Introduction to Finance: The Basics

Professor Xi Yang

Module 2: Financial Statements and Cash Flow

Table of Contents
Module 2: Financial Statements and Cash Flow ...................................................................... 1
Lesson 2-1: Module 2 Overview........................................................................................................ 2
Lesson 2-1.1. Module 2 Overview........................................................................................................................ 2

Lesson 2-2: Financials ....................................................................................................................... 5

Lesson 2-2.1. Financials ....................................................................................................................................... 5

Lesson 2-3: Balance Sheet .............................................................................................................. 21

Lesson 2-3.1. Balance Sheet: Introduction ........................................................................................................ 21
Lesson 2-3.2. Balance Sheet: Fiscal Year............................................................................................................ 28
Lesson 2-3.3. Balance Sheet: Other Topics ........................................................................................................ 35

Lesson 2-4: Income Statement ....................................................................................................... 46

Lesson 2-4.1. Income Statement ....................................................................................................................... 46

Lesson 2-5: Cash Flow of the Firm ................................................................................................... 50

Lesson 2-5.1. Statement of Cash Flow ............................................................................................................... 50

Lesson 2-6: Module 2 Wrap Up....................................................................................................... 57

Lesson 2-6.1. Module 2 Wrap Up ...................................................................................................................... 57

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Professor Xi Yang

Lesson 2-1: Module 2 Overview

Lesson 2-1.1. Module 2 Overview

In this module, we'll learn the basics of financial statements. In order to help you
understand the importance of financial statements I want you to think about a daily
example. Suppose you are a parent of a high school student, and you are curious about
your students' academic performance in school. One way is to take a look at their
transcript. It is an official document that summarize a student's coursework and grades.
The transcripts will also be used in their college applications, scholarship application
and others. Financial statement can be thought of as a transcript for a company. They
are official documents that summarize the financial performance of a company.
Financial statements are used by investors, creditors, researchers, and anyone who is
interested in the company. You need some basic knowledge to read a student's
transcript. What are the classes, are they easy classes or hard classes? What is the
credit assigned to each class? And what are the grades stands for? Follow the same
logic, you also need to know some basic knowledge in order to read financial
statements.

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We will cover three basic forms of financial statements. The first one is the balance
sheet. We'll talk about what the balance sheet captures, how it is organized and what
the items stand for. After that we'll introduce income statement. We'll cover how to use
income statement to evaluate the profit or losses of a company. We'll also explore the
link and the differences between these two financial statements. We'll also learn what is
the difference between cash flows and accounting earnings. What are different
perspectives of financiers and accountants? And how to derive cash flows. We also
want to talk about the relationship among three types of financial statements. After this
module, you should be able to read the financial statements of a company and interpret
the numbers. There's one more thing I want you to keep in mind before we start to learn
financial statements. Let's go back to the transcript example. Although the transcript is a
quick way to learn the academic performance of the student, it is impossible to capture
everything about a student. There are a lot of important things that transcript cannot tell
us.

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For example, what are the academic interests of the student and how creative the
student is? When you use financial statements to evaluate the financial performance of
a company. You also need to bear in mind that you should not be restricted by financial
statements. You need to see the whole picture of the business.

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Lesson 2-2: Financials

Lesson 2-2.1. Financials

The first question I want to introduce is the concept of financials. What are financials?
According to the requirement of the Security and Exchange Commission, SEC, public-
traded companies in the United States should file financial reports to remain listed on
the stock exchange. These reports are called financial statements or financials for short.

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In the United States, the rules and procedures used to prepare financial reports are
called Generally Accepted Accounting Principles, GAAP.

In other countries of the world like the European Union and more than 140 countries,
they use a different set of rules, which are called International Financial Reporting
Standards, IFRS. There are some differences between these two sets of accounting
standards, but people are working to make these two standards more consistent with

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each other. Since 2007, SEC allows foreign companies to prepare their financials using
IFRS.

Another question you may have is, where can I gather information on financials? There
are two places. One is through the company's website. Most large public companies
publish their financial reports on their websites. You just need to visit the company's
homepage and then click the tab called Investors or Investor Relations. You should be
able to find all the financial reports there.

