• The financial statements are end-products of a process for recording transactions of the

company related to operations, financing and investment

• Key financial statements:

▫ Balance sheet = financial position

▫ Income statement

▫ Statement of cash flows

▫ Statement of stockholders’ equity

1. Balance sheet (SFP) provides a snapshot

Total assets = current assets + long-term (Fixed) assets
Net fixed assets = fixed assets – accumulated DVA
DVA: depreciated value added
Current assets: cash and equivalents, AR, inventory
Long-term assets: net plant and equipment
Total liability and equity = current liability + long-term debt + stockholder’s equity
Outstanding shares = issued shares – treasury shares
current liability: accrued wages, AP (“free” liability / non-interested bearing / operating,
(interest-bearing) note payable
stockholder’s equity: common stock (paid-in capital) + retained earning = total assets –
total liability, additional paid-in capital (thặng dư vốn cỗ phần)
face value = 10.000
shares = n0
10.000 x n0 <= charter capital
• Operating assets and Nonoperating assets
▫ Operating assets: which consist of the assets necessary for operating the business,
majority of assets are operating assets (assets for O => O.A)
▫ Nonoperating assets: which include short term investments above the level
required for operation, land held for future use, excess cash held for other purposes
rather than operating purpose
• Operating liabilities and Debt
▫ Operating liabilities: automatically arise during operation – also known as
spontaneous financing (or non-interested bearing liabilities)
▫ Debt
• Cash versus Other assets
▫ Cash and equivalents account represent cash in hand
▫ The noncash assets should generate cash over time and the cash they would bring
in if they were sold today could be higher or lower than the reported values
• Accounts receivable represent credit sales
• Inventories show the cost of raw materials, work in process and finished
goods
• Net fixed assets represent the cost of buildings and equipment used in
operation minus the depreciation
Working capital (current asset / vốn lưu động) <> these assets “turn over” - they are
used and then replaced throughout the year
Net working capital NWC = CA – CL
Net operating working capital:
NOWC = OCA – OCL
= (CA – excess cash) – (current liability – note payable)
= (cash + AR + inventories) – (AP + accruals)
Total debt = short-term interested bearing liabilities + long-term interest bearing
liabilities
Total liabilities = total debt + “free” liabilities
• Other sources of fund Some companies use “hybrid” securities such as preferred
stock, convertible bonds and long-term leases to finance assets
• Depreciation Accelerated depreciation or straight-line depreciation
• Market values versus Book values market value > book value
 The accounting numbers (book values) are different from what the assets would
sell for (market values)
Future perspective and investors’ expectation
• Time dimension
The balance sheet changes everyday
Firm whose business is seasonal, experiences especially large balance sheet
changes during the year

2. Income statement profit = sales – costs , T = t% x EBT

Thu nhập trước thuế: Là lợi nhuận mà doanh nghiệp/công ty hay nhà đầu tư thu được
trước khi nộp thuế và tiền lãi phải trả
EBIT (earnings before interest and taxes – có tính lãi vay và thuế)
Operating income (or EBIT) = Sales revenues - Operating costs
= Sales – Operating cost exc DA – DA
= income after tax (ko có tax) + taxes + interest
= interest before tax + interest
¿
EBT = 1−T

Two companies with identical operations report significantly different net incomes (debt,
different tax, and non-operating assets)
Compare 2 companies’ operating performances => focus on operating income
¿
EPS (Earnings per share) = Common shares outstanding

Dividends
DPS (Dividends per share) =
Common shares outstanding

NI = Div. + Add R.E

Add R . E
 EPS = DPS +
Common shares outstanding
 Total common equity
BVPS (Book value per share) =
Common shares outstanding
EBITDA
▫ Depreciation and amortization (DA) are reported as costs, but they are not
cash expenses
▫ Used when concern with the amount of cash a firm is generating
• The Income statement is tied to the Balance sheet through the Retained
earnings account on Balance sheet

3. Statement of Cash flows

Three components of cash flows

- Cash flow from operating activities – deals with items that occur as part of
normal ongoing operation
 + Net income
+ Depreciation and amortization
+ Increase in inventories
+ Increase in accounts receivable
+ Increase in accounts payable
+ Increase in accrued wages and taxes
+ Net cash provided by (used in) operating activities

- Cash flow from investing activities – involves changes in capital assets (involving
long-term assets; the purchase and sale of short-term investments)
+ Additions to PPE (property, plant, and equipment)
+ Net cash used in investing activities

- Cash flow from financing activities – cash flows to and from creditors and
owners (changes in debt and equity)
+ Increase in notes payable
+ Increase in bonds (long-term debt)
+ Payment of dividends to stockholders
+ Net cash provided by financing activities
• Cash flow from operating activities is reported in direct or indirect format
▫ Direct method: lists the cash amounts received and paid by firm.
Net cash flow = in cash flow – out cash flow
▫ Indirect method: starts with Net income, add back non-cash items (DA) and
adjust for changes in current assets and liabilities.
Net cash flow = Net income + DA –(+) Increases (Decreases) in non-cash
current assets +(-) Increases (Decreases) in operating liabilities
Why is interest expense included in 'cash flow from operations' on the cash flow
statement?
• When FASB 95, Statement of Cash Flows, was created requiring interest expense
to be classified in operating activities, it's interesting to note that three of the seven
board members were in dissent.
This is speculation, but perhaps the logic is that interest expense is a period
expense already included in net income (part of operating activities), whereas the
inflows and outflows of financing activities are balance sheet transactions. 
Perhaps there is no way to logically connect the two (i.e. classify them both as
financing activities).
You should also note that "Interest Paid" appears as a supplemental disclosure (is
neither operating, investing or financing).  I believe the logic is that one cannot
derive this amount from the interest that is buried (included) in net income and
accrued interest payable (typically included in Accounts Payable).
So the disclosure, as it is required, tells the reader all the numbers they need to
know:  inflows and outflows from financing activities and the related interest
(appearing in the supplemental section).  This method would appear to provide
more transparency, as opposed to lumping the two together in financing activities
 and not being able to tell how much of the outflow was principle payments versus
interest.
Why is Interest Expense Included in the Operating Activities Section of the Cash
Flow Statement?
• Paragraph 23 of the Statement of Financial Accounting Standards No.
95, Statement of Cash Flows, (Financial Accounting Standards
Board, www.fasb.org) requires that "cash outflows for operating activities are: ...d.
Cash payments to lenders and other creditors for interest..." [Three of the seven
members of the FASB at the time dissented to this requirement. They would have
preferred that interest paid be reported as a financing activity.]
Under the indirect method of preparing the statement of cash flows, the operating
activities section begins with net income. This means that the interest expense is
already contained within the net income amount and will be adjusted to cash
amount of interest paid by reflecting the change in Interest Payable.

