Accounting & International Business 15 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Global Conglomerate Corporation Balance Sheet The Balance Sheet Identity Assets = Liabilities + Stockholders’ Equity Total assets for 2015 ($177.7 million) are equal to total liabilities ($155.5 million) plus stockholders’ equity ($22.2 million). Let’s examine Global’s assets, liabilities, and stockholders’ equity in more detail. Marc Desban, Ph.D. General Accounting & International Business 16 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Assets Remember Global’s assets are divided into current and long-term assets. Marc Desban, Ph.D. General Accounting & International Business 17 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Current Assets First, current assets are either cash or assets that could be converted into cash within one year. Current assets 1. Cash and other marketable securities, which are short-term, low-risk investments that can be easily sold and converted to cash (such as money market investments like government debt that matures within a year); 2. Accounts receivable, which are amounts owed to the firm by customers who have purchased goods or services on credit; 3. Inventories, which are composed of raw materials as well as work-in-progress and finished goods; 4. Other current assets, which is a catch-all category that includes items such as prepaid expenses (such as rent or insurance paid in advance). Marc Desban, Ph.D. General Accounting & International Business 18 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Long-Term Assets Tangible Assets The first category of long-term assets is net property, plant, and equipment. These include assets such as real estate or machinery that produce tangible benefits for more than one year. If Global spends $2 million on new equipment, this $2 million will be included with property, plant, and equipment on the balance sheet. Global est un nom Marc Desban, Ph.D. General Accounting & International Business 19 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Depreciation Because equipment tends to wear out or become obsolete over time, Global will reduce the value recorded for this equipment each year by deducting a depreciation expense. An asset’s accumulated depreciation is the total amount deducted over its life. The firm reduces the value of fixed assets (other than land) over time according to a depreciation schedule that depends on the asset’s life span. I am not a cash item! Depreciation is not an actual cash expense that the firm pays; it is a way of recognizing that buildings and equipment wear out and thus become less valuable the older they get. The book value (BV) of an asset, which is the value shown in the firm’s financial statements, is equal to its acquisition cost less accumulated depreciation. Net property, plant, and equipment shows the book value of these assets. Marc Desban, Ph.D. General Accounting & International Business 20 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Intangible Assets When a firm acquires another company, it will acquire a set of tangible assets (such as inventory or property, plant, and equipment) that will then be included on its balance sheet. Intangible Assets In many cases, however, the firm may pay more for the company than the total book value of the assets it acquires. In this case, the difference between the price paid for the company and the book value assigned to its tangible assets is recorded separately as goodwill and intangible assets. Marc Desban, Ph.D. General Accounting & International Business 21 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Intangible Assets Example of Intangible Assets Global paid $25 million in 2013 for a firm whose tangible assets had a book value of $5 million. The remaining $20 million appears as goodwill and intangible assets. This entry in the balance sheet captures the value of other ”intangibles” that the firm acquired through the acquisition (e.g., brand names and trademarks, patents, customer relationships, and employees). If the firm assesses that the value of these intangible assets declined over time, it will reduce the amount listed on the balance sheet by an amortization or impairment charge that captures the change in value of the acquired assets. Like depreciation, amortization is not an actual cash expense. Marc Desban, Ph.D. General Accounting & International Business 22 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Other long-term assets Other long-term assets Other long-term assets can include such items as property not used in business operations, start-up costs in connection with a new business, investments in long-term securities, and property held for sale. The sum of all the firms’ assets is the total assets at the bottom of the left side of the balance sheet. Marc Desban, Ph.D. General Accounting & International Business 23 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Liabilities Important distinction The liabilities shown on the right side of the balance sheet are divided into current and