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Here's an example from Target Corporation. So, this is the Target website for investors.
If you want to check the filings, then you can click the tab "Investors".

When you click the tab, then you can see a bunch of manuals over here like what is the
corporate overview, stock information, annual reports, and corporate governance. Here,
if you want to check the annual report, you can just click the "Annual Reports".

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Then you will see this is the most recent Corporation Annual Report.

If you scroll down a little bit, you will see the historical information. Let's use one year as
an example. Let's click the "2017 Annual Report".

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The first page of the report is the logo of the company.

When you scroll down a little bit, you will see some financial highlights like the sales
number, the EBIT number, net earnings, and diluted earnings per share. We will talk
about these concepts in the later chapters.

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When you scroll down a little bit more, then you can see the total sales. 23% comes
from beauty and household essentials, and 20% comes from food and beverage, and
so on and so forth. Then followed by a letter by the CEO and the chairman.

After that is the financial summary of the company.

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If you scroll down a little bit more, then you will see the 10-K Form. This is the financial
report. If you are interested in the financial report, you can also click the "Download"
button to download it to your local computer so that you can use it in the future.

Another place you can get the financials is the SEC's website.

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Financial filings can be searched at the EDGAR website on the SEC's website.

EDGAR stands for the Electronic Data Gathering, Analysis, and Retrieval system.
Companies file their forms required by the SEC using this system. This database is
used widely by academia and industry researchers. Now, I want to show you how to use
the system to search for files you need.

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If you go to the SEC's website, in the homepage, you will find at the upper right corner,
you can click a tab which is called the "Company Filings".

If you click that, then you will be directed to this webpage. This is the EDGAR Company
Filings webpage. You can search the information of a company using company's name,
and then click "Search". There's another way to do it much faster, which is to use the

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"Fast Search" tab. Here, you can enter the ticker symbol of the company, and then
search the company.

Here, suppose I'm interested in Target Corporation, and I would enter the ticker symbol
TGT over here. Then click "Search".

And you will get a webpage look like this. These are all filings by Target Corporation.

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You can see a number of filings like S-8 Form. 8-K Form is the current report. They
have the filing's name, the format, the description, the filing date, and also the file
number. Suppose I'm interested in a 10-Q quarterly report, I can click "Documents".

Then check the detailed information. This is a quarterly report.

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This is the 10-Q Form. You can scroll down to see the information of the 10-Q Form. If
you want to download it to your computer, you can click "Control P" and print it to your
local computer and save it as a PDF file.

Let's go back to the search findings. Suppose you are interested in some specific
information or specific date; you can also filter your result. For example, I'm only
interested in the 10-K Form, so I can just put 10-K over here. Then search it.

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Now, you can see all the filings are 10-K filings over here. Now you have accumulated
all the 10-K Forms filed by Target during the past years.

A Form 10-K is an annual report required by the SEC. It captures a comprehensive

summary of a company's financial position. The 10-K Form includes a detailed
description of its major businesses, competition, risk factors, and properties. It also has

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information about the corporate governance, executive compensation. Most importantly,
the audited financial statements. This form is signed by its directors to make sure the
information delivered here captures the accurate and complete information about the
company.

In addition to the 10-K Form, a company is also required to file quarterly reports on
Form 10-Q. Form 10-Q reports the company's financial situation after each quarter. It is
much shorter than the annual report. It is unaudited financial statements.

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The Form 8-K, also called the current report, must be filed if there are any major
changes to a business or significant events that were not covered in the 10-K or 10-Q
reports. What is considered as a significant event or material event? Some examples,
such as a sudden departure of the CEO, acquisition, bankruptcy, or changes in
corporate governance. The public company generally must file a current report on Form
8-K within four business days to provide an update to previously filed quarterly reports
and annual reports. These reports are often important to their shareholders because
they contain information that will affect the share price.

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Lesson 2-3: Balance Sheet

Lesson 2-3.1. Balance Sheet: Introduction

Now we want to learn the basics of the balance sheet. Here's an example of a balance
sheet of Target Corporation. You can get it from the company's annual report. This is a
condensed version of the actual balance sheet because I want to use this version to
illustrate some concepts that apply to all the corporations.

