business activities and financial statements

7/29/2019 Business Activities and Financial Statements

1/23

Reformulated Balance sheet

Assets

Operating assets

Financial assets

Total Assets

Liabilities and Equity

Operating liabilities

Financial obligations

Common stockholders equity

Total OL + F


2/23

also called incurred for the purpose of operation

borowed capital (debt) + preference shares

OA

FA

A + FA

OL

FO

CSE

+ CSE


3/23

Reformulated Balancesheet

Operating Assets

Operating assetsOperating liabilities

Net operating assets

Financial Obligations & Owne

Financial liabilities

Financial assets

Net financial obligatio

Common equity

Total NFO & Equity


4/23

OA(OL)

NOA

rs Equity

FO

(FA)

s NFO

CSE

NFO + CSE


5/23

Income Statem

Operating income

Operating revenue

Operating expense

Net financial expense

Financial expenseFinancial income

Earnings


6/23

the P and L statementent

OR

(OE) OI

FE(FI) NFE

Earn


7/23

1

Assets 2005 2006 Liability and Equity

Operating Assets 189.90 205.30 Operating LiabilitiesFinancial Assets 42.00 45.70 Financial liabilities

Shareholder's Equity

Total 231.90 251.00 Total

Operating revenue 134.5

Operating Expenses -112.8

Operating income 21.7

Interest revenue 2.50

Interest expense -9.6 -0.07973422

Net income 14.60 if entire incom

Reformulate the balancesheet and answer the following que

1 How much was paid as net dividends in 2006?

2 What is the free cash flow for 2006?

3 What was the return on net operating assets in 2006?

4 What was the firm's net borrowing cost?

Isolate financial from operating activities

Balance Sheet

Income Statement 2006


8/23

regrouping

2005 2006

34.20 40.60 NOA120.40 120.40

77.30 90.00

231.90 251.00

NBC (net b -7.10

To cross check

e is paid as dividendthere wont be any change in equity from 2005 to 2006Therefore only the remainin

stions

1.90 1.90 Netincome - (change i

12.70

earlier FCF it is Operating cash flow - Capex.

Now it can be arived from our regrouping .. Operating

income -(change in net operating assets) Also called capital em

13.18% is the real return from operations

9.505%


9/23

2005 2006 2005 2006

155.70 164.70 NFO 78.40 74.70EQUITY 77.30 90.00

155.70 164.70

To reduce this - borrow thru ECB or Japan where the cost of borrowing is less

or Invest wisely and thereby ur cash is properly investing

Value of firm is going to increase only through operating activities

share holder's equity)

loyed


10/23

Current Assets

Cash and Cash equivalents 828.00

Short term investments 400.80

Accounts receivable 2120.20

Inventories 1633.60Deferred income tax 165.00

Prepaid expenses 364.40

Total current assets 5512.00

Property, Plant and equipment 1586.90

Intangible assets 366.30

Goodwill 135.40

Deferred income tax 291.00

Total assets 7891.60

Current liabilities

Current portion of long term debt 6.60

Notes payable 146.00

Accounts payable 763.80

Accrued liabilities 974.40

Income tax payable 118.20

Total current liabilities 2009.00

Long term debt 682.40

Deferred income taxes 418.20

Preference stock 0.30

Shareholders equity 4781.70

Total liabilities and shareholders equity 7891.60

Reclassify under the following groupings

Net Operating Assets 5481.80

Net financial Obligations 700.10 NFO + Common stock

Common stock holder's equity 4781.70


11/23

another exercise on regrouping

anything invested under financing - that will earn u a revenue or financial assets

OPERATING ASSETS FINANCIAL ASSETS

5111.20

quity = NOA


12/23

Reformulate the following balance sheet and income statement for

manufacturing concern. Amounts are in millions. (Tax rate is 36%)

Assets Liabilities a

Operating Cash 23 Accounts p

Cash equivalents 435 Accrued Ex

Accounts receivable 1827 Deferred T

Inventory 2876

PPE 3567 Long-term

Preferred s

Common e

Total 8728

Revenues 7493

Operating expenses 6321

Interest expense 221

Income before tax 951

Income tax paid 342.36

Net income 608.64

Preferred dividend 26

Net income 582.64

Balance Sheet

Income statement


13/23

Reformulated Balance sheet

nd Equity NOA 4787

or capital employed

ayable 1245

penses 1549 Total 4787

x liability 712

debt 3678

tock 432

quity 1112

8728

reformulating the income statement

Revenue

Operating Expences

Operating Income before Tax

Tax at 36%

Operating Income After Tax or NOPAT

Financial expense or Interest Expense(FE)