long-term liabilities. Marc Desban, Ph.D. General Accounting & International Business 24 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Liabilities Current Liabilities Liabilities that will be satisfied within one year are known as current liabilities. They include the following: 1. Accounts payable, the amounts owed to suppliers for products or services purchased with credit; 2. Short-term debt or notes payable, and current maturities of long-term debt, which are all repayments of debt that will occur within the next year; 3. Items such as salary or taxes that are owed but have not yet been paid, and deferred or unearned revenue, which is revenue that has been received for products that have not yet been delivered. Marc Desban, Ph.D. General Accounting & International Business 25 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Net Working Capital Net Working Capital: a cash issue The difference between current assets and current liabilities is the firm’s net working capital, the capital available in the short term to run the business. For example, in 2015, Global’s net working capital totaled $9 million ($57 million in current assets – $48 million in current liabilities). Firms with low (or negative) net working capital may face a shortage of funds unless they generate sufficient cash from their ongoing activities. Marc Desban, Ph.D. General Accounting & International Business 26 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Long-Term Liabilities Long-Term Liabilities Leasing: location avt de devenir propio Long-term liabilities are liabilities that extend beyond one year. 1. Long-term debt is any loan or debt obligation with a maturity of more than a year. When a firm needs to raise funds to purchase an asset or make an investment, it may borrow those funds through a long-term loan. 2. Capital leases are long-term lease contracts that obligate the firm to make regular lease payments in exchange for use of an asset.2 They allow a firm to gain use of an asset by leasing it from the asset’s owner. For example, a firm may lease a building to serve as its corporate headquarters. 3. Deferred taxes are taxes that are owed but have not yet been paid. Firms generally keep two sets of financial statements: one for financial reporting and one for tax purposes. Occasionally, the rules for the two types of statements differ. Deferred tax liabilities generally arise when the firm’s financial income exceeds its income for tax purposes. Because deferred taxes will eventually be paid, they appear as a liability on the balance sheet Marc Desban, Ph.D. General Accounting & International Business 27 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Stockholders’ Equity Partie: Problème Rappel: The sum of the current liabilities and long-term liabilities is total liabilities. The difference between the firm’s assets and liabilities is the stockholders’ equity; it is also called the book value of equity. The Balance Sheet Identity Assets = Liabilities + Stockholders’ Equity As we stated earlier, it is an accounting measure of the net worth of the firm. Ideally, the balance sheet would provide us with an accurate prob assessment of the true value of the firm’s equity. Unfortunately, this is unlikely to be the case... Marc Desban, Ph.D. General Accounting & International Business 28 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Stockholders’ Equity First Many of the assets listed on the balance sheet are valued based on their historical cost rather than their true value today. Ex For example, an office building is listed on the balance sheet according to its historical cost net of depreciation. But the actual value of the office building today may be very different (and possibly much more) than the amount the firm paid for it years ago. The same is true for other property, plant, and equipment, as well as goodwill: The true value today of an asset may be very different from, and even exceed, its book value. Marc Desban, Ph.D. General Accounting & International Business 29 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Stockholders’ Equity Second Probably more important, problem is that many of the firm’s valuable assets are not captured on the balance sheet. Ex Consider, for example, the expertise of the firm’s employees, the firm’s reputation in the marketplace, the relationships with customers and suppliers, the value of future research and development innovations, and the quality of the management team. These are all assets that add to the value of the firm that do not appear on the balance sheet! Marc Desban, Ph.D. General Accounting & International Business 30 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Market Value Versus Book Value Warning about the Book Value For the reasons cited above, the book value of equity, while accurate from an accounting perspective, is an inaccurate assessment of the true value of the firm’s equity. Successful firms are often able to borrow in excess of the book value of their assets because creditors recognize that the market value of the assets