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The balance sheet takes a snapshot of a firm's accounting value at a certain time. The
balance sheet of target summarizes the value of the firm as of February 1st, 2020, and
February 2nd, 2019. All the values are in million dollars.

Let's take a look at the left-hand side of the balance sheet. The assets of the company
are listed on the left. The assets can be divided into current assets and fixed assets.

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Current assets are the assets that can be converted into cash within a year. Fixed
assets have a life longer than one year.

The current assets include three major components. First, cash and equivalents refer to
cash or assets that can be converted into cash immediately. Cash equivalents include
bank accounts, money market funds, commercial paper, and treasury bills. It is followed
by accounts receivable. We can also call it receivables for short. It is the amount of
money owed to a company, by its customers who purchase the goods or services on
credit. Inventory includes raw materials, work in progress, and finished products. Other
current assets include prepaid expenses. For example, a company purchased the
insurance that will cover the next 12 months. It paid $500,000 upfront for the insurance
policy. This amount belongs to all prepaid expenses and the company will book
$500,000 as other current assets. If we sum up these items, we get the total current
assets, $12.9 billion in 2020 and $12.5 billion in 2019.

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Fixed assets are composed of tangible assets and intangible assets. Property, plant,
and equipment are tangible assets because they have physical forms. The net property
plant and equipment is the amount after deducting depreciation. Intangible assets have
no physical form. Some examples include trademarks, patterns, and copyrights. The
sum of tangible assets and intangible assets equal to total fixed assets. Total fixed
assets increase from $28.77 billion in 2019 to $29.88 billion in 2020. Total assets are
calculated as the sum of current assets and fixed assets. Total assets are $42.78 billion
in 2020 and $41.29 billion in 2019. The assets are listed in descending order of liquidity.
Most liquid assets are listed on top, and the least liquid assets are at the bottom.

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Now, let's take a look at the right-hand side of the balance sheet. It shows the
company's liabilities and equity. From the right-hand side, you can tell how the
company's assets are financed.

The liabilities are the company's debt and the other financial obligations. It is composed
of two parts: current liabilities and long-term liabilities. Current liabilities are the liabilities
you have to fulfill within a year. When a company buys goods or services from its

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suppliers but has not paid yet, this amount will be booked as accounts payable. Current
liabilities also include accrued expenses and others, like employee wages not paid or
interests not paid. Long-term liabilities are liabilities that are due more than one year
from the date of the balance sheet. It includes long-term loans, deferred tax liabilities,
and pension liabilities. It increases from $14.98 billion in 2018 to $16.46 billion in 2020.

Now, let's take a look at the equity's part. When a company issues common stocks and
receives more than the par value of the stocks. The par value part is booked as
common stocks, and the surplus part is booked as paid-in-capital. The retained
earnings are the accumulated earnings that is retained by the company at the end of the
fiscal year. When we sum up the above items together, we get a total stockholders'
equity, $11.83 billion in 2020 and around $11.3 billion in 2019. This is also called the
book value of the equity, it's quite different from the equity value treated in the stock
market. Total liabilities and equities are the sum of the current liabilities, long-term
liabilities, and stockholders' equity.

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When you compare the left-hand side with the right-hand side of the balance sheet, you
will find that the value of the total assets is equal to the value of total liabilities and
shareholders' equity.

This is not just coincidence; this should always be the case. We also have a name for it,
the balance sheet identity. This is also why we call it a balance sheet.

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Lesson 2-3.2. Balance Sheet: Fiscal Year

Let's think about when the balance sheet is prepared. In order to help you understand
the question, you can think about yourself. Suppose you are walking, and a
photographer takes a picture of you. At that moment, you are momentarily still in that
picture. The same logic applies to the company. The company is running all the time.
The balance sheet is a snapshot taken at the end of its fiscal year. Here comes the
question, what a fiscal year is and how a company determines its fiscal year.

A fiscal year is also called the financial year or budget year. It is a one-year period used
for calculating annual financial statements in businesses and other organizations. It is
important because it defines an organization's budget, and it is used for financial
reporting.

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The fiscal year of US Federal Government starts from October 1st of the budget's prior
year to September 30th of the current year. Suppose the federal government spends 10
billion dollars on transportation and water infrastructure in November 2019. This amount
would belong to fiscal year 2020.

