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ADMS 3531 (17)
Chapter 17

Chapter 17 Detailed Note.docx

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Administrative Studies
ADMS 3531
Dale Domian

Chapter 17: Projected Cash Flow and Earnings 17.1 Sources of Financial Information - in the daily stock price reports of the newspaper, you will see a shamrock symbol (clover) next to entries for many individual stocks and it symbolizes that the company will send annual reports to readers who request them through The Globe and Mail – requests can be made through telephone or fax - online websites where companies whose stock trades on the exchange sometimes provide recent quarterly or annual financial reports - in addition to company reports, a wealth of primary financial information is available to investors through Ontario Securities (OSC), it requires publicly traded companies to submit financial statements on a regular basis - investors can get financial statements of Canadian companies from SEDAR files – SEDAR lists company reports, announcements, and other info about public companies and mutual funds since 1997 - investors can use EDGAR files from Securities and Exchange Commission (SEC) website to find financial statements of US stock exchange listed companies - majority of big Canadian companies are listed on the US stock markets as well as on the Canadian exchanges - Ontario Securities Exchange Commission’s disclosure regulations require that when a company discloses material non-public information to security analysts and stockholders who may well trade on the basis of the information, it must also make a simultaneous disclosure of that information to the general public - disclosure regulations: requires companies making a public disclosure of material non-public information to do so fairly without preferential recipients - material non-public information: any information that could reasonably be expected to affected the price of a security 17.2 Financial Statements - financial statements reveal hard facts about a company’s operating and financial performance - OSC requires timely dissemination of financial statements to the public - firm’s balance sheet, income statement, and cash flow statement are essential reading for security analysts - balance sheet: provides a snapshot view of a company’s assets and liabilities on a particular date - income statement: measures operating performance over an accounting period, usually a quarter or a year, and summarizes company revenues and expenses - cash flow statement: reports how cash was generated and where it was used over the accounting period The Balance Sheet Fixed Assets Accounting Style Numeric Style Plant Facilities $35,000 $35,000 Production Equipment 20,000 +20,000 Administrative Facilities 15,000 +15,000 Patents 10,000 +10,000 Accumulated Depreciation (20,000) -20,000 Total Fixed Assets $60,000 $60,000 - common to both numerical columns, an underline indicates that the numbers listed above should be summed - however, accounting notation omits the “+” sign and “-“ sign, and it is indicated by parentheses “( )” instead - asset categories include: current assets, fixed assets, goodwill, and other assets - current assets: cash or items that will be converted to cash or be used within a year (for example, inventory will be sold, accounts receivable will be collected, and materials and supplies will be used within a year - fixed assets: have an expected life longer than one year and are used in normal business operations (they may be tangible or intangible), tangible fixed assets include property, plant, and equipment, intangible assets include rights, patents, and licenses - except for land, all fixed assets normally depreciate in value over time - goodwill: measures the premium paid over market value to acquire an asset - other assets: miscellaneous items not really fitting into any of the other asset categories - liability categories include current liabilities, long-term debt, and other liabilities - current liabilities: require payment or other action within a one-year period - long-term debt: notes, bonds, or other loans with a maturity longer than one year - other liabilities: miscellaneous items not belonging to any other liability category - shareholder’s equity: the difference between the total assets and total liabilities (it includes paid-in capital, which is the amount received by the company from issuing common stock, and retained earnings, which represent accumulated income not paid out as dividends but instead used to finance company growth) - ASSETS = LIABILITIES + EQUITY Income Statement - income statements begin with net sales from which cost of goods sold (COGS) is subtracted to yield gross profit - cost of goods sold (COGS): represents direct costs of production and sales (costs that vary directly with level of production and sales) - next, operating expenses are subtracted from gross profit to yield operating income - operating expenses: indirect costs of administration and marketing (costs that do not vary directly with production and sales) - subtracting interest expense on debt from operating income yields pretax income - then finally, subtracting income taxes from pretax income yields net income - net income: is the “bottom line” because it is normally the last line of the income statement - NET INCOME = DIVIDENDS + RETAINED EARNINGS Example of an Income Statement Borg Corporation Year 2536 Net Sales $110,000 Cost of Goods Sold (89,000) Gross Profit $ 21,000 Depreciation (3,000) (10,000) Other Operating Expenses $ 8,000 Operating Income (2,000) Interest Expense $ 6,000 Pretax Income (2,400) Income Taxes $ 3,600 Net Income (1,080) Dividends $ 2,520 Retained Earnings The Cash Flow Statement - reports where a company generated cash and where cash was used over a specific accounting period - cash f
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