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Chapter 2

The document discusses key financial statements including the balance sheet, income statement, and cash flows. It provides examples of how to calculate cash flows from assets using information from the balance and income statements. The balance sheet shows assets and liabilities at a point in time, while the income statement shows revenues and expenses over a period of time. Cash flows are critical for decision making and are calculated as operating cash flow minus capital expenditures and changes in net working capital.

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20070305 Nguyễn Thu Phương
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65 views16 pages

Chapter 2

The document discusses key financial statements including the balance sheet, income statement, and cash flows. It provides examples of how to calculate cash flows from assets using information from the balance and income statements. The balance sheet shows assets and liabilities at a point in time, while the income statement shows revenues and expenses over a period of time. Cash flows are critical for decision making and are calculated as operating cash flow minus capital expenditures and changes in net working capital.

Uploaded by

20070305 Nguyễn Thu Phương
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Chapter 2

Financial Statements,
Taxes, and Cash Flow

1
The Balance Sheet

• The balance sheet is a snapshot of


the firm’s assets and liabilities at a
given point in time
• Assets are listed in order of
decreasing liquidity
 Ease of conversion to cash without
significant loss of value
• Balance Sheet Identity
 Assets = Liabilities + Stockholders’
Equity

2
Figure 2.1

3
U.S. Corporation Balance Sheet

4
Market vs. Book Value

• The 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?

5
Klingon Corporation

KLINGON CORPORATION
Balance Sheets
Market Value versus Book Value
Book Marke Book Marke
t t
Assets Liabilities and
Shareholders’ Equity

NWC $ $ 600 LTD $ $


400 500 500
NFA 700 1,000 Equity 600 1,100
1,100 1,600 1,100 1,600
6
Income Statement

• You generally report revenues first


and then deduct any expenses for the
period
• Matching principle – GAAP says to
recognize revenue when it is fully
earned and match expenses required
to generate revenue to the period of
recognition

7
U.S. Corporation Income Statement

8
Work the Web

• Publicly traded companies must


file regular reports with the
Securities and Exchange
Commission
• These reports are usually filed
electronically and can be searched
at the SEC public site called
EDGAR

9
Taxes

• The one thing about taxes we can


rely on is that they will always be
changing
• Marginal vs. average tax rates
• Marginal – the percentage paid on
the next dollar earned
• Average – the tax bill / taxable
income
• Other taxes

10
Example: Marginal vs. Average
Rates
• Suppose your firm earns $4 million
in taxable income (pg 32,33).
• What is the firm’s tax liability?
• What is the average tax rate?
• What is the marginal tax rate?

• If you are considering a project


that will increase the firm’s taxable
income by $1 million, what tax
rate should you use in your
analysis?

11
Cash Flow From Assets

• Critical Piece of Info


• From Assets:
• Cash Flow From Assets (CFFA) =
Cash Flow to Creditors + Cash
Flow to Stockholders

Cash Flow From Assets = Operating


Cash Flow – Net Capital Spending
– Changes in NWC

12
Example: U.S. Corporation
• OCF (I/S) = EBIT + depreciation – taxes =
$547
• NCS ( B/S and I/S) = ending net fixed
assets – beginning net fixed assets +
depreciation = $130
• Changes in NWC (B/S) = ending NWC –
beginning NWC = $330
• CFFA = 547 – 130 – 330 = $87
• CF to Creditors (B/S and I/S) = interest paid
– net new borrowing = $24
• CF to Stockholders (B/S and I/S) =
dividends paid – net new equity raised =
$63
• CFFA = 24 + 63 = $87

13
Balance Sheet and Income
Statement Info
• Current Accounts
• 2007: CA = $1,500; CL = $1,300
• 2008: CA = $2,000; CL = $1,700
• Fixed Assets and Depreciation
• 2007: NFA = $3,000; 2008: NFA =
$4,000
• Depreciation expense = $300
• LT Liabilities and Equity
• 2007: LTD = $2,200; Common Stock =
$500; RE = $500
• 2008: LTD = $2,800; Common Stock =
$750; RE = $750
• Income Statement Information
• EBIT = $2,700; Interest Expense = $200;
Taxes = $1,000; Dividends = $1,250

14
Cash Flows
• OCF = $2,700 + $300 – $1,000 =
$2,000
• NCS = $4,000 – $3,000 + $300 =
$1,300
• Changes in NWC = ($2,000 – $1,700) –
($1,500 – $1,300) = $100
• CFFA = $2,000 – $1,300 – $100 = $600
• CF to Creditors = $200 – ($2,800 –
$2,200) = - $400
• CF to Stockholders = $1,250 – ($750 –
$500) = $1,000
• CFFA = - $400 + $1,000 = $600
• The CF identity holds.

15
Quick Quiz
• What 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?

• Homework Probs: 1, 2, 5, 11, 14

16

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