Financial Statements And Cash Flow Analysis

Professor XXXXXCourse Name / Number

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Financial Statements

Balance Sheet

Income Statement

Managers and Analysts Use Financial Statement to Conduct:- Cash Flow Analysis

- Performance (Ratio) Analysis

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Four Key Financial Statements

1. Balance Sheet2. Income Statement3. Statement Of Retained Earnings4. The Statement Of Cash Flows

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Staples Balance Sheet($ Thousands)

Current assets Jan 31, 2004 Feb 1, 2003 Cash & Equivalents $457,465 $495,889 ST Investments 934,275 100,175 Receivables 410,330 364,419 Inventories 1,465,989 1,555,205 Other current assets 114,598 105,559 Deferred taxes 96,247 96,229 Total current assets $3,478,904 $2,717,476 Fixed assets Property, plant and equipment $1,505,301 $1,447,752 Goodwill 1,202,007 1,207,824 Intangible assets 253,768 267,841 Other assets 63,066 80,495 Total Non-Current Assets $3,024,142 $3,003,912 Total assets $6,503,046 $5,721,388

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Staples Liabilities & Stockholders’ Equity ($ Thousands)

Current liabilities Jan 31, 2004 Feb 1, 2003

Payables and Accrued Expenses $1,933,084 $1,874,655 Short Term and Current Long Term 190,150 327,671 Total current liabilities $2,123,234 $2,175,326 Long term Debt 567,433 732,041 Total long-term liabilities $567,433 $732,041 Other 149,479 155,129

Total liabilities $2,840,146 $3,062,496

Shareholders’ equity Common Stock $316 $299 Retained Earnings 2,209,302 1,719,091 Treasury Stock (561,099) (556,812) Capital Surplus 1,933,379 1,484,833 Other Stockholder Equity 81,002 11,481 Total Stockholder Equity $3,662,900 $2,658,892 Total liabilities & stockholders’ equity $6,503,046 $5,721,388

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Staples Income Statement ($ Thousands)

Jan 31, 2004

Feb 01, 2003

Total Revenue $13,181,222 $11,596,075 Cost of Revenue (9,559,123) (8,652,593) Gross Profit $3,622,099 $2,943,482 Operating/Selling 2,282,092 1,795,428 General/Admin. Expenses 524,094 451,501 Non Recurring 9,639 8,746 Other 7,986 2,135 Operating income $798,288 $682,672 Earnings Before Interest and Taxes $798,288 $682,672 Interest Expense 20,176 20,609 Income Tax Expense 287,901 215,963 Net Income from Continuing Operations

$490,211 $446,100

Net income $490,211 $446,100

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The Sources and Uses of Corporate Cash

• Decrease in any asset

• Increase in any liability

• Net profits after taxes

• Depreciation and other non-cash charges

• Sale of stock

• Increase in any asset

• Decrease in any liability

• Net loss• Dividends paid• Repurchase or

retirement of stock

SourcesSources UsesUses

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Common stock

Cumul. Translat

adjustmtRetained earnings

Treasury stock Income

Balances February 1, 2003 1,485,132 11,481 1,719,091 (556,812) 484,710

Equity offering 252,972 --- --- --- ---

CS issues for option exercise 121,553 --- --- --- ---

Tax benefit for option exercise 30,613 --- --- --- ---

CS to employee saving plan 9,136 --- --- --- ---

Sale of CS under ESOP 16,170 --- --- --- ---

Issues of restricted stock 18,389 --- --- --- ---

Translation adjustments --- 69,521 --- --- 69,521

Reissuance of treasury stock 97 --- --- 28 ---

Net income for year --- --- 490,211 --- 490,211

Purchase of treasury stock --- --- --- (4,315) ---

Other (367) --- --- --- ---

Balances January 31, 2004 1,933,379 81,002 2,209,302 (561,099) 559,732

Staples Statement Of Retained Earnings ($ Thousands)

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Staples Statement Of Cash Flows ($ Thousands)

Cash Flow From Operating Activities

Jan 31,2004

Feb 1,2003

Net income (net profit after tax) $490,211 $446,100

Depreciation 282,811 267,209

Adjustments to Net Income 22,709 35,993

Changes in Account Receivables (4,218) 62,460

Changes in Liabilities 81,123 121,943

Changes in Inventories 80,721 80,721

Changes in Other Operating Activities (34) (3,574)

Cash Flows from Operating Activities $1,019,732 $914,350

Cash Flow from Investment Activities

Capital Expenditures ($280,703) ($1,435,879)

Other Cash Flows from Investing Activities (831,190) (100,175)

Cash Flows From Investing Activities ($1,114,803) ($1,536,401)

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Staples Statement Of Cash Flows ($Thousands)

Cash Flow From Financing Activities

Jan 31, 2004 Feb 1, 2003

Sale (Purchase) of Stock $385,506 $78,421

Net Borrowings (350,235) 635,662

Net Cash Provided by Financing Activities $35,271 $714,038

Effect of exchange rate changes on cash 21,376 9,033

Net (decrease) increase in cash ($38,424) $101,065

Cash and Cash Equivalents, End of Period $457,465 $495,889

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Profit vs. Cash Flow

• Profit based on Accrual Accounting• Finance Emphasizes the Importance of

Timing•“You Can’t Deposit Net Income, Only

Cash”• Timing of Cash Flow Matters

•Accrual Accounting May Obscure Timing

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What are the key measures of cash flow?

