Financial accounting

Goals of FSA

determine value (future) and evaluate performance (past and present)

Two worlds

Firm and equity

Intrinsic value of a company

What a company is worth based on how much cash it is expected to generate in the future

Why do we discount cash flows

Money received today is worth more than the same amount in the future

How to predict future cash flows

Income statement to predict future revenues, expenses, and net income, balance sheet to predict assets, liabilities, equity to support, then statement of cash flows to determine how much cash the company is expected to generate.

3 steps of relative analysis

Find comparable firm, calculate ratio for each firm, apply ratio to the firm you are analyzing

ROA

How much income a company generates from its assets (profitability)

Profit Margin

How much sales revenue remains as profit after accounting for expenses (efficiency)

Total asset turnover

How well a company’s assets generate sales (prouctivity)

ROE

How much profit a company generates for each dollar of shareholders equity

Cap structure leverage

how much debt a company uses to finance its operations and assets compared to its equity.