Introduction to Corporate Finance

2: Financial Statement and Cash Flow Analysis

ASSESSING THE MARKET VALUE OF GLOBAL BRANDS

How much is a global brand name worth? Interbrand

Corporation, a New York–based consulting

company, has been trying to answer this question

for several years. The table below details what this

company considers the five most valuable brands

of 2014, and also lists the change in value of those

brands from 2013. The total brand values are large,

and all the brands included are those of US-based

companies. Additionally, the rankings are remarkably

stable from year to year; the 2014 ranking listed all

five brands included in 2013, with similar rankings.

Although American companies are not

required to disclose estimated brand values in

their financial statements, large, publicly traded

British and Australian companies must do so. Brand

values do, however, have a major impact on US

accounting rules in one important area: accounting

for the ‘goodwill’ created when a company is

acquired by another company for more than the

acquired company’s book value. This premium over

book value represents the higher market (versus

book) value of intangible assets such as patents,

copyrights and trademarks, as well as brand names

and business relationships that are not accounted

for at all.

The Financial Accounting Standards Board

(FASB) requires acquirers to periodically assess

the fair value of assets they purchase through

acquisitions. If the fair value of those assets declines

significantly over time, the company must recognise

‘goodwill impairment’, meaning that the value of its

intangible assets has also declined. Charges arising

from goodwill impairment can have a dramatic

effect on reported earnings.

Rank

2014

Brand 2014 brand value

($ million)

Per cent change Country of

ownership

1 Apple 118,863 21% US

2 Google 107,439 15% US

3 Coca-Cola 81,563 3% US

4 IBM 72,244 –8% US

5 Microsoft 61,154 3% US

finance in practice

Source: Interbrand. Used with permission. For full list of top 100 brands, see http://www.bestglobalbrands.com/2014/ranking/#?sortBy=rank&sortAscending=true&listForm

at=ls. Accessed 3 February 2015.

2-1d STATEMENT OF CASH FLOWS

The statement of cash flows summarises the inflows and outflows of cash during a given period,

typically a year. This statement isolates the company’s operating, investment and financing cash

flows and reconciles them with changes in its cash and marketable securities during the year.

Table 2.5 presents GPC’s statement of cash flows for the year ended 30 June 2016. This statement

is discussed in greater depth in Section 2-2, where we present some important cash flow concepts

and measures, then show how to use those data to develop and interpret the statement of cash

flows.

LO2.1