is far higher than the book value. Thus, it is not surprising that the book value of equity will often differ substantially from the amount investors are willing to pay for the equity. Marc Desban, Ph.D. General Accounting & International Business 31 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis The Market Value (time: multiplié par) (shares: actions) = So there is a difference in valuation between the market and the accounting The total market value of a firm’s equity equals the number of shares (en circulation) outstanding times the firm’s market price per share. The market value of equity is often referred to as the company’s market capitalization (or ”market cap”). The market value of a stock does not depend on the historical cost of the firm’s assets; instead, it depends on what investors expect those assets to produce in the future. Remember Market Value of Equity = Shares outstanding × Market price per share (stock= pr parler d'un ensemble d'actions ; a share: actions d'une entrep specifiq) Marc Desban, Ph.D. General Accounting & International Business 32 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Application Problem 1. If Global has 3.6 million shares outstanding, and these shares are trading for a price of $14 per share, what is Global’s market capitalization? 2. How does the market capitalization compare to Global’s book value of equity in 2015? (voir p.26) Marc Desban, Ph.D. General Accounting & International Business 33 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Application Solution Global’s market capitalization is (3.6 million shares) × ($14/share) = $50.4 million. This market capitalization is significantly higher than Global’s book value of equity of $22.2 million. Investors are willing to pay 50.4/22.2 = 2.27 times the amount Global’s shares according to their book value. Marc Desban, Ph.D. General Accounting & International Business 34 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Market to Book Market-to-Book Ratio We computed the market-to-book ratio (also called the price-to-book ratio) for Global, which is the ratio of its market capitalization to the book value of stockholders’ equity. (computed: calculer) Market Value of Equity Market to Book Ratio = (1) Book Value of Equity The market-to-book ratio for most successful firms substantially exceeds 1, indicating that the value of the firm’s assets when put to use exceeds their historical cost. Variations in this ratio reflect differences in fundamental firm characteristics as well as the value added by management Marc Desban, Ph.D. General Accounting & International Business 35 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Value vs Growth Stocks Value style? Analysts often classify firms with low market-to-book ratios as value stocks, and those with high market-to-book ratios as growth stocks. Marc Desban, Ph.D. General Accounting & International Business 36 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Entreprise Value A firm’s market capitalization measures the market value of the firm’s equity, or the value that remains after the firm has paid its debts. What is the value of the business itself? The enterprise value of a firm (also called the total enterprise value or TEV) assesses the value of the underlying business assets, unencumbered by debt and separate from any cash and marketable securities. Enterprise Value = Market Value of Equity + Debt - Cash Global’s market capitalization in 2015 is $50.4 million. Its debt is $116.7 million ($3.5 million of notes payable, $13.3 million of current maturities of long-term debt, and remaining long-term debt of $99.9 million). Therefore, given its cash balance of $21.2 million, Global’s enterprise value is 50.4 + 116.7 - 21.2 = $145.9 million. Marc Desban, Ph.D. General Accounting & International Business 37 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Entreprise Value Interpretation? The enterprise value can be interpreted as the cost to take over the business. That is, it would cost 50.4 + 116.7 = $167.1 million to buy all of Global’s equity and pay off its debts, but because we would acquire Global’s $21.2 million in cash, the net cost of the business is only 167.1 - 21.2 = $145.9 million. Marc Desban, Ph.D. General Accounting & International Business 38 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis 2.5.4 Interest Coverage Ratios 1 Introduction to Financial Statements 2.5.5 Leverage Ratios 1.1 Origins and early history of the IASB 2.5.6 Valuation Ratios 1.2 Preparation of Financial Statements 2.5.7 Operating Returns 1.3 Process of IFRS standard setting 3 The Financial Leverage 2 Construction of Financial Statements 3.1 Definition of financial leverage 3.1.1 Context 2.1 The Balance Sheet 3.1.2 Definition of financial leverage 2.1.1 The Balance Sheet Identity 3.1.3 The Leverage computation 2.1.2 Assets 3.2 Principle of leverage 2.1.3 Liabilities 3.2.1 Application 2.1.4 Net Working Capital 3.3 Leverage Limits 2.1.5 Stockholders’ Equity 2.2 Income Statement 4 The Debt Market 2.2.1 Income vs. Expenses 4.1 Bond