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Key Measures of Cash Flow

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Cash Flow from

Operations

Operating Cash Flow

Free Cash Flow

• Total Cash Generated

• Cash Flow Before Repaying Lenders

• Cash Flow Firm Could Distribute to Investors

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• Current Ratio • Quick Ratio• Inventory Turnover Ratio• Average Collection Period• Debt-to-Equity Ratio• Times Interest Earned Ratio• Gross Margin• EPS• P/E Ratio• Market-to-Book Ratio

Types Of Financial Ratios

Activity Ratios

Debt Ratios

Profitability Ratios

Market Ratios

Liquidity Ratios

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Liquidity Ratios

seitilibailcurrent

assetscurrent = ratioCurrent

seitilibailcurrent

inventoryassets-current = ratioQuick

Staples (2004)

64.1 = ratioCurrent 95.0 = ratioQuick

Office Depot (2004)

57.1 = ratioCurrent 98.0 = ratioQuick

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Activity Ratios

inventory

sold goods ofcost = turnoverInventory

assets fixednet

sales = overasset turn Fixed

52.6 = turnoverInventory

36.4 = overasset turn Fixed Staples (2004)

Office Depot (2004)

35.6 = turnoverInventory

81.4 = overasset turn Fixed

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Activity Ratios (Continued)

daypersalesAverage

receivableAccounts = periodcollectionAverage

365

salesAnnual = daypersalesAverage

assets total

sales = overasset turn Total

99.936,112,36$ = daypersalesAverage

days 36.11 = periodcollectionAverage

03.2 = overasset turn Total Staples (2004)

Office Depot (2004)

.9333,859,084$ = daypersalesAverage

days 86.37 = periodcollectionAverage01.2 = overasset turn Total

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Debt Ratios

equityrs'Stockholde

debttermLong = ratioequity Debt-

assets total

seitilibail total = ratioDebt

44.0 = ratioDebt

16.0 = ratioequity Debt- Staples (2004)

Office Depot (2004)

55.0 = ratioDebt

30.0 = ratioequity Debt-

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Debt Ratios (Continued)

interest

taxesandinterest before earnings = earnedinterest Times

57.39 = earnedinterest Times Staples (2004)

Office Depot (2004)

12.9 = earnedinterest Times

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Profitability Ratios

sales

taxes&interestbeforeEarnings = marginprofit Operating

sales

profitsGross = marginprofit Gross

%5.27 = marginprofit Gross

%06.6 = marginprofit Operating Staples (2004)

Office Depot (2004)

%35.31 = marginprofit Gross

%04.4 = marginprofit Operating

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Profitability Ratios (Continued)

sales

incomeNet = marginprofit Net

goutstandinstock common of shares ofnumber

incomeNet = shareper Earnings

%72.3 = marginprofit Net

98.0$ = shareper Earnings Staples (2004)

Office Depot (2004)

%24.2 = marginprofit Net

89.0$ = shareper Earnings

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Profitability Ratios (Continued)

assets Total

incomeNet = assets on totalReturn

equity rs'Stockholde

incomeNet = equitycommon on Return

%54.7 = assets on totalReturn

%4.13 = equitycommon on Return Staples (2004)

Office Depot (2004)

%50.4 = assets on totalReturn

%89.9 = equitycommon on Return

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Market Ratios

stockcommonofsharepervalueBook

stockcommonofsharepervalueMarketratio (M/B)k Market/boo

55.4 ratio (M/B)k Market/boo Staples (2004)

Office Depot (2004)

94.2 ratio (M/B)k Market/boo

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Corporate Taxes

Significant cash outflow

Ordinary income tax

• Progressive tax rate schedule• Average tax rate: tax divided by

the pretax income• More relevant: marginal tax rate

Capital gains tax

• Under existing tax laws, use ordinary income tax rates for capital gain taxes

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Financial Ratios For Cross-Sectional and Trend Analysis

• Cross-Sectional Analysis: Comparing Different Firms’ Financial Ratios at the Same Point in Time– Compared to firms in same industry– Benchmarking - compares a company’s

ratio values to those of competitors that company wishes to emulate

• Trend Analysis - Performance Evaluation Over Time– Developing trends can be seen using

multiyear comparison

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Financial Statements and Financial Ratios

Balance Sheet

Income Statement

Liquidity Ratios

Activity Ratios

Debt Ratios

Profitability Ratios

Market Ratios