Overview of Financial

Statement Analysis

CHAPTER

Book Organization
Financial Statement Analysis
Part I
Introduction and Overview

Chapter 1: Overview of
Financial Statement
Analysis
Chapter 2: Financial
Reporting and
Analysis

Part II
Accounting Analysis
Chapter 3: Analyzing
Financial Activities
Chapter 4: Analyzing
Investing Activities
Chapter 5: Analyzing
Investing Activities:
Special topic
Chapter 6: Analyzing
Operating Activities

Part III
Financial Analysis
Chapter 7: Cash Flow
Analysis
Chapter 8: Return on
Invested Capital
Chapter 9: Profitability
Analysis
Chapter 10: Prospective
Analysis
Chapter 11: Credit
Analysis
Chapter 12: Equity
Analysis and Valuation

Credit Analysis
Credit worthiness: Ability to honor credit obligations
(downside risk)

Liquidity
Ability to meet shortterm obligations
Focus:
Current Financial
conditions
Current cash flows
Liquidity of assets

Solvency
Ability to meet longterm obligations
Focus:
Long-term financial
conditions
Long-term cash flows
Extended profitability

Credit Analysis
Debt Characteristics

Seniority - order claims are paid

Collateral - asset earmarked for claims
Covenants - constraints on debtors
to protect creditors
Other provisions - sinking fund
requirements, etc.

Intrinsic Value

(or Fundamental Value)

Strateg
y

Value of Company (or stock) without

reference to market value (or stock price)

Intrinsic value > Market value

Buy

Intrinsic value < Market value

Sell

Intrinsic value = Market value

Hold

Accounting Analysis
Process to evaluate and adjust financial
statements to better reflect economic reality

Comparability problems across firms and across time

Manager estimation error
Distortion problems

Earnings management
Distortion of business

Accounting
Risk

Financial Statements Reflect Business

Activities
Planning

Investing

Operating

Current:
l
l

l
l

Cash
Accounts
Receivable
Inventories
Marketable
Securities

Noncurrent:
l

l
l

Land, Buildings, &

Equipment
Patents
Investments

Assets

Balance Sheet

l
l
l
l

l
l

Sales
Cost of Goods Sold
Selling Expense
Administrative
Expense
Interest Expense
Income Tax Expense

Net Income

Financing
Current:
l
l
l
l

Noncurrent:
l
l
l

Income statement
Cash Flow
Statement of
Cash Flows

Notes Payable
Accounts Payable
Salaries Payable
Income Tax
Payable
Bonds Payable
Common Stock
Retained Earnings

Liabilities & Equity

Balance Sheet
Statement of
Shareholders Equity

Kodak
Dec 31, 1998 (In millions, except per share data)

Assets
Current Assets
Cash and cash equivalents
Marketable securities
Receivables
Inventories
Deferred income tax charges
Other
Total current assets
Properties
Land, buildings and equipment at cost
Less: Accumulated depreciation
Net properties
Other Assets
Goodwill (net of accumulated
amortization of $534)
Long-term receivables and
other non-current assets
Deferred income tax charges
Total Assets

Liabilities and
Shareholders Equity
$

457
43
2,527
1,424
855
293
5,599
13,482
7,568
5,914

Current Liabilities
Payables
Short-term borrowings
Taxes - income and other
Dividends payable
Deferred income tax credits
Total current liabilities
Other Liabilities
Long-term borrowings
Post-employment liabilities
Other long-term liabilities
Deferred income tax credits
Total liabilities

1,232

Shareholders' Equity

1,705

Common stock, par value $2.50 per share,

950,000,000 shares authorized; issued
391,292,760 shares
Additional paid in capital
Retained earnings
Accumulated other comprehensive loss

283
$ 14,733

Treasury stock, as cost, 68,494,402 shares

Total shareholders' equity
Total liabilities and equity

3,906
1,518
593
142
19
6,178
504
2,962
1,032
69
10,745

978
902
6,163
(111)
7,932
3,944
3,988
$
14,733

Income Statement
Kodak
For Year Ended Dec. 31, 1998

(In millions, except per share data)

Sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Research and development costs
Purchased research and development
Restructuring costs and asset impairments
EARNINGS FROM OPERATIONS
Interest expense
Other income (charges)
Earnings before income taxes
Provision for income taxes
Earnings from continuing operations
Gain on sale of discontinued operations
NET EARNINGS

$13,406
7,293
6,113
3,303
880
42
1,888
110
328
2,106
716
1,390
$
1,390

Statement of Shareholders Equity

Koda
For year ended Dec. 31, 1998
k
(In millions, except number of shares)

Shareholders Equity Dec 31, 1997

Net earnings
Other comprehensive income (loss):
Unrealized holding gains arising during
period ($122 million pre-tax)
Reclassification adjustment for gains included
in net earnings ($66 million pre-tax)
Currency translation adjustment
Minimum pension liability adjustment
($7 million pre-tax)
Other comprehensive income
Comprehensive income
Cash dividends declared
Treasury stock repurchased (3,541,295 shares)
Treasury stock issued under employee plans
(3,272,713 shares)
Tax reductions - employee plans
Shareholders Equity Dec 31, 1998

Accumulated
Additional
Other
Common Pail In Retained
Comprehensive
Treasury
Stock
Capital EarningsIncome (Loss) Stock
978
914
5,343
(202) (3,872)
1,390
-