The fiscal year for 46 out of 50 states run from July 1st to June 30th. Because a lot of

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public universities rely on funding from the state, they also set their fiscal year to be
consistent with the state's fiscal year.

For small businesses, such as sole proprietorships and partnerships, the IRS requires
that their fiscal year should be the same as calendar year. The main reasoning is that
they report all business income as personal income. The calendar year is used for
individual income tax return.

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For a big corporation, it has the freedom to choose any consistent fiscal year when it
first forms. For about 65% of the public traded companies in the United States, the fiscal
year is the same as the calendar year. If they want to change the fiscal year later, they
have to get the approval from the IRS and file an 8K report with the SEC.

A related question is how to determine the fiscal year for a corporation. If a company is
doing a lot of business with the federal government, a good choice is to match the fiscal

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year with the government. If a business has a strong seasonal component, like retail
business, a large percentage of their annual profits are generated in one or two seasons
of the year. A smart choice is to end the fiscal year shortly after the highest revenue
time of the year. That is why most top retailers end their fiscal years after the Christmas
shopping season.

For big companies, the ends of their fiscal years are different from each other. Let's take
a look at some examples of public companies. When you check their annual 10-K
reports, the end of their fiscal year is listed on the first page of the report.

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Target Corporation's fiscal year ends on February 1st, 2020. According to its rule,
Target begins its fiscal year in the first full week of February and ends its fiscal year on
the Saturday nearest January 31st.

Walmart ends its fiscal year at the end of January. Here is the 10-K form for Walmart. In
2020, it ends on January 31st. The next fiscal year begins from February 1st. Walmart's
fiscal year is consistent with other large retailers. Because by that time they have

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already sold out their holiday inventories, collected their receivables, and realized their
profits. This is a perfect time to report their financials to their shareholders.

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Lesson 2-3.3. Balance Sheet: Other Topics

In this part of the lesson, we want to talk about the several questions we need to pay
attention to when we study the balance sheet. The first one is liquidity. Liquidity
evaluates how easily an asset can be converted into cash without significant reduction
in value. When we compare current assets with fixed assets, current assets are much
more liquid than fixed assets because they can be converted into cash within one year
or less.

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Within current assets, cash and cash equivalents are the most liquid because they're
already cash. The liquidity of accounts receivable is higher than inventory. Holding
receivables are much closer to cash than holding inventory because sales have already
been made, the company just need to collect the bills from their customers. If a
company wants to get immediate cash, it can sell the receivables to a factoring
company. About 75% of the receivables value will be paid immediately, and the
remaining part is rebated once the factor collects payments from clients.

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Fixed assets are much harder to convert into cash. Some examples of fixed assets
include real-estate, vehicles, equipment, assembly lines and patterns. A lot of them are
highly specific assets and cannot be used elsewhere, so the resale values are low.
Suppose the company expects to pay utility bill, pay suppliers or employees in the near
future, the easiest way to meet that obligation is to use cash. They need to prepare
enough liquid assets in their hands at least enough to fulfill their near-term obligations.
Liquidity is also important in case of emergency and unexpected expenses, otherwise,
they have to sell the real-estate or equipment to pay their bills, this is not an efficient
way to run a business.

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We talked a lot about the importance of liquidity for a company. One question I want you
to think about, is, should the company hold a lot of liquid assets? The answer is that a
company needs to hold an appropriate level of liquid assets, but too much liquid assets
can be bad for business. In order to understand the question a little bit better, we need
to weigh the benefits and the costs of holding liquid assets.

The benefit of holding liquid assets is that the more liquid of firm's assets, the less likely

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the firm is to experience problems meeting short-term obligations. Even if in an
economic downturn, a company with a lot of liquid assets would be able to pay its
creditors easily without liquidating its fixed assets. The company won't be sued by its
creditors or suppliers for unpaid bills.

However, holding liquid assets has it downsize, the rate of return from liquid assets is
much lower than fixed assets. Fixed assets defined the nature of the business. A
business is valuable because it produces goods and services with the investments in
fixed assets. By investing in liquid assets, the firm sacrificed the opportunity to invest in
more profitable investment vehicles.

