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2-1 CHAPTER 2 Financial Statements, Cash Flow, and Taxes.

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Presentation on theme: "2-1 CHAPTER 2 Financial Statements, Cash Flow, and Taxes."— Presentation transcript:

1 2-1 CHAPTER 2 Financial Statements, Cash Flow, and Taxes

2 2-2 The Annual Report Balance sheet – provides a snapshot of a firm’s financial position at one point in time. Income statement – summarizes a firm’s revenues and expenses over a given period of time. Statement of retained earnings – shows how much of the firm’s earnings were retained, rather than paid out as dividends. Statement of cash flows – reports the impact of a firm’s activities on cash flows over a given period of time.

3 2-3 The Balance Sheet Cash Versus Other Assets Inventory & Depreciation Accounting Liabilities Breakdown of the common equity account Preferred versus common stock

4 2-4 Balance Sheet: Assets Cash A/R Inventories Total CA Gross FA Less: Dep. Net FA Total Assets , ,160 1,287,360 1,926,802 1,202, , ,790 2,866, , , ,200 1,124, , , ,800 1,468,800

5 2-5 Balance sheet: Liabilities and Equity Accounts payable Notes payable Accruals Total CL Long-term debt Common stock Retained earnings Total Equity Total L & E , , ,600 1,650, , ,000 32, ,592 2,866, , , , , , , , ,768 1,468,800

6 2-6 Income statement Sales COGS Other expenses EBITDA Depr. & Amort. EBIT Interest Exp. EBT Taxes Net income ,034,000 5,528, ,988 (13,988) 116,960 (130,948) 136,012 (266,960) (106,784) (160,176) ,432,000 2,864, , ,328 18, ,428 43, ,600 58,640 87,960

7 2-7 Other data No. of shares EPS DPS Stock price Book Value Per Share Cash Flow Per Share ,000 -$1.602 $0.11 $2.25 $4.93 -$ ,000 $0.88 $0.22 $8.50 $6.64 $1.07

8 2-8 Statement of Retained Earnings (2002) Balance of retained earnings, 12/31/01 Add: Net income, 2002 Less: Dividends paid Balance of retained earnings, 12/31/02 $203,768 (160,176) (11,000) $32,592

9 2-9 Statement of Cash Flows (2002) OPERATING ACTIVITIES Net income Add (Sources of cash): Depreciation Increase in A/P Increase in accruals Subtract (Uses of cash): Increase in A/R Increase in inventories Net cash provided by ops. (160,176) 116, , ,600 (280,960) (572,160) (164,176)

10 2-10 Statement of Cash Flows (2002) L-T INVESTING ACTIVITIES Investment in fixed assets FINANCING ACTIVITIES Increase in notes payable Increase in long-term debt Payment of cash dividend Net cash from financing NET CHANGE IN CASH Plus: Cash at beginning of year Cash at end of year (711,950) 436, ,000 (11,000) 825,808 (50,318) 57,600 7,282

11 2-11 What can we conclude about the financial condition from the statement of CFs? Net cash from operations = -$164,176, mainly because of negative NI. The firm borrowed $825,808 to meet its cash requirements. Even after borrowing, the cash account fell by $50,318.

12 2-12 What about net operating profit after taxes (NOPAT)? NOPAT = EBIT (1 – Tax rate) NOPAT 02 = -$130,948(1 – 0.4) = -$130,948(0.6) = -$78,569 NOPAT 01 = ?

13 2-13 What was the effect on net operating working capital? NOWC = Current - Non-interest assets bearing CL NOWC 02 = ($7,282 + $632,160 + $1,287,360) – ( $524,160+$636,808 + $489,600) = $276,234 NOWC 01 = ?

14 2-14 What was the change in Net Cash Flow? NCF 02 = NI + Depreciation and Amortization = ($160,176) + $116,960 = -$43,216 NCF 01 = ?

15 2-15 Does the company pay its suppliers on time? Probably not. A/P increased 260%, over the past year, while sales increased by only 76%. If this continues, suppliers may cut off the company’s trade credit.

16 2-16 How did the company finance its operation? The company financed its operation with external capital. It issued long-term debt

17 2-17 Federal Income Tax System

18 2-18 Tax treatment of various uses and sources of funds Interest paid – tax deductible for corporations (paid out of pre-tax income), but usually not for individuals (interest on home loans being the exception). Interest earned – usually fully taxable (an exception being interest from a (muni”). Dividends paid – paid out of after-tax income. Dividends received – taxed as ordinary income for individuals (“double taxation”).

19 2-19 More tax issues Tax Loss Carry-Back and Carry- Forward – since corporate incomes can fluctuate widely, the tax code allows firms to carry losses back to offset profits in previous years or forward to offset profits in the future.


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