1 chapter 2 financial statement and cash flow analysis
TRANSCRIPT
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Chapter 2
Financial Statement and Cash Flow Analysis
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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.
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Topics Covered
The Balance Sheet The Income Statement Measuring Cash Flow & The Statement of
Cash Flows Corporate Taxes Financial Ratio Analysis
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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.
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The Balance SheetThe Main Balance Sheet Items
Current AssetsCash & SecuritiesReceivablesInventories
+
Fixed AssetsTangible AssetsIntangible Assets
Current LiabilitiesPayablesShort-term Debt
+
Long-term Liabilities
+
Shareholders’ Equity
=
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Target Balance Sheet($ Thousands)
Empty EmptyEmpty Empty
PERIOD ENDING 29-Jan-05 31-Jan-04
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 13,922,000 12,928,000
Fixed Assets
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
Total Assets 32,293,000 31,392,000
Target Liabilities & Stockholders’ Equity ($
Thousands)PERIOD ENDING 29-Jan-05 31-Jan-04
Current Liabilities
Accounts Payable 7,716,000 7,448,000
Short/Current Long Term Debt 504,000 866,000
Total Current Liabilities 8,220,000 8,314,000
Long Term Debt 9,034,000 10,217,000
Other Liabilities 1,037,000
Deferred Long Term Liability Charges 973,000 1,796,000
Total Liabilities 19,264,000 20,327,000
Stockholders' Equity
Common Stock 74,000 76,000
Retained Earnings 11,148,000 9,645,000
Capital Surplus 1,810,000 1,341,000
Other Stockholder Equity -3,000 3,000
Total Stockholder Equity 13,029,000 11,065,000
Total Liabilities & Equity 32,293,000 31,392,000
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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).
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Target’s Income Statement (thousands of $)PERIOD ENDING 29-Jan-05 31-Jan-04
Total Revenue 46,839,000 48,163,000
Cost of Revenue 31,445,000 31,790,000
Gross Profit 15,394,000 16,373,000
Selling General and Administrative 10,534,000 11,534,000
Other Operating Expenses 1,259,000 1,320,000
Operating Income or Loss 3,601,000 3,519,000
Earnings Before Interest And Taxes 3,601,000 3,519,000
Interest Expense 570,000 559,000
Income Before Tax 3,031,000 2,960,000
Income Tax Expense 1,146,000 1,119,000
Net Income From Continuing Ops 1,885,000 1,841,000
Discontinued Operations 1,313,000 -
Net Income 3,198,000 1,841,000
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Accounting Income vs. Cash FlowAn 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?
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Sources and Uses of Corporate Cash
Sources
• Decrease in any asset
• Increase in any liability
• Net profits after taxes
• Depreciation and other non-cash charges
• Sale of stock
Uses
• Increase in any asset• Decrease in any
liability• Net loss• Dividends paid• Stock repurchase or
retirement
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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
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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
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Target’s Statement Of Cash Flows ($ Thousands)PERIOD ENDING 29-Jan-05 31-Jan-04
Net Income 3,198,000 1,841,000
Depreciation 1,259,000 1,320,000
Adjustments To Net Income -437,000 846,000
Changes In Accounts Receivables -209,000 -744,000
Changes In Liabilities 1,064,000 912,000
Changes In Inventories -853,000 -583,000
Changes In Other Operating Activities -827,000 -432,000
Total Cash Flow From Operating Activities 3,195,000 3,160,000
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures -3,068,000 -3,004,000
Other Cashflows from Investing Activities 4,247,000 85,000
Total Cash Flows From Investing Activities 1,179,000 -2,919,000
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Target’s Statement Of Cash Flows ($Thousands)PERIOD ENDING 29-Jan-05 31-Jan-04
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid -272,000 -237,000
Sale Purchase of Stock -1,144,000
Net Borrowings -1,477,000 -72,000
Other Cash Flows from Financing Activities 56,000 26,000
Total Cash Flows From Financing Activities -2,837,000 -283,000
Change In Cash and Cash Equivalents $1,537,000 ($42,000)
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Target’s Cash Flows Fiscal 2004-2005 ($Thousands)
-3000000
-2000000
-1000000
0
1000000
2000000
3000000
4000000
2004 2005
OperatingInvestingFinancingChange in Cash
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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.
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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
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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).
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Corporate Tax Rates (2002)
Taxable Income over($) Not over ($) Tax Rate (%)0 50,000 15
50,000 75,000 2575,000 100,000 34
100,000 335,000 39335,000 10,000,000 34
10,000,000 15,000,000 3515,000,000 18,333,333 3818,333,333 35
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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.
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