The most important lesson here is to achieve a balance between current assets and
fixed assets. A company needs to prepare enough liquid assets to run day to day
operations smoothly without sacrificing its ability to generate revenues in the long run.

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Here, I want you to think about one question, what's the implication of liquidity in your
personal financial management? This liquidity topic will also shed light on how you
manage your personal finance. You should have some liquid savings in your bank
account to pay monthly bills and handle unexpected expenses. How much liquid
savings to have is appropriate? One advice to you is to keep about 3-6 months of
monthly expenses. However, sitting on too much cash is a terrible choice because the
average bank checking account is paying almost nothing, the return of cash does not
keep up with the rate of inflation. Although you won't have any trouble paying your bills,
your purchasing power is reduced. With enough cash to pay your bills, you should also
invest part of your money in fixed assets such as a house or apartment, furniture,
appliances, or car, and your education or entertainment. These assets are not very
liquid, but they make you happy, increase your productivity and boost your human
capital.

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Now, we want to introduce another concept, net working capital. Net working capital is
the difference between current assets and current liabilities. It evaluates whether a
company's short-term assets are available to pay short-term obligations or not, it is a
good indicator of a firm's liquidity in the short-term.

For example, a positive net working capital indicates that a company has enough short-
term liquidity to pay its current obligations. Well, a negative net working capital means

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that a company needs to borrow money from a bank or raise money from investors to
remain solvent. When we study the balance sheet, we also need to understand the
difference between book value and market value.

The balance sheet shows you the book value of assets. It is calculated as the historical
value of the asset, less accumulated depreciation, and amortization.

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Market value refers to the current asset price in the marketplace. The book value of an
asset may be quite different from its market value. For example, a company bought a
copy machine for $5,000, and booked $1,000 as depreciation in the first year, the
remaining book value of the copy machine is $4,000. The same machine is currently
trading in the market at $4,500. In this case, the market value of the asset is higher than
the book value of the asset.

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The book value of equity is calculated by subtracting all liabilities from total assets, this
relationship comes from the balance sheet identity. Because of the current accounting
rules and difficulties in valuing assets and liabilities, the book value of shareholders
equity serves as a plug-in number to make sure the balance sheet is balanced.

The market value is the value of a company based on the financial markets. The market

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value of equity is calculated by multiplying the current share price by the total number of
shares outstanding. Market value of equity is also called market capitalization.

Now, let's compare the book value and the market value of equity for Target. According
to the balance sheet, the book value of shareholder's equity is $11.8 billion. The market
value is derived using the total number of shares outstanding, 510.9 million shares
times the current market price. The graph shows you the Target share price information
for the past year. The stock price is fluctuating within the range of $80 per share and
$120 per share. The market cap is in the range of $40 billion to $60 billion which is
much higher than the book value $11.8 billion. Target's market value is greater than its
book value, which means investors trust the earnings capability of Target and believe
the company is worth more than its book value.

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Lesson 2-4: Income Statement

Lesson 2-4.1. Income Statement

When you are interested in a company, you might be curious about how profitable the
company is. In order to answer that question, you need to learn another important
financial statement. The income statement. The income statement shows the
company's revenues, expenses, and income over an entire physical year. The
accounting income is calculated based on the identity here. You can think of income
statement as videotaping all the economic activities carried out by a company within the
physical year.

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The table here shows you the income statement of Target Corporation for physical year
2019.

The first line shows the company's total revenues from February 3, 2019, to February 1,
2020, is $78.1 billion. The cost of sales, $54.9 billion is the direct expenses to produce
all the goods and services. It includes production costs, storage costs and direct labor
costs. When you subtract the cost of sales from total revenues, you get gross profit

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$23.2 billion. Gross profit reflects a company's efficiency in producing goods or services.
Selling general and administrative expenses is $16.2 billion, which is also called SG&A.
It includes indirect costs or fixed costs of running a business. Some examples are
advertising, insurance, utilities, rent and management salaries. Almost all the other
costs not directly related to production can be grouped into SG&A. Depreciation and
amortization are $2.3 billion. These are the expenses of the fixed asset spreading out its
useful life. If the fixed asset is a tangible asset, we call the expense depreciation, well
we call it amortization if the fixed asset is an intangible asset. Operating income is $4.66
billion which is calculated by subtracting SG&A and depreciation and amortization from
gross profit. For target corporation, operating income is the same as earnings before
interest and taxes also called EBIT because there's no other income.

