Corporate Finance

Lecture 2
Introduction to
Financial Statement

Topics Covered

Enterprise Activities
Introduction to financial statement
Balance Sheet
Income Statement
Production cycle and cash flows
Cash equation
Sources and Uses
Cash Flows Statement

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Corporate Finance

Enterprise activities
& Financial statements

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Objectives and Enterprise

Activities
Objectives,
Strategies

Wealth
Products, markets

Investing
(short, long term)

Financing
(short, long term)

ASSETS

DEBT + EQUITY

Operating
PROFIT/LOSS
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ENTERPRISE ACTIVITIES
Any the economics politics system, language,
national borders, ownership type, industry, small
and large scale organizations, even with a nation,
per household or an individual these three
activities are the same.
Investing activity
Financing activity
Operating activity

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TWO QUESTIONS

Anyone involved in a business (with rights or

responsibilities) want to know two basic
information:
(1) Current financial position?
(2) Performance over time?
Discussion:
Who is involved in the business?
What do they do with the information?
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Corporate Finance

ANSWERS

The results are shown by the

financial statements

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Introduction to Financial
Statements

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Corporate Finance

Investing activity and Financing activity

are shown by the Balance Sheet
ASSETS
-Current assets:
Cash
Receivables
Inventory
-Non-current assets
-Long term investments

DEBT + EQUITY
-Liabilities (debts):
Borrowings
Payables
-Equity:
Initial capital
Retained earnings

Investing activity

Financing activity

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Operating activity
is shown by the Income statement
Revenue, net:
(-) Cost of Good Sold (COGS)
(=) Gross profits
(-) Operating Expenses
(=) Earning before Interest and Tax (EBIT)
(-) Interests (I)
(=) Earning before Tax (EBT)
(-) Tax (T)
(=) Net Earning (Income) (NI)
(-) Dividends
(=) Retained Earnings (RE)

Operating activity
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The relationship between Balance sheet and

Income statement

Balance
sheet
(31/12/2013
)

Income statement

Balance
sheet
(31/12/2014
)

Cc lu :
Li nhun t cc hot ng trn bo co thu nhp s lm tng
(nu li) hoc lm gim (nu l) li nhun gi li trn bng cn
i k ton.
V li nhun gi li (l vn ca ch s hu) = Doanh thu Chi ph
Nn c th ni:
Doanh thu lm tng vn ch s hu
Chi ph lm gim vn ch s hu
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Cuu Long Company

Balance sheet
at 31/12
ASSETS

2013
200

2014
2

Accounts Receivable

100

458

Inventory

220

550

520

1.010

920

850

1000

970

Cash

Sub: Current Assets

Fixed assets, net
Where,

LIABILITY & EQUITY

Borrowings

2013
250

2014
130

Accounts Payable

152

140

Sub: Current liability

402

270

Capital

800

1.028

Retained earnings

238

562

1.038

1.590

Sub: Equity

Costs (*)
Depreciation (accum.)
Total

-80

-120

1.440

1.860

Total

1.440

1.860

(*) Liquidation of assets, price: 20; which, Costs: 30, Accumulated depreciation: 10

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Cuu Long Company

Income statement
for the year ended 31/12

Revenue, net
(-) Cost of good sold
(=) Gross profit
(-) Operating expenses
(-) Depreciation
(=) Earnings before Interest and Tax
(EBIT)
(-) Interest
(=) Earnings before Tax (EBT)
(-) Tax (25%)
(=) Net income

2013
7.000
5.800
1.200
800
50

2014
7.500
6.100
1.400
825
50

350
38
312
78
234

525
53
472
118
354

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Production cycle and cash flows

Cash
Collection

Acct. receivable
(Sales on credit)

Inventory
(Production)

(Sales on cash)

Fixed assets
(Investing)
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(Depreciation)
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Cash equation
Assets = Liability + Equity
Current assets + Fixed assets = Lia. + Equity
Cash + Accounts receivable + Inventory = Lia. +
Equity Fixed assets
Cash = Lia. + Equity Fixed assets Accounts
receivable Inventory
Notes:
A change in assets will changes in the opposite in cash.
A change in debt or capital will changes in the same in cash.

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Cuu Long company, Balance sheet

2013 2014 Change Cash flow
ASSETS
Cash
Accounts receivable
Inventory
Fixed assets, net
LIA. & EQUITY
Borrowings
Accounts payable
Equity
Retained earnings
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200
100
220
920

2
458
550
850

-198
358
330
-70

-198
-358
-330
70

250
130
152
140
800 1028
238
562

-120
-12
228
324

-120
-12
228
324
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sources and uses

2013 2014 Change Cash flow
ASSETS
Cash
Acounts receivable
Inventory
Fixed assets, net
LIA. & EQUITY
Borrowings
Acounts payable
Equity
Retained earnings

2
458
550
850

-198
358
330
-70

-198
-358
-330
70

250 130
152 140
800 1028
238 562

-120
-12
228
324

-120
-12
228
324

200
100
220
920

SOURCES
Decrease in fixed assets

70

Increase in equity

228

Increase in retained earnings

324

Decrease in cash balance

198

Total:

820

USES
Increase in accounts receivable

358

Increase in inventory

330

Decrease in borrowings

120

Decrease in accounts payable

Total:

820

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Cuu Long company

CASH FLOW STATEMENT
(Indirect method)

12

17

I. OPERATING ACTIVITY
Net income
Adjusted the depreciation
Adjusted the changes in working capital:
Increase in accounts receivable
Increase in inventory
Decrease in accounts payable
Cash flows from operating activity
II. INVESTING ACTIVITY
Liquidation
Cash flows from investing activity
III. FINANCING ACTIVITY
Borrowings
Equity
Dividend
Cash flows from financing activity
NET CASH FLOW (=I+II+III)
Compared:
Cash in beginning:
Cash in ending:

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354
50
-358
-330
-12
-296
20
20
-120
228
-30
78
-198
200
2
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Cashflow statement can tell us the company is at

what stage of development

Cash flows
from activities:

Company
A

Company
B

Company
C

Operating

(10)

12

22

Investing

(40)

(20)

(12)

Financing

50

(10)

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Nguyn Tn Bnh

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Cashflow statement can tell us the company is at

what stage of development

Discussion:
Company A: a new business, growing faster, less profitable
activities, accounts receivable and inventories high. To maintain
the growth to investment assets and to raise capital from outside.
Company B: still growing and need to invest and funding
sources.
Company C: mature and stable. Cashflow from operating
activities strongly, and the company has used it to pay the debt,
dividend.

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Nguyn Tn Bnh

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Microsoft Corporation, Cash flow statement (mil. USD)

for the year ended 30/6
OPERATING ACTIVITY

20X1

20X2

20X3

Net income

7,346

7,829

9,993

Depreciation

1,536

1,084

1,439

Change in working capital, net

4,540

5,596

4,365

13,422

14,509

15,797

(5,586)

(4,572)

(5,223)

(8,734)

(10,845)

(7,213)

(898)

(908)

3,361

(26)

61

Cash in beginning

4,846

3,922

3,016

Cash in ending

3,922

3,016

6,438

Cash flow from operating activity

FINANCING ACTIVITY
Cash flow from financing activity
INVESTING ACTIVITY
Cash flow from investing activity
Net cash flow
Change in exchange rate

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