Financial Statements The focus on financial statements in finance is how managers and investors interpret and use them. A firm’s annual report contains both verbal and quantitative information. The quantitative information consists of four financial statements: (1) Balance Sheet, (2) Income Statement, (3) Statement of Cash Flows, and (4) Statement of Stockholders' Equity.
The balance sheet shows the firm's assets and claims against those assets. In other words, assets are equal to liabilities and equity. Assets are shown in order of their and claims are listed in the order of when they must be paid. Current assets include cash and their equivalents, accounts , and inventory, while long-term assets are those whose useful lives exceed one year. Liabilities are divided into and long-term debt. We differentiate between total debt and total liabilities. A company's total debt includes both its short-term and long-term liabilities. Total liabilities equal plus the company's "free" liabilities. is the difference between current assets and current liabilities, while is equal to current assets less the difference between current liabilities and notes payable. is capital supplied by common stockholders and represents ownership. The income statement reports on operations over a period of time. Companies' operating performances can be compared by looking at each firm's EBIT, often referred to as . A typical stockholder focuses on the bottom line of the income statement, . The income statement is tied to the through the retained earnings account. Net income minus paid is equal to the retained earnings for the year, and this amount is added to the cumulative retained earnings from prior years to obtain the year-end retained earnings balance. Management's goal is to maximize the firm's stock price. The value of any asset, including a share of stock, is based on the the asset is expected to produce. Therefore, managers strive to maximize the available to investors. The statement of cash flows shows how much a firm is generating. It is divided into four parts:
(1) Operating activities,
(2) Long-Term Investing activities,
(3) Financing activities, and
(4) Summary.
Changes in stockholders' equity during an accounting period are reported in the statement of stockholders' equity. Changes in stockholders' equity can come from new stock issues, stock repurchases, net income, and paid. Quantitative Problem: Rosnan Industries' 2013 and 2012 balance sheets and income statements are shown below.
Balance Sheets: 2013 2012
Cash and equivalents $70 $55
Accounts receivable 275 300
Inventories 375 350
Total current assets $720 $705
Net plant and equipment 2,000 1,490
Total assets $2,720 $2,195
Accounts payable $150 $85
Accruals 75 50
Notes payable 120 145
Total current liabilities $345 $280
Long-term debt 450 290
Common stock 1,225 1,225
Retained earnings 700 400
Total liabilities and equity $2,720 $2,195
Income Statements: 2013 2012
Sales $2,000 $1,500
Operating costs excluding depreciation 1,250 1,000
EBITDA $750 $500
Depreciation and amortization 100 75
EBIT $650 $425
Interest 62 45
EBT $588 $380
Taxes (40%) 235 152
Net income $353 $228
Dividends paid $53 $48
Addition to retained earnings $300 $180
Shares outstanding 100 100
Price $25.00 $22.50 WACC 10.00%
The balance in the firm's cash and equivalents account is needed for operations and is not considered "excess" cash.
1. What is Rosnan's 2013 net operating working capital (NOWC)?
2. What is Rosnan's 2013 net working capital (NWC)?