Presentation on theme: "Financial Statements, Taxes, and Cash Flows"— Presentation transcript:
1 Financial Statements, Taxes, and Cash Flows Chapter TWO
2 Key Concepts and Skills Know the difference between book value and market valueKnow the difference between accounting income and cash flowKnow the difference between average and marginal tax ratesKnow how to determine a firm’s cash flow from its financial statements
3 Chapter OutlineThe Balance SheetThe Income StatementTaxesCash Flow
4 Balance SheetThe balance sheet is a snapshot of the firm’s assets and liabilities at a given point in timeAssets are listed in order of decreasing liquidityEase of conversion to cashWithout significant loss of valueBalance Sheet IdentityAssets = Liabilities + Stockholders’ Equity
6 Net Working Capital and Liquidity Current Assets – Current LiabilitiesPositive when the cash that will be received over the next 12 months exceeds the cash that will be paid outUsually positive in a healthy firmLiquidityAbility to convert to cash quickly without a significant loss in valueLiquid firms are less likely to experience financial distressBut liquid assets earn a lower returnTrade-off to find balance between liquid and illiquid assets
7 Building the balance sheet A firm has current assets of 100 SR, net fixed assets of 500 SR, short-term debt of 70 SR and long-term debt of 200 SR. what does the balance sheet look like? What is shareholder’s equity? What is net working capital?
8 Ex 1 Page 41Penguin Pucks, Inc., has current assets of 5,100 $, net fixed assets of 23,800 $ , current liabilities of 4,300$, and long-term debt of 7,400 $. What is the value of the shareholder’s equity account for this firm? How much is net working capital?
9 Ex 16 page 42Prepare a 2009 balance sheet for Bertinelli Crop. Based on the following information cash= 195,000 $ ; patents and copy rights = 780,000 $ ; accounts payable= 405,000 $; accounts receivable= 137,000$ ; tangible net fixed assts = 2,800,000 $; inventory= 264,000 ; notes payable= 160,000$ ; accumulated retained earnings= 1,934,000 $; long-term debt= 1,195,300.
10 Market Vs. Book ValueThe balance sheet provides the book value of the assets, liabilities, and equity.Market value is the price at which the assets, liabilities ,or equity can actually be bought or sold.Market value and book value are often very different. Why?Which is more important to the decision-making process?
11 Income StatementThe income statement is more like a video of the firm’s operations for a specified period of time.You generally report revenues first and then deduct any expenses for the periodMatching principle – GAAP says to show revenue when it accrues and match the expenses required to generate the revenue
12 Ex 15 Page 42Given the following information for Rosato Pizza Co., calculate the depreciation expense : sales= 41,000 $ , costs 19,500 $ , addition to retained earnings 5,100$ , dividend paid 1,500 $ , interest expense 4,500$, tax rate 35 percent.
14 TaxesThe one thing we can rely on with taxes is that they are always changingMarginal vs. average tax ratesMarginal tax rate – the percentage paid on the next dollar earnedAverage tax rate – the tax bill / taxable incomeOther taxes
16 EXAMPLESSuppose our corporation has a taxable income of 200,000 $ what is the tax bill?If the taxable income was $ what is the tax bill?If the taxable income was $ what is the tax bill?ALGERNON, Inc. has a taxable income of $. What is the average tax rate? Its marginal tax rate?EXAMPLE 2.4
17 EX 6&7 Page 41The Renata Co. had $ in 2009 taxable income. Using the rates from table 2.3 in the chapter, calculate the company’s 2009 income taxes?What is the average tax rate? What is the marginal tax rate?
18 Ex 18 Page 43(Refer to table 2.3) Corporation Growth has $ in taxable income, and corporation Income has $ in taxable income.What is the tax bill for each firm?Suppose both firms have identified a new project that will increase taxable income by $. How much in additional taxes will each firm pay ?Why is this amount the same?
