Financial Accounting Part 2

Introduction

• Financial analysis, cash flow analysis, and valuation

1. Quick Review of Financial Statements

• Who uses financial statements?
• Review of the balance sheet
• Review of the income statement
• Review of the statement of cash flows

2. Analyzing Financial Statements

• What is financial ratio analysis?
• Comparing financial statements across time
• Comparing financial statements across companies
• Common-size financial statements

3. Ratio Analysis: DuPont Framework

• Gunpowder, the French Revolution, and the DuPont framework
• Ratio analysis
• Return on equity
• DuPont framework
• Current ratio
• Debt ratio
• Price-earnings ratio
• Real world: Apple vs. Google vs. Microsoft

4. Ratio Analysis: The Operating Cycle

• Nike, McDonald’s, and the operating cycle
• The operating cycle
• Days sales in inventory
• Average collection period
• Days purchases in payable
• Real world: Procter & Gamble

5. The Statement of Cash Flows

• Jim Stice operating cash flow matrix and a wife named Kay
• Analyzing cash flows
• What does it tells us?
• Cash flow patterns
• One method of analysis
• Two methods for presentation

6. Forecasting Financial Statements

• Forecasting the financial statements of Home Depot
• What causes financial statement amounts to change?
• The initial assumptions
• Forecasted income statement
• Forecasted retained earnings
• Forecasted assets
• Forecasted liabilities and equity

7. Intro to Business Valuation

• The intersection of accounting and finance
• Value is based on expectations about the future
• Overview of the market approach: Using multiples
• Overview of the cost approach: Depreciated replacement cost
• Overview of the income approach: Discounted cash flow

8. Valuation: Using Multiples

• The Microsoft IPO
• Simple illustration: Valuation of 69 Blaine Avenue
• Earnings multiples
• Equity multiples
• Sales multiples
• Other multiples: The case of WhatsApp

9. Valuation: Free Cash Flows

• Buying the Hong Kong car?
• Basic idea: Cash flows, timing, and risk
• Risk and interest rates
• Forecasting cash flows
• Simple discounted cash flow valuation example

10. Valuation: Comparing Models

• Brief McDonald's history
• McDonald's: The numbers
• McDonald's: Dividend-based valuation
• McDonald's: Earnings multiple
• McDonald's: Discounted cash flow valuation
• McDonald's: Lessons from a comparison of the models

Conclusion

• Next steps