ACCOUNTING FOR FINANCIAL MANAGEMENT. Financial Statements

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1 ACCOUNTING FOR FINANCIAL MANAGEMENT Financial Statements Balance Sheet Income Statement Statement of Cash Flows Statement of Stockholders Equity

2 Financial Statements Keep in mind: Backward vs. Looking Book Values vs. Values Accounting Numbers vs. Tax Deductible vs. Taxable to Financial Statements Balance Sheet DocYost, Inc. December 31 Assets: Cash 7,282 9,000 S-T invest. 20,000 48,600 AR 632, ,200 Inventories 1,287, ,200 Total CA 1,946,802 1,124,000 Gross FA 1,202, ,000 Less: Depr. 263, ,200 Net FA 939, ,800 Total assets 2,886,592 1,468,800

3 Balance Sheet DocYost, Inc. December 31 Liabilities and SE: Accts. payable 324, ,600 Notes payable 720, ,000 Accruals 284, ,000 Total CL 1,328, ,600 Long-term debt 1,000, ,432 Common stock 460, ,000 Ret. earnings 97, ,768 Total equity 557, ,768 Total L&E 2,886,592 1,468,800 Income Statement DocYost, Inc. For Year Ended December Sales 5,834,400 3,432,000 COGS 4,980,000 2,864,000 Other expenses 720, ,000 Deprec. 116,960 18,900 Tot. op. costs 5,816,960 3,222,900 EBIT 17, ,100 Int. expense 176,000 62,500 EBT (158,560) 146,600 Taxes (40%) (63,424) 58,640 Net income (95,136) 87,960

4 Sources and Uses of Cash Statement of Cash Flows DocYost, Inc. For Year Ended December 31, 2017 Operating Activities: Net Income (95,136) Adjustments: Depreciation and Amort. 116,960 Change in AR (280,960) Change in inventories (572,160) Change in AP 178,400 Change in accruals 148,960 Net cash provided by ops. (503,936)

5 Statement of Cash Flows DocYost, Inc. For Year Ended December 31, 2017 Investing Activities : Cash used to acquire FA (711,950) Statement of Cash Flows DocYost, Inc. For Year Ended December 31, 2017 Financing Activities: Change in S-T invest. 28,600 Change in notes payable 520,000 Change in long-term debt 676,568 Payment of cash dividends (11,000) Net cash provided by fin. act. 1,214,168 Net change in cash (1,718) Cash at beginning of year 9,000 Cash at end of year 7,282

6 Statement of Stockholders Equity DocYost, Inc. For Year Ended December 31, 2017 Balance of ret. earnings, 12/31/ ,768 Add: Net income, 2017 (95,136) Less: Dividends paid, 2017 (11,000) Balance of ret. earnings, 12/31/ ,632 Net Cash Flow Net Cash Flow =

7 Operating Assets Operating Assets = Necessary to operate the firm Operating Current Assets Usually cash, accounts receivable, and inventories Operating Long-Term Assets Operating Current Liabilities= NOT capital that Usually accounts payable and accruals Nonoperating Assets Nonoperating Assets = NOT necessary to operate the firm Out of the control of management Examples:

8 Operating Capital Net Operating Working Capital = Operating Current Assets Operating Current Liabilities For example: (cash + accounts receivable + inventories) (accounts payable + accruals) Total Net Operating Capital = Net Operating Working Capital + Operating Long-Term Assets Net Operating Profit After Taxes (NOPAT) NOPAT = Features/Uses: Ignores Can compare companies with different capital structures Gives Profit from Operations

9 Free Cash Flow (FCF) FCF = Cash flow available to investors after necessary investment in fixed assets and working capital Free Cash Flow (FCF) Net Investment in Operating Capital = Gross Investment in Operating Capital =

10 Free Cash Flow (FCF) Uses of Free Cash Flow (FCF)

11 Return on Invested Capital (ROIC) ROIC = Goal: Taxes Average vs. Marginal Tax Rates Corporate Taxes: Capital Gains Taxed as ordinary income Dividends Received If own < 20%, can exclude 70% If own > 20% but < 80%, can exclude 80% If own > 80%, can exclude 100% Interest

12 2017 Corporate Tax Rates Taxable Income Tax on Base Rate on amount above base 0-50, % 50,000-75,000 7,500 25% 75, ,000 13,750 34% 100, ,000 22,250 39% 335,000-10M 113,900 34% 10M - 15M 3,400,000 35% 15M M 5,150,000 38% 18.3M and up 6,416,667 35% Taxes

13 Taxes Corporate Taxes: Tax loss carry-backs and carry-forwards 2 years back 20 years forward Taxes Personal Taxes: Capital Gains If own < 1 year, taxed as ordinary income If own > 1 year, taxed at lower rate Dividends Taxed at lower rate Interest Munis S-Corporations vs. C-Corporations

14 Market Value Added (MVA) MVA= Over life of a company Market value of stock equity supplied by shareholders Total market value of firm total capital Economic Value Added (EVA) EVA = Over period of time Measures true economic profit Can be applied to divisions NOPAT After-tax cost of capital used to support operations

15 MVA and EVA for Home Depot What do we need? Where do we find it? What are MVA and EVA? Chapter 6 Suggested Problems Questions: 6-3, and 6-5 through 6-7 Problems: 6-1, 6-2 (typo-corporate not Porporate), 6-3, 6-7, 6-10, and 6-12