Terminology 2.2.2 Earnings Calculations 4.1.1 Introduction 2.3 The Statement of Cash Flows 4.1.2 Zero-Coupon Bonds 2.3.1 Operating Activities 4.1.3 The Yield to Maturity 2.3.2 Investment Activities 4.2 Coupon Bonds 2.3.3 Financing Activities 4.2.1 The Cash Flows of a Coupon 2.3.4 Application Bond 2.4 Other Financial Statement Information 4.2.2 Computing the IRR-YTM 2.5 Financial Statement Analysis 4.3 Corporate Bonds 2.5.1 Profitability Ratios 4.3.1 Corporate Bond Yield 2.5.2 Liquidity Ratios 4.3.2 Yield to Maturity and Bond Price 2.5.3 Working Capital Ratios Fluctuations Marc Desban, Ph.D. General Accounting & International Business 39 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis The Income statement A few tips about the Income Statement The income statement or statement of financial performance lists the firm’s revenues and expenses over a period of time. The last or “bottom” line of the income statement shows the firm’s net income, which is a measure of its profitability during the period. The income statement is sometimes called a profit and loss, or “P&L” statement, and the net income is also referred to as the firm’s earnings. Marc Desban, Ph.D. General Accounting & International Business 40 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Earnings Calculations Whereas the balance sheet shows the firm’s assets and liabilities at a given point in time, the income statement shows the flow of revenues and expenses generated by those assets and liabilities between two dates. Marc Desban, Ph.D. General Accounting & International Business 41 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Global Conglomerate Corporation Income Statement Sheet 1er 2ème 3ème Marc Desban, Ph.D. General Accounting & International Business 42 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Gross Profit Gross Profit The first two lines of the income statement list the revenues from 1er sales of products and the costs incurred to make and sell the products. Cost of sales shows costs directly related to producing the goods or services being sold, such as manufacturing costs. Other costs such as administrative expenses, research and 2è development, and interest expenses are not included in the cost of sales. The third line is gross profit, which is the difference between sales 3è revenues and the costs. Marc Desban, Ph.D. General Accounting & International Business 43 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Operating Expenses The next group of items is operating expenses These are expenses from the ordinary course of running the business that are not directly related to producing the goods or services being sold. They include administrative expenses and overhead, salaries, marketing costs, and research and development expenses. The third type of operating expense, depreciation and amortization, is not an actual cash expense but represents an estimate of the costs that arise from wear and tear or obsolescence of the firm’s assets. The firm’s gross profit net of operating expenses is called operating income. Marc Desban, Ph.D. General Accounting & International Business 44 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Earnings before Interest and Taxes (EBIT) EBIT We next include other sources of income or expenses that arise from activities that are not the central part of a company’s business. Eg. Income from the firm’s financial investments is one example of other income that would be listed here. After we have adjusted for other sources of income or expenses, we have the firm’s earnings before interest and taxes, or( EBIT.) Marc Desban, Ph.D. General Accounting & International Business 45 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Pretax and Net Income How to get Net Income? From EBIT, we deduct the interest expense related to outstanding debt to compute Global’s pretax income, and then we deduct corporate taxes to determine the firm’s net income. Net income represents the total earnings of the firm’s equity holders. It is often reported on a per-share basis as the firm’s earnings per share (EPS), which we compute by dividing net income by the total number of shares outstanding: Net Income $2.0 Million EPS = = = $0.556 per Share (2) Shares Outstanding 3.6 Million Shares Marc Desban, Ph.D. General Accounting & International Business 46 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis 2.5.4 Interest Coverage Ratios 1 Introduction to Financial Statements 2.5.5 Leverage Ratios 1.1 Origins and early history of the IASB 2.5.6 Valuation Ratios 1.2 Preparation of Financial Statements 2.5.7 Operating Returns 1.3 Process of IFRS standard setting 3 The Financial Leverage 2 Construction of Financial Statements 3.1 Definition of financial leverage 3.1.1 Context 2.1 The Balance Sheet 3.1.2 Definition of financial leverage 2.1.1 The Balance Sheet Identity 3.1.3 The Leverage computation 2.1.2 Assets 3.2 Principle of leverage 2.1.3 Liabilities 3.2.1 Application 2.1.4 Net Working Capital 3.3 Leverage Limits 2.1.5 Stockholders’ Equity 2.2 Income Statement 4 The Debt Market 2.2.1 