REVIEW OF FINANCIAL STATEMENT

PREPARATION, ANALYSIS, AND

INTERPRETATION
FOUR FINANCIAL STATEMENT
companies present four basic financial statements:

1. Balance Sheet
2. Income Statement
3. Statement of Stockholders’ Equity
4. Statement of Cash Flows
 What does the comapny own and who
has claims against the company?

The BALANCE SHEET provides a snapshot of a comapany’s

financial position as of a certain date. it reports assets, items of
value such as inventory and equipment, and weather the assets
are financed with liabilities (debt) or stockholders’ equity (owners
shares)
 How profitable is the company?

The INCOME STATEMENT reports the company’s profitablity

during an accounting period. It reports revenues, amount
received from customers for products sold or services
provided, and expenses, the cost incurred to produce
revenues. Their difference in net income (also called earnings)
 Who owns the company?

The STATEMENTS OF STOCKHOLDERS EQUITY reports if the

earnings (net income) of this accounting period are distributed as
dividends or retained in the business as retained earnings. It also
report amounts paid (contributed to the company by stockholders
to purchase common stock and preferred stock.
 Does the company generate
cash flow?

The STATEMENT OF CASH FLOWS reports cash inflows and

cash outflows during an accounting period.
FOUR FINANCIAL STATEMENTS

1. Balance Sheet
2. Income Statement
3. Statement of Stockholders’ Equity
4. Statement of Cash Flows

Together, these four financial statements help investors

understand a company’s finances.
THE BALANCE SHEET

The Balance Sheet reports assets and the amount of assets

financed with liabilities and stockholders equity as of a certain
date. It is based on the accounting equation:

ASSETS= LIABILITIES+STOCKHOLDERS’ EQUITY

In this chapter, we explore the financial statements of
Nike, Inc.:
Nike is the largest seller of atlethic footwear and atlethic apparel
in the world, selling in over 170 countries. It also markets apparel
with licensed college team, professional team, and league logos.
Almost all of Nike’s products are manufactured by independent
contractors and virtually all footwear and apparel products are
produced outside the United States.
Nike also sells products under the Cole Haan, Converse, Chuck
Taylor, All Star, One Star, Jack Purcell, Hurley, and Umbro
brands.
Here is Nike’s May 31,2011 Balance Sheet:
ASSETS
Are items of value that a corporation has a right to use.
Typical assets account include cash, account receivable,
inventory, equipment, buildings , and land. Accoun receivable
are accounts to be received in the future from customers.
Notice that Nike’s largest reported asset is ‘accounts receivable,
net’ for $3,138 million. These moneys that customers owe to
Nike for items purchased are the second largest asset item is
inventory, held for sale to retailers, of $2,715 million. Nike had
$1,955 million in cash on May 31, 2011.

Nike had $2,115 of property, plant, and equipment which consist

of land buildings vehicles and other equipment Because almost
all of Nike’s products are manufactured by independent
contractors it has not had to invest in factories to manufacture
its own goods Therefore property plant and equipment is
relatively low.
 LIABILITIES

Are amounts owed to creditors; the amount of debt owed to third parties.
Typical liability accounts include accounts payable, wages payable, notes
payable, and bonds payable. The key word found in many liability accounts is
payable. Accounts Payable are amounts that the corporation must pay to
suppliers in the future. Accounts payable of $1,469 million was Nike’s
second-largest liability. The company’s largest liability item was “other
current liabilities” of $2,302 million.
 STOCKHOLDERS’ EQUITY

Is the portion of assets the owners own free and clear of any
liabilities. Stockholders’ equity may also be referred to as
shareholders’ equity or owners’ equity.
Typical stockholders
Typical stockholders’ equity accounts include:

Contributed Capital—amounts paid-in (contributed) to the

company by stockholders to purchase common stock and
preferred stock.
Retained Earnings—net income earned by the company
since its incorporation and not yet distributed as
dividends.
Since Nike opened in 1968, it received $3,947 million in
investments from stockholders. The retained earnings account
indicates that, over these years, Nike has earned $5,801 million
in net income that has not yet been distributed to stockholders
as dividends.

Based on the accounting equation, assets can be financed

either with liabilities or with stockholders’ equity. For example,
Nike’s $14,998 million in assets were financed with $5,155
million worth of liabilities (debt) and $9,843 million in
stockholders’ equity.
THE INCOME STATEMENTS
The income statements reports a company’s profitability during an
accounting period.
REVENUE

Are amounts received from customers for products sold and services
provided. Sales Revenue and Service Revenue are amounts earned
engaging in the primary business activity.
Nike sold $20,862 million worth of footwear, apparel, equipment, and
accessories.
EXPENSES

Expenses are costs incurred to produce revenues. It is sensible for

companies to incur expenses that will generate revenue and increase
profits. The largest expense item for manufacturers and retailers is the
cost of sales expense (also referred to as cost of goods sold), which
reports the wholesale costs of inventory sold to customers during the
accounting period.
Nike’s largest expense is “Cost of sales” of $11,353 million.
It also incurred $6,694 in selling and administrative
expense and $471 million in interest expense. Related
income taxes were $711 million.
NET INCOME
Net income is the difference between revenues and expenses. It is also
referred to as profit (loss), earnings, or the bottom line.

Revenues - Expenses = Net Income

Nike was profitable. It earned $2,133 million, or approximately $2.1

billion in profits for the year ending May 31, 2011.
THE STATEMENT OF STOCKHOLDERS’ EQUITY
The Statement of Stockholders’ Equity reports changes in the
contributed capital and retained earnings accounts during an
accounting period.
Retained earnings: Earnings not distributed as dividends, increased
by net income (earnings) of the accounting period and decreased
when earnings are distributed as dividends to the stockholders.