19 The Concept of Cash Flow Cash flow is one of the most important pieces of information that a financial manager can derive from financial statementsThe statement of cash flows does not provide us with the same information that we are looking at hereWe will look at how cash is generated from utilizing assets and how it is paid to those that finance the purchase of the assets
20 CASH FLOW FROM ASSETSCash Flow From Assets (CFFA) = Cash Flow to Creditors + Cash Flow to Stockholders CASH FLOW IDENTITYOperating Cash Flow (OCF)Capital SpendingChange in Net Working Capital (NWC)
21 U.S. CORPORATION2008 AND 2009 Balance Sheets($ in millions)s Equity Liabilities and Owner’ AssetsCurrent liabilitiesCurrent Assets266232Accounts payable160104Cash123196Notes payable668455Accounts receivable389428total555553Inventory1.4031.112TotalFixed Assets454408Long-term debt1.7091.644Net plant and equipmentOwner’s equity640600Common stocks and paid-in surplus16291320Retained earnings2269192031122756Total liabilities and owner’s equityTotal Assets
23 Capital Spending = Beginning net fixed assets - Dep 1709Ending Net Fixed Assets1644- Beginning net fixed assets65+ Depreciation130Net Capital SpendingCapital Spending = Ending net fixed assets - Beginning net fixed assets + DepIf the firm didn’t purchase any new fixed assetsCapital Spending = Beginning net fixed assets - Dep
24 Change in Net Working Capital 1014Ending NWC684- Beginning NWC330Change in NWCChange in NWC = Ending NWC – Beginning NWC
25 Cash Flow From Assets = OCF– Net Capital Spending – Changes in NWC U.S CORPORATION2009 Cash Flow From Assets547Operating Cash Flow130- Net capital spending330- Change in NWC87Cash Flow From AssetsCash Flow From Assets = OCF– Net Capital Spending – Changes in NWC
26 Free Cash FlowAnother name for cash flow from assets“Free” …… ??
27 Ex 8 Page 41So Long, Inc., has sales of $, costs of $, depreciation expense of $ , and interest expense of1.150 $. If the tax rate is 35 percent, what is the operating cash flow, or OCF?
28 Ex 9 Page 41Earnhardt Driving School’s 2008ba;ance sheet showed net fixed assets of 3.4 $ million, and the 2009 balance sheet showed net fixed assets of 4.2 $ million. The company’s 2009 income statement showed a depreciation expense of $. What was net capital spending for 2009?
29 Ex 10 Page 42The 2008 balance sheet of Saddle Creek, Inc., showed current assets of $ and current liabilities of $. The 2009 balance sheet showed current assets of 2.250$ and current liabilities of $. What was the company’s 2009 change in net working capital, or NWC?
31 Cash Flow to Creditors & Stockholders It is the net payment to creditors and owners during the yearCash to creditors = Interest paid – Net new borrowingU.S CORPORATION2009 Cash Flow to Creditors70Interest paid46- Net new borrowing24Cash to creditors
32 Cash Flow to Creditors & Stockholders U.S COROPORATION2009 Cash Flow to Stockholders103Dividend paid40- Net new equity raised63Cash flow to stockholdersCash flow to stockholders= dividend paid – New equity raised
34 Ex 11 Page 42The 2008 Balance sheet of Maria’s Tennis shop Inc,. Showed long-term debt of 2.6 million. And the 2009 Balance sheet Showed long-term debt of 2.9 million. The 2009 Income statement showed an interest expense of what was the firm’s cash flow to creditors?
35 Ex 12 Page 42The 2008 Balance sheet of Maria’s Tennis shop Inc,. Showed in the common stock account and 5.2 million in the additional paid-in surplus accounts . The balance sheet showed 815,000 and 5.5 million in the same two accounts, respectively. If the company paid out 490,000 in cash dividends during 2009, what was the cash flow to stockholders for the year?
36 Example: Balance Sheet and Income Statement Information Current Accounts2007: CA = 3625; CL = 17872006: CA = 3596; CL = 2140Fixed Assets and Depreciation2007: NFA = 2194; 2006: NFA = 2261Depreciation Expense = 500Long-term Debt and Equity2007: LTD = 538; Common stock & APIC = 4622006: LTD = 581; Common stock & APIC = 372Income StatementEBIT = 1014; Taxes = 368Interest Expense = 93; Dividends = 285
38 Short-term notes payable EX 26 Page 44 calculate : CFFA, CF to creditors, and CF to stock holders20082009Sales7,2338,085Depreciation1,0381,085Cost of goods sold2,4872,942Other expenses591515Interest485579Cash3,7924,041Accounts receivable5,0215,892Short-term notes payable732717Long-term debt12,70015,435Net fixed assets31,80533,921Accounts payable3,9844,025Inventory8,9279,555Dividends8821,011Tax rate34%
39 ReviewWhat is the difference between book value and market value? Which should we use for decision-making purposes?What is the difference between accounting income and cash flow? Which do we need to use when making decisions?What is the difference between average and marginal tax rates? Which should we use when making financial decisions?How do we determine a firm’s cash flows? What are the equations and where do we find the information?