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1. Financial Management
Lecture 03
By: Noor ul hadi (Lecturer)
Govt College of Management Sciences
Peshawar

2. Brief History of Accounting and
Financial Statement
Thousand years ago, individuals were self-
contained in sense that they gathered their
own food, made their own cloths, built their
own shelters.
Then specialization began, barter system
took place.
Money introduced by traders.
Business started loans, lenders could
physically inspect assets.

3. The Annual Report
The annual report is the most important reports
issues to shareholders. Two types of information
are given in this reports.
First, the verbal section contain chairman letter, firms
operation, new development plan, and business
operation.
Secondly annual report presents four basic type of
financial statements that are:
1. Balance sheet,
2. Income statement,
3. Statement of Retain Earning
4. Cash flow Statement.

4. The Annual Report
• Balance sheet – provides a snapshot of a
firm’s financial position at one point in time.
• Income statement – summarizes a firm’s
revenues and expenses over a given period of
time.
• Statement of retained earnings – shows how
much of the firm’s earnings were retained,
rather than paid out as dividends.
• Statement of cash flows – reports the impact
of a firm’s activities on cash flows over a given
period of time.

5. Balance Sheet
It provides a snapshot of a firm’s financial position at
one point in time.
Important Points of Balance sheet:
1. Cash versus other assets:
• All assets are in term of dollars, only cash is actual money.
• Some marketable securities have short time maturity which can be
quickly converted to cash, are also called cash equivalents.
• Some securities have long life and its price can not be predictable,
are called short term investment.
• Receivables are bills other owes.
• Inventories show the dollars invested in raw-material, WIP and
finished goods available for sale.
• Fixed Asset shows money invested for long time which need time to
convert into cash.

6. Balance sheet
• Liabilities versus stockholder equity.
Claim against asset are of two type ie. Stockholder
equity and liabilities.
1. Stockholders’ equity: (the owners of the co)
It is also know known common stock holder equity,
(CSE)
CSE= Assets – Liabilities – Prefer stock
Decline in assets effect decline in CSE, Bad debt
effect on AR. Depreciation on Fixed asset etc
1. Liabilities. (top priority to compensate in case
of insolvency.)

7. Balance Sheet
Prefer vs Common Stock
Prefer is hybrid type stock or cross between
common stock and debt.
Equity refer to common stock.
2nd priority to compensate after liabilities is
given to prefer stock in case of insolvency

8. Balance Sheet
Break off the common equity:
Equity section is divided in two accounts.
1. Common stock
2. Retain earnings. Retain earning account is
built up over time as a firm save a part of
earning.
Stockholder want to know sources of earning
either by sale or by other sources.
Creditors less concern of sources of equity and
only interested in total equity.

9. Balance Sheet
Inventory Accounting:
Using FIFO and LIFO
Inflation impact on inventory
1. Balance sheet inventory are higher than if
used LIFO
2. Cost of goods sold lower
3. Fluctuation in Higher profit.
MicroDrive uses the FIFO method with $615
million of inventory in 2000. when switch to
LIFO in 2001 inventory become $585 Billion
which reduce earning by 18 millions.

10. Depreciation Method.
Financial Statements are prepare for two
purposes i.e. for stockholder and tax
purposes.
Accelerated method for tax purposes.
And straight line method to stockholders.

11. The time demission
• At a point in time
• Balance sheet vary at different point of
time.
• Cash and current assets are frequently
changes.
• Inventory depend on season
• Fixed assets change with depreciation and
accumulative depreciation.

13. Income statement
Summarizes a firm’s revenues and
expenses over a given period of time.
• Net Sale is always sale at the top.
• Various costs are subtracted to obtain
income.
• Cost include operating cost, interest
cost and taxes.

14. Income Statement
• Bottom line of income statement is Earning per
Share. (EPS) which is most important tool to
analysis the company’s earning.
• Net Income vs Comprehensive Income.
• Comprehensive income = Net income+
unrealized gain or loss.**
• ** Marketable security value increase or
decrease.
Micro-Drive 2000 EPS $2.36 which reduce to
$2.27 in 2001
But dividend raised from $1.06 to $1.15

15. Income Statement
• Depreciation and Amortization are similar
and present allocation of costs of assets
over their useful lives.
• It is charged annually, Depreciation is
charged on Tangible assets. Amortization
is charged on intangible assets such as
patents, copyrights, trademark and
goodwill.

