Week 8 - The Balance Sheet & The Income Statement

The Balance Sheet

Definition: Financial statement that show the value of the firm’s assets and liabilities at a particular point in time (from an accounting perspective).

Balance Sheet

PepsiCo Balance Sheet (December 31, 2006) $Millions The Main Balance Sheet Items Current Assets Cash & Securities Receivables Inventories + Fixed Assets Tangible Assets Intangible Assets = Current Liabilities Payables Short-term Debt + Long-term Liabilities + Shareholders’ Equity The Balance Sheet Common-Size Balance Sheet All items in the balance sheet are expressed as a percentage of total assets. Common Size Balance Sheet Market Value vs. Book Value Book Values are determined by GAAP Market Values are determined by current values Generally Accepted Accounting Principles (GAAP) Procedures for preparing financial statements. Equity and Asset “Market Values” are usually higher than their “Book Values”

Market Value vs. Book Value

Example:According to GAAP, your firm has equity worth $6 billion, debt worth $4 billion, assets worth $10 billion. The market values your firm’s 100 million shares at $75 per share and the debt at $4 billion. Q: What is the market value of your assets? A: Since (Assets=Liabilities + Equity), your assets must have a market value of $11.5 billion.

The Income Statement Definition Financial statement that shows the revenues, expenses, and net income of a firm over a period of time (from an accounting perspective). The Income Statement Example: Pepsico Income Statement (year end 2006) Net Sales 35,753 COGS -15,762 Selling, Gen.&Admin. expenses -11,530 Depreciation expense -1,406 EBIT 7,055 Net interest expense 66 Taxable Income 6,989 Income Taxes 1,347 Net Income 5,642 The Income Statement Earnings Before Income & Taxes (EBIT) EBIT = Total Revenues - costs – deprecation = 35,753 – 27,292 – 1,406 = $ 7,055 million