EBIT is a very important indicator to value the performance of a company's core

business without considering the capital structure and the tax expenses. EBIT is also a
widely used input variable for a lot of financial ratios. Interest expense is $468 million,
which is the cost of borrowing money from creditors. This expense does not depend on
operations, but on a company's capital structure. Interest expense is tax deductible.
When you deduct the interest from EBIT, you derive earnings before income tax, which
is also called EBT or pretax income. Based on EBT and the tax rate, you can calculate
how much tax you need to pay to the government. Target paid $909 million to the
government during the year. When income tax is deducted, you get the net income
$3.28 billion. This net income is also called net earnings or the bottom line. This is the
total amount a company earned after deducting all expenses, interests and taxes from
revenue. It is an indicator of how profitable a company is.

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Using net income and divided by total outstanding shares of common stock, 510.9
million shares you can derive the earnings per share, EPS. Target's earnings per share
is $6.42 per share. Part of the earnings is distributed to shareholders as dividends and
the remaining part will be retained by the company. Target, distributes $2.62 per share
to shareholders, dividing cash dividend, $2.62 by earnings per share, $6.42 yields a
dividend payout ratio of 41%. It means the company pays out 41% of its earnings as
dividends. The remaining part 59% is called retention ratio or pullback ratio. The
company retains 59% of its earnings to support its future growth. For a company with a
high growth potential, a smart choice is to pull back the earnings and reinvest them in
the company's operations. This is why you observe a retention ratio of 100% for a lot of
fast-growing companies.

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Lesson 2-5: Cash Flow of the Firm

Lesson 2-5.1. Statement of Cash Flow

Now let's take a look at the cash flow statement. Here, you may wonder since we
already have the balance sheet and the income statement. Why do we need an
additional statement? The balance sheet is a summary of a company's assets, liabilities,
and owner's equity at a certain time. The income statement shows the company's
revenues and expenses during a period of time. The cash flow statement fills the gap
between the balance sheet and income statement. By showing how much cash is
generated or spent, operating, investing, and financing activities for a specific period of
time. I would like to explain about different perspectives of a financier and accountant.

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A financier cares more about the cash inflows and cash outflows of a company because
cash flows determine the value of a business. Well, accountant pays more attention to
accounting that income. The cash flow is different from earnings because of the
noncash items such as depreciation and amortization. We can set up an example to
help you understand the problem. Suppose a company buys a copy machine for $5,000
and the life of the machine is five years.

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The financier sees a cash outflow at the very beginning and noncash flows, in the
following years. For accountants, they spread out the cost of $5,000 evenly in the five
years, the depreciation expands in each year is $1,000, according to the straight-line
depreciation method. Here, we want to explain why cash flow analysis is so popular in
finance.

Based on GAAP accounting principles, accountants can also use a different

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depreciation schedule to spread out the expenses of an asset. There are a lot of leeway
in such decisions. Depreciation has an impact on how much taxes a company pays to
the government and affect the net income. Besides depreciation, there are other items
in the balance sheet and income statement that also suffer from the same problem.

Cash flow is a more accurate way to capture the company's financial health because
the cash flow numbers are hard to manipulate. The statement of cash flows is
composed of three categories: operating activities, investment activities and financing
activities.

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Professor Xi Yang

The operating activity's part start with net income $3.28 billion, which is the bottom line
of the income statement. Then we need to adjust for all the non-cash items accordingly,
first we add back depreciation and amortization, which is $2.6 billion because
depreciation expense is not a cash outflow. When we calculate the net income, we
deduct it as an expense and now we need to add it back. We also add other noncash
items such as share based compensation expense, $147 million and $178 million
dollars of deferred income taxes. In addition to that, we need to adjust for cash flows
generated by operating assets and liabilities. For example, Target's inventory decreased
$505 million dollars during the year. This decrease in inventory is considered a cash
inflow of Target because cash is freed up from inventory and available to be used
elsewhere. Changing other assets brings a cash inflow of $18 million. There's 140
million cash inflow from changing accounts payable and $199 million dollars cash inflow
from changing accrued and other liabilities. This reflects a net increase in charged
expenses which have not been paid by Target.