Income vs. Expenses 4.1 Bond Terminology 2.2.2 Earnings Calculations 4.1.1 Introduction 2.3 The Statement of Cash Flows 4.1.2 Zero-Coupon Bonds 2.3.1 Operating Activities 4.1.3 The Yield to Maturity 2.3.2 Investment Activities 4.2 Coupon Bonds 2.3.3 Financing Activities 4.2.1 The Cash Flows of a Coupon 2.3.4 Application Bond 2.4 Other Financial Statement Information 4.2.2 Computing the IRR-YTM 2.5 Financial Statement Analysis 4.3 Corporate Bonds 2.5.1 Profitability Ratios 4.3.1 Corporate Bond Yield 2.5.2 Liquidity Ratios 4.3.2 Yield to Maturity and Bond Price 2.5.3 Working Capital Ratios Fluctuations Marc Desban, Ph.D. General Accounting & International Business 47 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis The Statement of Cash Flows A useful statement? The income statement provides a measure of the firm’s profit over a given prob time period. However, it does not indicate the amount of cash the firm has generated. There are two reasons that net income does not correspond to cash earned. 1. There are non-cash entries on the income statement, such as depreciation and amortization. 2. Certain uses of cash, such as the purchase of a building or expenditures on inventory, are not reported on the income statement. The firm’s statement of cash flows utilizes the information from the income statement and balance sheet to determine how much cash the firm has generated, and how that cash has been allocated, during a set period. Marc Desban, Ph.D. General Accounting & International Business 48 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis The Statement of Cash Flows Important you said? From the perspective of an investor attempting to value the firm, the statement of cash flows provides what may be the most important information of the financial statements. The statement of cash flows is divided into three sections: 1. operating activities, 2. investment activities, 3. financing activities. Marc Desban, Ph.D. General Accounting & International Business 49 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis 1er 2eme 3eme 4eme Marc Desban, Ph.D. General Accounting & International Business 50 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Operating Activities The first section of Global’s statement of cash flows adjusts net income by 1er all non-cash items related to operating activity. ie. add it back Eg. For instance, depreciation is deducted when computing net income, but it is not an actual cash outflow. Thus, we add it back to net income when determining the amount of cash the firm has generated. Similarly, we add back any other non-cash expenses (for example, deferred taxes or expenses related to stock-based compensation). Next, we adjust for changes to net working capital that arise from changes to accountsreceivable, accounts payable, or inventory. When a firm sells a product, it records the revenue as income even though it may not receive the cash from that sale immediately. Instead, it may grant the customer credit and let the customer pay in the future. The customer’s obligation adds to the firm’s accounts receivable. Marc Desban, Ph.D. General Accounting & International Business 51 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Adjustment for changes to net working capital We use the following guidelines to adjust for changes in working capital: 1. Accounts Receivable: When a sale is recorded as part of net income, but the cash has not yet been received from the customer, we must adjust the cash flows by deducting the increases in accounts receivable. This increase represents additional lending by the firm to its customers, and it reduces the cash available to the firm. 2. Accounts Payable: Conversely, we add increases in accounts payable. Accounts payable represents borrowing by the firm from its suppliers. This borrowing increases the cash available to the firm. 3. Inventory: Finally, we deduct increases to inventory. Increases to inventory are not recorded as an expense and do not contribute to net income (the cost of the goods are only included in net income when the goods are actually sold). However, the cost of increasing inventory is a cash expense for the firm and must be deducted. Marc Desban, Ph.D. General Accounting & International Business 52 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Adjustment for changes to net working capital We can identify the changes in these working capital items from the balance sheet. Eg. For example, Global’s accounts receivable increased from $13.2 million in 2014 to $18.5 million in 2015. We deduct the increase of 18.5 - 13.2 = $5.3 million on the statement of cash flows. Note that although Global showed positive net income on the income statement, it actually had a negative $1.2 million cash flow from operating activity, in large part because of the increase in accounts receivable. Marc Desban, Ph.D. General Accounting & International Business 53 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Investment Activity The next section of the statement of cash flows shows the cash required for investment