16. Income Statement
• EBITDA, is refer to Earning before
interest, taxes, depreciation and
amortization. And net income is usually
refer when interest, tax, depreciation and
amortization is deducted, and more
concisely net income in corporation refer
to EBITDA – preferred dividend

18. Income Statement
Earning Per Share (EPS) =
Net Income / Common share outstanding
=113500000/50,00,000
= $2.27

19. Income Statement
Dividends per Share DPS=
=Dividend paid to common stock holder /
common share outstanding
=57500000/50000000
=1.15

20. Income Statement
Book value per Share
= Total common equity / common shares
outstanding
=896000000/50000000
=17.92

21. Income statement
Cash flow per share=
=(Net income + depreciation +
amortization)/ common share outstanding
=213500000/50000000
=4.27

22. Statement of Retained Earning.
The statement of retained earning shows the
change in retained earnings between balance
sheet data, Retained earning represent a claim
against assets that is not divided in share
holders.
The retained earning in balance sheet do not
shows cash and are not available for the
payment of dividend.
Retained earnings are kept to reinvesting purpose
to expand the business.

23. Net Cash Flow
Net Cash-flow refers to business’s net cash
flow generated in one financial period.
It is differs from accounting profit because of
the revenues and expenses listed on the
income statement were not paid in cash
during the year not received.
Net Cashflow = Net Income –
NonCashRevenue +Non Cash charges.

24. Net Cash flow.
Noncash charges are depreciation and
amortization. These items reduce the net
income.
Depreciation and amortization are noncash
chares, so they must be added back to net
income to obtain net cash flow.

25. Statement of Cash flow.
The statement of cash flows reports the effect of
operating, investing, and financing activates on
cash flows over an accounting period.
It is different from the profit, the company profit
may be higher than its cash (showing as an
asset in balance sheet at the end of year). The
reason is this that companies don’t keep all
income as cash but used in variety of ways.
Such as dividend, inventory, account receivable
etc.

26. Statement of Cash flow
Cash position may be effected by
1. Net Income
Net income increase cash flow if it is not utilizes
for other sources.
2. NonCash Adjustment to net income.
• Adjustment of NonCash charges such as
depreciation and amortization.

27. Statement of Cash flow (con’t)
Cash position may be effected by
3. Changes in working capital
Increase in current assets other than cash
decrease cash. And decrease in current
assets increase cash.
Increase in current liabilities increase cash
whereas decrease in current liabilities
decrease cash.

28. Statement of Cash flow (con’t)
Cash position may be effected by
4. Fixed Assets
Investment in fixed asset will reduce the
company cash position, and sells of fixed
asset increase cash flow.
Purchase of fixed assets decrease cash flow
and sell of fixed asset increase cash
flow.

29. Statement of Cash flow (con’t)
Cash position may be effected by
5. Security Transactions.
If a company issues stock or bonds during
the year, the fund raised will increase its
cash position. On the other hand, if the
company uses cash to by back
outstanding stock or to pay off debt, or it
pays dividend will reduce cash.

30. Statement of Cash flow
Factors effecting Cash position are categories below:
Activities of Cash Flow
Operating Activities Investment Activities Financing Activities

31. Categories of Cash flow Activities
1. Operating Activities.
• Operating Activities includes net income,
depreciation and changes in current assets and
current liabilities other than cash, short term
investment and short term debt.
2. Investment Activities.
• Which includes investments in or sales of fixed asset.
3. Financing Activities.
• It includes raising cash by selling short-term
investment or by issuing short term debt, long
term debt, or stock. Payment of dividend and buy
back outstanding share or bond reduces
company cash.

32. MicroDrive Statement of Cash Flow 2001 (Millions of Dollar)
Operating Activities
Net Income 117.50
Adjustment:
Non-Cash Adjustment:
Depreciation 100.00
Due to changes in net working capital
Increase in Account receivable (60.00)
Increase in inventory (200.00)
increase in Account payable 30.00
increase in Accruals 10.00
Net cash provided by operating activities (2.50)
Long term investing Activities
Cash used to acquire fixed assets (230.00)
Financial Activities
Sale of short term investment 65.00
Increase in note payable 50.00
increase in bonds outstanding 174.00
payment of dividend (61.50)
Net cash provided by financing activities 227.50
Net change (5.00)
Cash at beginning of the years 15.00