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Professor Xi Yang

Overall, Target generated $7.12 billion of cash flow from operating activities for the
period ending February 1, 2020. In physical year 2019, Targets spend $3.03 billion
dollars in capital expenditure, this amount of money is used to invest in new property,
plant, and equipment. According to the annual report of Target, about 64.5% of the
capital expenditure are invested to remodel existing stores. 8.7% are used to build new
stores and the remaining 26.8% are spent on information, technology, supply chain and
others. This expenditure won't be shown in the income statement because it will be
spread out over the life of the asset as depreciation. Target collected $63 million dollars
from selling property, plant and equipment, and earned $20 million dollars from other
investments. The total cash required for all investing activities is $2.94 billion, this
represents a cash outflow for the company.

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Professor Xi Yang

The last part of the statement of cash flows, is the cash flows from financing activities.
Target raised $1.74 billion dollars by issuing long-term debt, paid back $2.07 billion
dollars of previously issued long-term debt to its creditors. It paid out $1.33 billion
dividends to its shareholders and repurchased $1.57 billion dollars from existing
shareholders. The company also received the $73 million dollars in cash from stock
option exercise. Therefore, the total cash required for financing activities is $3.15 billion,
this reflects the cash flow to Target's creditors and shareholders. Now we put these
three parts together and calculate the net change in cash and cash equivalents. Target
has total cash inflows of $1.02 billion in physical year 2019. We also want to link this
information with the balance sheet. At the beginning of physical year 2019, that is
February 2, 2019, cash and cash equivalents stood at $1.56 billion dollars, with cash
inflows added during the year. The new cash and cash equivalents is $2.58 billion, this
perfectly matches the numbers in the balance sheet. When we combine the information
from the statement of cash flows with the balance sheet and the income statement, we
have a better understanding of the company's financial situation.

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Professor Xi Yang

Lesson 2-6: Module 2 Wrap Up

Lesson 2-6.1. Module 2 Wrap Up

In this module, we introduce the financials. There are some widely circulated reports
including 10-K annual report, 10-Q quarterly report and 8-K current report.

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Professor Xi Yang

Financial reports can be easily accessed through company's websites or SEC EDGAR's
website.

We learned the three types of financial statements. The balance sheet, the income
statement, and the statement of cashflows.

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Professor Xi Yang

The balance sheet shows the company's assets, liabilities, and shareholders' equity.
The balance sheet is organized according to the balance sheet identity. The assets of a
company are listed on the left side, and the liabilities and shareholders' equity are listed
on the right-hand side. We covered the basics of a fiscal year, the definition of a fiscal
year, and how to determine a fiscal year for a business.

Assets are listed based on their liquidity while liabilities are listed according to their due

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Professor Xi Yang
dates. We learned how to calculate the net working capital based on the balance sheet.
We also talked about the difference between book value and market value. All the
values in the balance sheet are book values. They might be quite different from their
market values.

We also learned the income statement. We start with total revenue and deduct the cost
and other expenses until we reach the bottom line. Some important concepts are
introduced, earnings before interests and taxes is a very important indicator to value the
performance of a company's core business without considering the capital structure and
the tax expenses.

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Professor Xi Yang

Net income is the bottom line. It is the total amount a company earned after deducting
all expenses, interests, and taxes from revenues. It can be used to evaluate whether a
company makes a profit or not.

Earnings per share is the earnings based on each outstanding share. Earnings will
either be distributed to shareholders or retained in the company to finance its future
investments.

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Last, we talked about the statement of cash flows. It shows a company's inflows and
outflows of cash. A cash flow statement can tell us whether the company generated
cash flow or not. Cashflow statements are grouped into three parts. Each part reports
the cashflow from one of three kinds of activities, operating activities, investing
activities, and financing activities. We talked a lot about financial statement. But I have
one caveat to share with you.

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Although financial statements are important. But we need to look beyond the financial
statements to see the whole picture of a business. In order to understand the business,
we also need to know the company's strategy is business model, competition and the
industry trends. With a deeper understanding of the business, you should be able to use
financial statements more efficiently to address a lot of your questions in corporate
finance and investments.

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