activities. Investment Purchases of new property, plant, and equipment are referred to as capital expenditures (the famous CAPEX). ! Recall that capital expenditures do not appear immediately as expenses on the income statement. Instead, firms recognize these expenditures over time as depreciation expenses. To determine the firm’s cash flow, we already added back depreciation because it is not an actual(sortie cashdeoutflow. trésorerie) Now, we subtract the actual capital expenditure that the firm made. Similarly, we also deduct other assets purchased or long-term investments made by the titres negocialbles (bond du trésor, obligations, actions) firm, such as acquisitions or purchases of marketable securities. We see that in 2015, Global spent $21 million in cash on investing activities. Marc Desban, Ph.D. General Accounting & International Business 54 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Financing Activity The last section of the statement of cash flows shows the cash flows from financing activities. Financing Activity Eg. Dividends paid to shareholders are a cash outflow. Global paid $1 million to its shareholders as dividends in 2015. The difference between a firm’s net income and the amount it spends on dividends is referred to as the firm’s retained earnings for that year: Remember Retained Earnings = Net Income − Dividends Marc Desban, Ph.D. General Accounting & International Business 55 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Financing Activity Financing Activity Eg. Global retained $2 million - $1 million = $1 million, or 50% of its earnings in 2015. Also listed under financing activity is any cash the company received from the sale of its own stock, or cash spent buying (repurchasing) its own stock. Global did not issue or repurchase stock during this period. The last items to include in this section result from changes to Global’s short-term and long-term borrowing. Global raised money by issuing debt, so the increases in borrowing represent cash inflows. Marc Desban, Ph.D. General Accounting & International Business 56 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis The final line of the statement of cash flows 4eme The final line of the statement of cash flows The final line of the statement of cash flows combines the cash flows from these three activities to calculate the overall change in the firm’s cash balance over the period of the statement. Eg. In this case, Global had cash inflows of $1.7 million, which matches the change in cash from 2014 to 2015 shown earlier in the balance sheet. By looking at the statement as a whole, we can determine that Global chose to borrow to cover the cost of its investment and operating activities. Although the firm’s cash balance has increased, Global’s negative operating cash flows and relatively high expenditures on investment activities might give investors some reasons for concern. If that pattern continues, Global will need to raise capital, by continuing to borrow or issuing equity, to remain in business. Marc Desban, Ph.D. General Accounting & International Business 57 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Problem Questions Suppose Global had an additional $1 million depreciation expense in 2015. If Global’s tax rate on pretax income is 26%, what would be the impact of this expense on Global’s earnings? How would it impact Global’s cash balance at the end of the year? Marc Desban, Ph.D. General Accounting & International Business 58 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Global Conglomerate Corporation Income Statement Sheet Marc Desban, Ph.D. General Accounting & International Business 59 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Solution Depreciation is an operating expense, so Global’s operating income, EBIT, and pretax income would fall by $1m ($1.7 vs $2.7m). This decrease in pretax income would reduce Global’s tax bill by 26% × $1m = $0.26m. Therefore, Net income would fall by $0.742m. PRETAX = $1.7m minus Taxes (26% × $1.7m) drives to a Net Income of $1.258m instead of $2m (∆ of -$0.742m). On the statement of cash flows, Net Income would fall by $0.742m, but we would add back the additional depreciation of $1m because it is not a cash expense. Thus, cash from operating activities would rise by -0.74 + 1 = $0.26 million. Thus, Global’s cash balance at the end of the year would increase by $0.26 million, the amount of the tax savings that resulted from the additional depreciation expense. Marc Desban, Ph.D. General Accounting & International Business 60 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis 2.5.4 Interest Coverage Ratios 1 Introduction to Financial Statements 2.5.5 Leverage Ratios 1.1 Origins and early history of the IASB 2.5.6 Valuation Ratios 1.2 Preparation of Financial Statements 2.5.7 Operating Returns 1.3 Process of IFRS standard setting 3 The Financial Leverage 2 Construction of Financial Statements 3.1 Definition of financial leverage 3.1.1 Context 2.1 The Balance Sheet 3.1.2 Definition of financial leverage 2.1.1 The Balance Sheet