1. REVIEW OF ACCOUNTING (Chapter 2) §Financial Statements l Balance Sheet l Income Statement l Statement of Cash Flows §Free Cash Flow §Corporate Taxes §Individual Taxes

2. BALANCE SHEET Statement of Financial Position 12/31/xx Cash Marketable Securities Accounts Receivable Inventory Total Current Assets Investments Plant & Equipment Less: Accumulated Dep. TOTAL ASSETS Accounts Payable Notes Payable Accrued Expenses Total Current Liabilities Bonds Payable Total Liabilities Preferred Stock Common Stock Paid-in-Capital Retained Earnings Total Stockholders’ Equity TOTAL LIABILITIES & EQUITY

3. BALANCE SHEET (Continued) §Current Assets: Can or will be used up during the next accounting cycle (normally - one year). §Current Liabilities: Short-term obligations to creditors. §Preferred Stock: A hybrid security (Will discuss later). §Common Equity: Common Stock Paid-in-Capital Retained Earnings (i.e., All equity except preferred stock)

4. INCOME STATEMENT (For the Year Ended 12/31/xx) Sales (Cost of Goods Sold) Gross Profit (Depreciation) (Other Operating Expenses) Operating Profit (EBIT) (Interest) Earnings Before Taxes (EBT) (Taxes) Earnings After Taxes (EAT) (Preferred Dividends) Earnings Available to Common (EAC)

5. INCOME STATEMENT (Continued) §Note: Dividends are a distribution of after-tax income. §EAC is available for common dividends or retained earnings. §Earnings Per Share (EPS): EPS = (EAC)/(Number of Common Shares) §Price Per Share: Price = (EPS)(P/E Ratio)

6. STATEMENT OF CASH FLOWS (For the Year Ended 12/31/xx) CASH FLOWS FROM OPERATING ACTIVITIES: Net income after taxes + Depreciation and amortization + or - changes in current and noncurrent accounts that are associated with the sale of goods and services Net Cash Flows from Operating Activities (1) CASH FLOWS FROM INVESTING ACTIVITIES: + Sales of plant, property, and equipment - Purchases of plant, property, and equipment Net Cash Flows from Investing Activities (2) CASH FLOWS FROM FINANCING ACTIVITIES: + Increases in debt, preferred stock, common stock, and paid-in-capital - Decreases in debt, preferred stock, common stock, and paid-in-capital - Dividend payments Net Cash Flows from Financing Activities (3) EFFECT OF FOREIGN EXCHANGE RATES ON CASH (4)

7. STATEMENT OF CASH FLOWS (Continued) The net increase or (decrease) in cash flows for the period under consideration is equal to the sum of (1), (2), (3), and (4), on the previous statement of cash flows. This amount should be equal to the change in the cash account from the beginning to the end of the period.

8. Free Cash Flow (FCF) §Cash flow that is available for special financing activities: *************************************** §Cash flow from operating activities l Less: Capital expenditures required to maintain the firm’s productive capacity. l Less: Dividends needed to cover preferred stock obligations and maintain the necessary payout on common stock. §Equals: Free Cash Flow (FCF)

9. Corporate Taxes (Some Considerations) §Tax Rates – Progressive (Higher levels of income are taxed at higher rates.) §Interest Paid – Tax deductible. §Dividends Paid – Not tax deductible. (Results in double taxation.) §Interest Income – Taxed as ordinary income. §Dividend Income – Normally, 70% of dividend income is excluded from taxation. (Avoids, somewhat, triple taxation.)

10. Federal Individual Tax Rates (Some Comments) §Tax rates are progressive. §Interest Income – Usually taxed as ordinary income. l Municipal bond interest income is as exception. §Dividend Income – Taxed as ordinary income. §Interest Paid – Usually not tax deductible. l Mortgage interest is an exception.