Contributed capital: Increased when the company receives new

investments from investors in exchange for newly issued stock. It is
decreased when the company buys back and retires stock.
Nike received $503 million in investments from owners, which
increased contributed capital to $3,947 million. It issued new stock
certificates in exchange for these investments. Nike’s retained
earnings increased by $2,133 million in net income the company
earned, but decreased by the $569 million paid as dividends to
stockholders, resulting in ending retained earnings of $5,801
million.
THE STATEMENT OF CASH FLOWS
The Statement of Cash Flows reports cash inflows and outflows
during an accounting period.
Business activity can be divided into three distinct
areas:
1. Operating Activities
2. Investing Activities
3. Financing Activities
OPERATING ACTIVITIES

Relate to a comapny’s main business: selling

product and service to earn net income.
INVESTING ACTIVITIES

Relate to the need for investing in property,

plant, and equipment or expanding by making
investment in other companies.
FINANCING ACTIVITIES

Relate to how a company finances its assets with debt or

stockholders’ equity. The Statement of Cash Flows describes
a company’s cash inflows and outflows for each of these
three areas.
“Nike’s sales generated $1.012 million in cash
flow after paying the company’s expenses.
Nike paid $1.021 for new investing activities.
The company paid $1,972 for financing
activities. Most of these payments went to
repurchase stock and to pay dividends.”
"RATIO ANALYSIS
Ratio analysis can reveal valuable information
about a company’s financial attributes, such
as profitability, efficiency in managing assets,
and whether the company has too much debt.
When computing ratios, analysts often
compare a company’s ratios with prior
periods, competitors, or industry averages."
“We will compute certain financial ratios for Nike (NKE),
and compare them with those of two competitors:

Under Armour (UA) and Adidas (ADDYY). The financial

statements of the three companies appear on the
following page.”
DEBT RATIO
The Debt Ratio reveals the proportion of assets
financed with debt.

Debt Ratio = Total Liabilities / Total Assets

"Companies owing too much debt might not
be able to make regular payments of interest
or the full amount due at maturity. If a
company cannot pay its debts on time it could
lose assets to creditors or even go bankrupt.
Although Adidas Group’s financial statements
are denominated in euros, the three
companies’ ratios can still be compared."
“Whereas Nike and Adidas both have more than $10 billion in
assets (€10,618 million equals approximately $13,700 million),
Under Armour is significantly smaller with only 5% of the
assets of Nike. Under Armour’s $178 million in debt looks
much smaller than the other two companies’. However, Under
Armour’s liabilities are still 26% of assets. Nike’s liabilities are
29% of assets (0.29 in decimal form) and Adidas has
significantly more debt—56% of assets.”
ASSET TURNOVER RATIO

Asset Turnover, computed by dividing total revenues by

total assets, measures how efficiently the company uses
assets to generate revenue.

Asset Turnover = Sales Revenue / Total Assets

How well does a company produce revenues from its assets? The
more assets a company has, the higher its revenues should be.
For example, one would expect Under Armour to have lower
revenues than Nike because it is smaller. Under Armour has fewer
assets available to produce revenues than Nike.
However, even though Nike is larger than Under
Armour, the asset turnover ratios indicate that Under
Armour is more efficient. Nike has an asset turnover of
1.39, whereas Under Armour’s is 1.57. Adidas was much
less efficient at using its assets to produce revenues,
delivering an asset turnover ratio of just 1.13.
RETURN ON SALES (ROS) RATIO

The Return on Sales (ROS) ratio, also referred to as Net

Profit Margin, measures the profitability of each dollar
of revenue.
Return on Sales = Net Income / Sales Revenue
How well does a company control expenses? A high ROS
ratio depends on controlling expenses to keep net
income high.
Nike’s ROS is 10.2% (0.102 in decimal form), nearly twice that
of Under Armour’s 6.5%, indicating that Nike earns, on average,
more than 10 cents of profit for each dollar of revenue,
compared to Under Armour’s average earnings of 6.5 cents of
profit per revenue dollar. Another way of looking at this is that
it takes Nike approximately 89.8 cents of expense to generate a
dollar of revenue, whereas Under Armour uses 93.5 cents of
expense to generate a dollar of revenue. Either way, Nike is
better at controlling expenses than both Under Armour and
Adidas, resulting in higher profits.
RETURN ON ASSETS (ROA) RATIO
The Return on Asset (ROA) ratio reveals how efficiently
assets are used to generate profit (net income).

Return on Assets = Net Income / Total Assets

A high ROA ratio depends on managing asset investments and
controlling expenses to keep net income high. Return on Assets is
the broadest measure of profitability

With Return on Assets of 14.2% (0.142 in decimal form), Nike

outperforms its competitors. Under Armour is second, with an ROA
of 10.2%, whereas Adidas Group comes in third with 5.3%
Return on Assets can also be computed by multiplying the two
components. Return on Sales by Asset Turnover
Analyzing the two component of Return on Asset will
help you describe corporate strategy. Some
companies focus on return on, sales relying on
product differentation to boost profits. Others focus
on assets turnover using high volume to gain strong
net income.
Return on Assets
Even though Under Armour has about 5% of the
assets of Nike, it generated higher asset turnover.
However, Nike showed its ability to control costs
with its strong return on sales of 10.2%, resulting in
return of assets almost 50% higher than that of
Under Armour. This indicates that Nike is able to
follow the business strategy of product
differentiation. Customers are willing to pay more for
Nike's strong brand names.
Adidas, on the other hand, is not faring as well. The
company is less profitable than the other two,
earning its investors a weak 5.3% return on assets,
comprised of a meager return on sales of 4.7%, and a
less efficient asset turnover of 1.13.
THANK YOU!!!