Change FA = Change NFA. + DA

Change FA = FA2 –FA1 = 100 – 100 = 0
Change NFA =NFA2 – NFA1 = 60 – 80
3-12. Hampton Industries had $39,000 in cash at year-end 2017 and $11,000 in cash at
year-end 2018. The firm invested in property, plant, and equipment totaling $210,000.
Cash flow from financing activities totaled $120,000.
a. What was the cash flow from operating activities?
b. If accruals increased by $15,000, receivables and inventories increased by $50,000,
and depreciation and amortization totaled $25,000, what was the firm’s net income?
a) invest activities; -210 => 39 – 210 + 120 + O = 11 => operating activities = +62
b) increased accruals = +15
increased AR and Inventories = -50
DA = +25
Cash flow operations = NI + DA + increase Accruals – increase AR & Inventories
=> 62 = NI + 25 + 15 – 50 => NI = 72

4. Uses and Limitations of FSs

5. Free cash flow (FCF)
• Corporate decision makers and security analysts often modify accounting data to
meet their needs. The most important modification is the concept of free cash flow
• FCF: The amount of cash that could be withdrawn without harming a firm’s
ability to operate and to produce future cash flows OR The amount of cash that
can be used for distribution to investors after the firm made the necessary
investments in operating capital

FCF = [(Sales – Operating cost exc DA – DA)*(1-t) + DA]- [(change in NFA+ DA) +
change in NOWC]
• The first term represents the amount cash generated from current operations
• EBIT(1-T) = NOPAT (Net operating profit after taxes: The profits a company
would generate if it had no debt and held only operating assets)
• DA are added back because these are noncash expenses that do not reduce the
amount of cash the company has available to pay investors
• The second term indicates cash invested in fixed assets (capital expenditures) and
operating working capital
• A positive FCF indicates that the firm is generating more than enough cash to
finance current investments in fixed assets and working capital (FCF dương cho
thấy công ty đang tạo ra nhiều tiền mặt hơn đủ để tài trợ cho các khoản đầu tư hiện
tại vào tài sản cố định và vốn lưu động)
 • A negative FCF means that the company does not have sufficient internal funds to
finance investments in fixed assets and working capital (FCF âm có nghĩa là công
ty không có đủ nguồn vốn nội bộ để tài trợ cho các khoản đầu tư vào tài sản cố
định và vốn lưu động)
•
• Importance of FCF:
• Allow companies to pursue opportunities that enhance shareholder wealth.
Assess the value of proposed capital budgeting projects, the potential
merger candidates
• Some investors prefer using FCF instead of net income to measure a
company's financial performance, because FCF is more difficult to
manipulate than net income
• Estimate the value of the stock ( ước tính giá trị cổ phiếu )
• Companies with positive FCF may be more likely to:
• Pay interest
• Pay principal
• Pay dividend
• Repurchase stock
• Invest in financial assets
FCF versus CF

6. MVA and EVA

 • MVA – Market Value Added
▫ The difference between the market value of a firm’s equity and the book
value shown on the balance sheet
MVA = Market value of Equity – Book value of Equity
▫ The higher its MVA, the better the job management is doing for the firm’s
shareholders
Note: Positive MVA may not be entirely attributable to management performance
• EVA – Economic Value Added
▫ Excess of NOPAT over capital costs
EVA = NOPAT – Annual dollar cost of capital
= EBIT(1-T) – (Total invested capital x After tax percentage cost of capital)
▫ Companies create value (positive EVA) if the benefits of their investment
exceed the cost of raising capital
▫ Total invested capital represents money that the company has raised from
debt, equity, and any other sources (preferred stock). The funds raised from
this capital are invested in net fixed assets and NOWC
▫ NOPAT is money that these investments have generated, representing
benefits of capital investments
▫ EVA takes into account the total cost of capital, which includes the cost of
equity (besides the cost of debt)

▫ 3-5. Harper Industries has $900 million of common equity on its balance
sheet, its stock price is $80 per share, and its market value added (MVA) is
$50 million. How many common shares are currently outstanding?
(900k + 50m) / 80 = 11,875,000
▫ 3-6. page 96 (136/866)
MVA = Market value of Equity – Book value of Equity
= (2000000*28) – 34000000 = 56000000 – 34000000 = $22000000
 ▫ 3-7. Barton Industries has operating income for the year of $3,500,000 and
a 36% tax rate. Its total invested capital is $20,000,000 and its after-tax
percentage cost of capital is 8%. What is the firm’s EVA?
Income*(1 – tax rate) = $3,500,000*(1 - 36%) = 2,240,000
EVA = Net operating income after taxes – (Invested capital * cost of capital)
= 2,240,000 – (20,000,000 * 8%) = 640000