Total
3,161
1,390

80

(44)
59

$978

(58)
46
$902

(570)
$6,163

(4)
91
91
1,481
(258)(570)
(258)
186
128
($111) ($3,944) 46$3,988

Statement of Cash Flows

Kodak

For year Ended Dec. 31, 1998 (In millions)

Cash flows from operating activities:
Earnings from continuing operations
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization
Purchased research and development
Provisions (benefit) for deferred income taxes
(Gain) loss on sale/retirement of assets
(Increase) decrease in receivables
(Increase) decrease in inventories
(Decrease) increase in liabilities excluding borrowings
Other items, net
Total adjustments
Net cash provided by operating activities
Cash flow from Investing activities:
Additions to properties
Proceeds from sale of assets
Cash flows related to sales of businesses
Acquisitions, net of cash acquired
Marketable securities - sales
Marketable securities - purchases
Net cash used in investing activities
Cash flows from financing activities:
Net increase (decrease) in borrowings with original maturities of 90 days or less
Proceeds from other borrowings
Repayment of other borrowings
Dividends to shareholders
Exercise of employee stock options
Stock repurchase programs
Net cash provided by (used in) financing
Effect of exchange rate changes on cash
activities
Net (decrease) increase in cash and cash equivalents

$ 1,390
853
42
202
(166)
(1)
(43)
(516)
(278)
93
1,483
(1,108)
297 (59)
(949)
(182)
162
(1,839)
894
1,133
(1,251)
(569)
128
(258)
77
8
(271)

Financial
Statement
Links Kodak
Balance Sheet
Dec. 31, 1997
Assets
Cash
Non-Cash Assets
Total Assets
Liabilities & Equity
Total liabilities

728
12,417
$13,145
$ 9,984
1,892
5,141
(3,872)
$ 3,161

Liabilities & Equity

$13,145

Income Statement
for Year Ended Dec. 31, 1998
Sales
$13,406
Expenses
12,016
Net Earnings
$ 1,390
Other Comprehensive Income
91
Comprehensive Income
$ 1,481
Statement of Shareholders Equity
for Year Ended Dec. 31, 1998
Share Capital, Dec. 31, 1997
Adjustments/Stock Issue
Share Capital, Dec. 31, 1998

$ 1,892
(12)
$ 1,880

Retained Earnings, Dec. 31, 1997

Add: Comprehensive Income
Less: Dividends
Retained Earnings, Dec. 31, 1998

$ 5,141
1,481
(570)
$ 6,052

Treasury Stock, Dec. 31, 1997

Treasury Stock Issued
Treasury Stock Repurchased
Treasury Stock, Dec. 31, 1998

$ 3,872
186
(258)
$ 3,944

(Period of time)

Balance Sheet
Dec. 31, 1998
Assets
Cash
Non-Cash Assets
Total Assets

457
14,276
$14,733

Liabilities & Equity

Total liabilities

$10,745

Equity:
Share Capital
Retained Earnings
Treasury Stock
Total equity

1,880
6,052
(3,944)
$ 3,988

Liabilities & Equity

$14,733

(Period of
time)

(Period of
time)

Equity:
Share Capital
Retained Earnings
Treasury Stock
Total equity

Statement of Cash Flows

for Year Ended Dec. 31, 1998
Operating Cash flows
$ 1,483
Investing Cash flows
(1,839)
Financing Cash flows
77
Exchange rate changes on cash
8
Net Change in Cash
$ (271)
Cash Balance, Dec. 31, 1997
728
Cash Balance, Dec. 31, 1998
$ 457

Additional Information
(Beyond Financial Statements)

Management Discussion & Analysis (MD&A)

Management Report
Auditor Report
Notes to Financial Statements
Supplementary Information (10-K, 10-Q, 8-K, 20F)
Proxy Statement
Social Responsibility Report

Analysis Preview
Year-to-Year
Kodak's Analysis
Comparative Income
Statements
Change Change
1998
(in mil.) %
1997
Sales
$
($ 1,132) (7.8)%
Cost of goods sold
7,293 $14,53
7,976
(683)
(8.5)
13,406
$
($
Gross profit
(6.8)
8$
6,113
6,562 449)
Operating Expenses:
Selling, general and admin.
3,303 3,912
(609)
(15.6)
Research and development
922 1,230
(308)
(25.0)
1,290 (1,290)
Restructuring costs
(100)
Earnings from operations
1,352
$ 1,888 $
$
Interest Expense
110 130 98 1,758
12
(12.2)
Other income (charges)
328
21
307
1,461
Earnings before income taxes $
$
$
3,873
Provision for income taxes
2,106
716
53
2,053
668
1,391
48 $
Net earnings
27,700
$ 1,390
$
5
1,385

Analysis Preview
Index-Number Trend Analysis
Kodak's Index - Number Trend Series (base year 1994)
1998
Sales
99
Total operating expenses 94
Earnings from operations144
Net earnings
249
Total assets
98
Shareholders' equity
99

1997
107
118
10
1
88
79

1996
117
115
141
182
96
118

1995
110
106
148
224
97
127

1994
100
100
100
100
100
100

Analysis Preview
Common-Size Analysis
Kodak's Common-Size Income Statements

Sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Research and development costs
Restructuring Costs
Earnings from operations
Interest expense
Other income
Earnings before income taxes
Provision for income taxes
Net earnings

1998

1997

100.0%
54.4
45.6%
24.6
6.9
0
14.1%
0.8
2.4
15.7%
5.3
10.4%

100.0%
54.9
45.1%
26.9
8.5
8.9
0.9%
0.7
0.1
0.3%
0.3
0.0%