# financial reporting

Pages: 17 (4250 words) / Published: Nov 17th, 2013
Financial Reporting and Analysis
Mark Hendricks
Financial Mathematics
University of Chicago

September 2011

Outline

Financial Reporting

Financial Analysis

Hendricks,

Financial Reporting and Analysis

UChicago Financial Mathematics

2/55

Financial reporting

Financial reporting is important for well-functioning markets.
Investors need information to properly allocate capital and hedge risk.
Regulators need good information to monitor fraudulently activity and systemic risk.
Financial reports are prepared according to accounting practices.

Hendricks,

Financial Reporting and Analysis

UChicago Financial Mathematics

3/55

Financial statements

There are three key ﬁnancial statements.
The balance sheet
The income statement
The statement of cash ﬂows
We discuss each in turn.

Hendricks,

Financial Reporting and Analysis

UChicago Financial Mathematics

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The balance sheet

The balance sheet details the ﬁnancial condition of the ﬁrm at one moment in time.
The balance sheet is a list of the ﬁrms assets and liabilities.
The values are “book” values, not market values.
Namely, assets and liabilities are valued in the statements according to accounting principles.
The values are based more on historical transaction prices than current valuations.

Hendricks,

Financial Reporting and Analysis

UChicago Financial Mathematics

5/55

Balance equation
The central idea behind the balance sheet is an accounting identity: assets = liabilities + shareholders’ equity
Note that this equation is an identity. The “shareholders’ equity” component is not a real market value of equity.
Rather, it is just a plug for the equation. This “book” value is rarely used.
The ﬁrst section of the balance sheet lists the assets of the ﬁrm. The short-term, or current assets are listed ﬁrst. This is where cash and other liquid securities are listed. After this, longer-term assets are listed.
Liabilities are

References: Berk, Jonathan and Peter DeMarzo. Corporate Finance. 2011. Bodie, Kane, and Marcus. Investments. 2011. Higgins, Robert. Analysis for Financial Management. 2009. Hull, John. Options, Futures, and Other Derivatives. 2012.