Outflowso negative 221

Tax Benefit at 36% ..So subtract it..that gives u t 79.56

So total outflow

Preference shares divident


14/23

NFO 3675

Common stock equity 1112

Total 4787

7493

6321

1172 (-)

421.92

750.08 (-) Key driver of the residual operating incomeSo only we are isolating

141.44

608.64 (-)

26 Shown differently as it wont give u any tax benefitSo only ppl go fo

582.64 (-)


15/23

it

r long term debts.eventhough preference shares are there


16/23

Pepsico reported the following income statement for the year in million dollars

Net sales 20367

Operating Expenses -17484Restructuring charges -65

Operating Profit 2818

Gain on sale of assets 1083

Interest expense -363

Interest income 118

3656

Income tax 1316.16

Net income 2339.84

(Income tax rate 36%)

a Reformulate the statement to distinguish operating items from financing items

and operating income from other income.


17/23

3 things in reformulating income - 1) NOPAT distinction

2) Other income to be shown separately

3) Financial income

NOPAT

Revenue

Operating ExpencesOperating Income before Tax

Tax at 36%

Operating Income After Tax or NOPAT

Other Income Category

Gain on sale of Asset

Restructuring charges

Other Income before Tax

Less Tax at 36%

Other Income after Tax

Financial Income (also called the Net Borrowing cost)

Net Financial Expense -245

Tax Benefit at 36% -88.2

So total outflow or Net Borrowing COST -156.8

Total (should be equal to the NET Income as given in the case)

Essentially what we saw given is regrouped under 3 categories now

cross verifying the tax components


18/23

20367

-174842883

1037.88

1845.12

1083

-65

1018

366.48

651.52 (-)

-156.8

2339.84

1316.16 got as the same as in the given case


19/23

HP reported earnings that were consistently growing at 20% per year. The growth rate

slowed down in 1990s. Earnings for the third quarter of 1998 were reported flat when

compared with the same period during the previous year. The income statement for HP

1998 third quarter was as under:

1998 1997

Net revenueProducts 9213 8900

Services 1766 1571

Total 10979 10471

Cost and expenses

COGS 7505 7053

R & D 815 777

S,G & A 1885 1816

10205 9646

Earnings from operations 774 825

Interest income 154 109

Interest Expense 54 53

Earnings Before tax 874 881

Provision for tax 253 264

Net earnings 621 617

Income tax rate 38%

a What is wrong with the interpretation that earnings were flat in 1998?


20/23


21/23

Year Ending 31st March 2006 2007 2008 2009 2010

SOURCES OF FUNDS

Equity 376 376 377 377 382Reserves and Surplus 8686 10061 11681 13358 13683

Shareholders Funds 9061 10437 12058 13735 14064

Loan Funds 120 201 214 178 108

Deferred Tax Net 325 473 545 867 785

FUNDS EMPLOYED 9506 11111 12817 14780 14957

APPLICATION OF FUNDS

Fixed Assets (Gross) 6471 8000 10087 11773 12977

Depreciation 2065 2390 2791 3287 3825

Fixed Assets (Net) 4405 5611 7296 8486 9151

Investments 3517 3068 2935 2838 5727

Net Current Assets 1584 2432 2587 3456 79

NET ASSETS EMPLOYED 9506 11111 12817 14780 14957

Operating income after tax 6654 7778 8972 10346 10470

Show the trends in RNOA

Given below are the data pertaining to ITC Ltd

Reformulate the balancesheet on the lines of Business activities

(Rupees Crores)


22/23

Consider the following Comparative Balancesheets

for the Liquidity company

2007

Operating cash 435000

Accounts receivable 40000

Inventories 100000

Land 400000Plant 200000

Less depreciation -100000

100000

Total 1075000

Accounts payable 25000

Equity capital 1050000

1075000

The company paid a dividend of 150000 during 2007 and

there were no equity contributions or stock repurchase

a. Calcualte Free cash flow generated during 2007

b. Where did the increase in cash come from?

Explain the change in cash balance

c. How would your calculation in part (a) change

if the firm invested in short term deposits

than paying a dividend?


23/23

2006

50000

0

0

800000200000

0

200000

1050000

0

1050000

1050000

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