Chapter 2 Financial Statement and Cash Flow Analysis 1 Learning Objectives Interpret information contained in the balance sheet, income statement, and statement of cash flows. Explain why income differs from cash flow. Measure and interpret financial ratios. Understand the essential features of the taxation of corporate income. 2 Topics Covered The Balance Sheet The Income Statement Measuring Cash Flow & The Statement of Cash Flows Financial Ratio Analysis Corporate Taxes 3 1
The Balance Sheet Definition Financial statements that show the value of the firm s assets and liabilities at a particular point in time (from an accounting perspective). A snapshot of a company s financial position. 4 The Balance Sheet The Main Balance Sheet Items Current Assets Cash & Securities Receivables Inventories + Fixed Assets Tangible Assets Intangible Assets = Current Liabilities Payables Short-term Debt + Long-term Liabilities + Shareholders Equity 5 Target Balance Sheet ($ Thousands) Current Assets Cash And Cash Equivalents 2,245,000 716,000 Net Receivables 5,069,000 5,776,000 Inventory 5,384,000 5,343,000 Other Current Assets 1,224,000 1,093,000 Total Current Assets Fixed Assets Empty Empty 13,922,000 Empty Empty 12,928,000 Gross Property Plant and Equipment 22,272,000 19,880,000 Accumulated Depreciation -5,412,000-4,727,000 Net Property Plant and Equipment 16,860,000 16,969,000 Goodwill 60,000 Intangible Assets 146,000 Other Assets 1,305,000 1,495,000 Total non-current assets 18,371,000 18,464,000 6 Total Assets 32,293,000 31,392,000 2
Target Liabilities & Stockholders Equity ($ Thousands) Current Liabilities Accounts Payable Short/Current Long Term Debt Total Current Liabilities Long Term Debt Other Liabilities Deferred Long Term Liability Charges Total Liabilities Stockholders' Equity Common Stock Retained Earnings Capital Surplus Other Stockholder Equity Total Stockholder Equity Total Liabilities & Equity 7,716,000 504,000 8,220,000 9,034,000 1,037,000 973,000 19,264,000 74,000 11,148,000 1,810,000-3,000 13,029,000 32,293,000 7,448,000 866,000 8,314,000 10,217,000 1,796,000 20,327,000 76,000 9,645,000 1,341,000 3,000 11,065,000 31,392,000 The Income Statement Definition Financial statement that shows the revenues, expenses, and net income of a firm over a period of time (from an accounting perspective). 8 Target s Income Statement (thousands of $) Total Revenue Cost of Revenue Gross Profit Selling General and Administrative Other Operating Expenses Operating Income or Loss Earnings Before Interest And Taxes Interest Expense Income Before Tax Income Tax Expense Net Income From Continuing Ops Discontinued Operations Net Income 46,839,000 31,445,000 15,394,000 10,534,000 1,259,000 3,601,000 3,601,000 570,000 3,031,000 1,146,000 1,885,000 1,313,000 3,198,000 48,163,000 31,790,000 16,373,000 11,534,000 1,320,000 3,519,000 3,519,000 559,000 2,960,000 1,119,000 1,841,000-1,841,000 9 3
Accounting Income vs. Cash Flow An Income Statement Sales Cost of Goods Sold Selling & Gen. Adm. Exp Depreciation Interest Exp Taxable Income Taxes Net Income Do all items reflect all cash collected and paid? NO!!! Income statement is on an accrued basis. What is and who is depreciation? 10 Sources and Uses of Corporate Cash Sources Uses Decrease in any asset Increase in any liability Net profits after taxes Depreciation and other non-cash charges Sale of stock Increase in any asset Decrease in any liability Net loss Dividends paid Stock repurchase or retirement 11 Statement of Cash Flows Shows how the firm used and raised cash during the year. Reconciles the Income Statement by the changes in the Balance Sheet from the beginning of the year to the end of the year 12 4
Parts of Statement of Cash Flows Cash Flow from Operations = net cash income from income statement: net income, Depreciation,change in A/R, Inv, Other CA, A/P, Accruals (Wages & Taxes), Other CL Cash Flow from Investments = Purchases and Sales of long-term real assets & investments and short-term investments Cash Flow from Financing = issuances and payments of debt and stock: L-T Debt, Common and Preferred Stock, Notes Payable & Dividends Paid 13 Target s Statement Of Cash Flows ($ Thousands) Net Income Depreciation Adjustments To Net Income Changes In Accounts Receivables Changes In Liabilities Changes In Inventories Changes In Other Operating Activities Total Cash Flow From Operating Activities 3,198,000 1,259,000-437,000-209,000 1,064,000-853,000-827,000 3,195,000 1,841,000 1,320,000 846,000-744,000 912,000-583,000-432,000 3,160,000 Investing Activities, Cash Flows Provided By or Used In Capital Expenditures Other Cashflows from Investing Activities Total Cash Flows From Investing Activities -3,068,000 4,247,000 1,179,000-3,004,000 85,000-2,919,000 14 Target s Statement Of Cash Flows ($Thousands) Financing Activities, Cash Flows Provided By or Used In Dividends Paid -272,000-237,000 Sale Purchase of Stock -1,144,000 Net Borrowings Other Cash Flows from Financing Activities -1,477,000 56,000-72,000 26,000 Total Cash Flows From Financing Activities -2,837,000-283,000 Change In Cash and Cash Equivalents $1,537,000 ($42,000) 15 5
Target s Cash Flows Fiscal 2004-2005 ($Thousands) 4000000 3000000 2000000 1000000 0-1000000 Operating Investing Financing Change in Cash -2000000-3000000 2004 2005 16 Key Measures of Cash Flow Cash Flow from Operations Total cash generated Operating Cash Flow Cash flow before repaying lenders Free Cash Flow Cash flow that firm could distribute to investors. 17 Specific Cash Flow Definitions Operating Cash Flow (OCF) = cash generated from the firm s operations OCF = Earnings Before Interest and Taxes (EBIT) Taxes + Depreciation Target 2005 OCF = 3,601,000 1,146,000 + 1,259,000 = 3,714,000 Free Cash Flow (FCF) = Cash available to the firm s investors after firm meets operating and investment needs FCF = OCF FA(gross) ( CA A/P Accruals) Target 2005 FCF = 3,714,000 2,408,000 (994,000 268,000) = 580,000 18 6
Corporate Income Taxes Corporate deductions from income: operating expenses, depreciation, interest expense. Dividends paid are NOT deductible. Interest and capital gain income is fully taxable. 30% (in general) of Dividend income is taxable. Losses can be carried back (for refund of past taxes paid) and carried forward (to reduce future taxable income & taxes). 19 Corporate Tax Rates (2002) Taxable Income over($) Not over ($) Tax Rate (%) 0 50,000 15 50,000 75,000 25 75,000 100,000 34 100,000 335,000 39 335,000 10,000,000 34 10,000,000 15,000,000 35 15,000,000 18,333,333 38 18,333,333 35 20 Corporate Tax Example Kramerica has taxable income of $90,000. What is their tax liability, marginal and average tax rates? Marginal tax rate = the tax rate on the next dollar of income. Average Tax Rate = taxes paid divided by taxable income. 21 7
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