Introduction to Corporate Finance

PArT 1: INTrODuCTION

TABLE 2.3 STATEMENT OF RETAINED EARNINGS FOR GLOBAL PETROLEUM CORPORATION

Global Petroleum Corporation statement of retained earnings for the year ended 30 June 2016 ($ in millions)

Retained earnings balance (1 January 2016) $3,670

Plus: Net income (for 2016) 949

Less: Cash dividends (paid during 2016)

Preferred shares $ 3

Ordinary shares 345

Total dividends paid 348

Retained earnings balance (30 June 2016) $4,271

2-1e NOTES TO FINANCIAL STATEMENTS

A public company’s financial statements include explanatory notes keyed to the relevant accounts in

the statements. These notes provide detailed information on the accounting policies, calculations and

transactions that underlie entries in the financial statements. For example, the notes to Woolworths Ltd’s

financial statements cover 90 of the 110 pages of its financial report to shareholders in its 2013 annual

report. Notes typically provide additional information about a company’s revenue recognition practices,

income taxes, fixed assets, leases and employee compensation plans. Professional security analysts find

this information particularly useful, and they routinely scour the notes when evaluating a company’s

performance and value.

CONCEPT REVIEW QUESTIONS 2-1

1 What role does the AASB play with regard to establishing accounting standards for Australia?

2 Are balance sheets and income statements prepared with the same purpose in mind? How are

these two statements different, and how are they related?

3 Which statements are of greatest interest to creditors? Which would be of greatest interest to

shareholders?

2-2 CASH FLOW ANALYSIS

Although financial managers are interested in the information in the company’s accrual-based financial

statements, their primary focus is on cash flows. Without adequate cash to pay obligations on time, to

fund operations and growth and to compensate owners, the company will fail. There is an expression

in corporate finance that ‘Cash is king’: this means that the focus for finance is really on the ability of

a company to pay its bills as they come due – whether they are payroll, payments to external suppliers,

declared dividends to shareholders, or interest charges and principal repayments on debt.

The financial manager and other interested parties can gain insight into the company’s cash flows

over a given time period by using some popular measures of cash flow, and by analysing the company’s

statement of cash flows.