Identity 3.1.3 The Leverage computation 2.1.2 Assets 3.2 Principle of leverage 2.1.3 Liabilities 3.2.1 Application 2.1.4 Net Working Capital 3.3 Leverage Limits 2.1.5 Stockholders’ Equity 2.2 Income Statement 4 The Debt Market 2.2.1 Income vs. Expenses 4.1 Bond Terminology 2.2.2 Earnings Calculations 4.1.1 Introduction 2.3 The Statement of Cash Flows 4.1.2 Zero-Coupon Bonds 2.3.1 Operating Activities 4.1.3 The Yield to Maturity 2.3.2 Investment Activities 4.2 Coupon Bonds 2.3.3 Financing Activities 4.2.1 The Cash Flows of a Coupon 2.3.4 Application Bond 2.4 Other Financial Statement Information 4.2.2 Computing the IRR-YTM 2.5 Financial Statement Analysis 4.3 Corporate Bonds 2.5.1 Profitability Ratios 4.3.1 Corporate Bond Yield 2.5.2 Liquidity Ratios 4.3.2 Yield to Maturity and Bond Price 2.5.3 Working Capital Ratios Fluctuations Marc Desban, Ph.D. General Accounting & International Business 61 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Other Financial Statement Information The most important elements of a firm’s financial statements are the balance sheet, income statement, and the statement of cash flows, which we have already discussed. Other Financial Statement Information Several other pieces of information contained in the financial statements warrant brief mention: the statement of stockholders’ equity, the management discussion and analysis the notes to the financial statements. Marc Desban, Ph.D. General Accounting & International Business 62 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Statement of Stockholders’ Equity The statement of stockholders’ equity breaks down the stockholders’ equity computed on the balance sheet into the amount that came from issuing shares (par value plus paid-in capital) versus retained earnings. ! Because the book value of stockholders’ equity is not a useful assessment of value for financial purposes, financial managers use the statement of stockholders’ equity infrequently (so we will skip the computational details here). We can, however, determine the change in stockholders’ equity using information from the firm’s other financial statements as follows: The change in stockholders’ equity Change in Stockholders’ Equity = Retained Earnings + Net sales of stock = Net Income - Dividends + Sales of stock - Repurchases of stock Marc Desban, Ph.D. General Accounting & International Business 63 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis The change in stockholders’ equity Eg. For example, because Global had no stock sales or repurchases, its stockholders’ equity increased by the amount of its retained earnings, or $1.0 million, in 2015. ! Note that this result matches the change in stockholders’ equity shown earlier on Global’s balance sheet. Les bénéfices nets de l'entreprise pour l'année 2015, soit 1,0 million de dollars, ont été conservés dans l'entreprise au lieu d'être versés sous forme de dividendes aux actionnaires. Cela a conduit à une augmentation de 1,0 million de dollars des capitaux propres des actionnaires sur le bilan de l'entreprise. Même si les actionnaires n'ont rien reçu directement (sous forme de dividendes), les bénéfices non distribués (retained earnings) sont conservés dans l'entreprise et réinvestis, ce qui augmente la valeur nette de l'entreprise. Cette valeur supplémentaire est enregistrée dans la section des capitaux propres (stockholders' equity) du bilan. Marc Desban, Ph.D. General Accounting & International Business 64 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Management Discussion and Analysis The management discussion and analysis (MD&A) The management discussion and analysis (MD&A) is a preface to the financial statements in which the company’s management discusses the recent year (or quarter), providing a background on the company and any significant events that may have occurred. Management may also discuss the coming year, and outline goals, new projects, and future plans. Management should also discuss any important risks that the firm faces or issues that may affect the firm’s liquidity or resources. Marc Desban, Ph.D. General Accounting & International Business 65 / 171  The Balance Sheet Introduction to Financial Statements Income Statement Construction of Financial Statements The Statement of Cash Flows The Financial Leverage Other Financial Statement Information The Debt Market Financial Statement Analysis Management Discussion and Analysis The management discussion and analysis (MD&A) Management is also required to disclose any off-balance sheet transactions, which are transactions or arrangements that can have a material impact on the firm’s future performance yet do not appear on the balance sheet. Eg. For example, if a firm has made guarantees that it will compensate a buyer for losses related to an asset purchased from the firm, these guarantees represent a potential future liability for the firm that must be disclosed as part of the MD&A. Marc Desban, Ph.D. General Accounting & International Business 66 / 171  The Balance Sheet Introduction to Financial Statements Income Statement