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FIN 501 Study Guide - Ontario Securities Commission, Toronto Stock Exchange, Cash Flow


Department
Finance
Course Code
FIN 501
Professor
Edward Blinder

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FIN501 investment analysis I
CHAPTER 17 PROJECTING CASH FLOW AND EARNINGS
SOURCES OF FINANCIAL INFORMATION
Primary source of financial information about a company is its annual report to stockholders
Other sources include The Globe and Mail, the Toronto Stock Exchange, Ontario Securities Commission
SEDAR: electronic archive of company filings with the Canadian securities regulatory agencies
Disclosure regulation: requires companies making a public disclosure of material non-public information to do so
fairly without preferential recipients
FINANCIAL STATEMENTS
Balance sheet: accounting statement that provides a snapshot view of a company’s assets and liabilities on a
particular date
o Asset: anything a company owns that has value
i. Current assets cash or items that will be converted to cash or be used within a year (EX.
Cash, AR, inventory, materials and supplies, prepaid expenses)
ii. Fixed assets tangible or intangible assets with an expected life longer than one year and
are used in normal business operations (EX. Property, plant, equipments, rights, patents, and
licenses)
iii. Investments various securities held for investment purposes (EX. Common and preferred
stock, goodwill)
iv. Other assets miscellaneous items not readily fitting into any of the other asset category
o Liability: a firm’s financial obligations
i. Current liabilities require payment or other actions within one year (EX. AP, accrued taxes)
ii. Long-term liabilities debt with a maturity longer than one year (EX. Notes, bonds, or other
loans)
iii. Other liabilities miscellaneous items not belonging to any other liability category
o Equity: an ownership interest in the company
Paid-in capital is the amount recieved by the company from issuing common stock
Retained earnings is the accumulated income not paid out as dividends but instead used to
finance company growth
ASSETS = LIABILITIES + EQUITY
Income statement: summary statement of a firm’s revenues and expenses over a specific accounting period, usually a
quarter or a year
o Income: difference between a company’s revenues and expenses, used to pay dividends to stockholders or
kept as retained earnings within the company to finance future growth
NET INCOME = DIVIDENDS + RETAINED EARNINGS
Cash flow statement: analysis of a firm’s sources and uses of cash over the accounting period, summarizing
operating, investing and financing cash flows
o Cash flow: income realized in cash form
o Noncash items: income and expense items not realized in cash form
o Three categories:
1. Operating cash flow: cash generated by a firm’s normal business operations, such as interest
payments to bondholders
2. Investment cash flow: cash flow resulting from purchases and sales of fixed assets and
investments
3. Financing cash flow: cash flow originating from the issuance or repurchase of securities and
the payment of dividends
o Interest payments are cash expenses reported on the income statement, so they do not appear in the cash
flow statement to reconcile the difference between income and cash flow
Profitability ratio
RETURN ON ASSETS = NET INCOME / TOTAL ASSETS
RETURN ON EQUITY = NET INCOME / STOCKHOLDER EQUITY
GROSS MARGIN = GROSS PROFIT / NET SALES
OPERATING MARGIN = OPERATING INCOME / NET SALES
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