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1、Chapter 2Financial Statements,Taxes,and Cash Flow0Chapter OutlineThe Balance SheetThe Income StatementTaxesCash Flow1Key Concepts and SkillsKnow the difference between book value and market valueKnow the difference between accounting income and cash flowKnow the difference between average and margin
2、al tax ratesKnow how to determine a firms cash flow from its financial statements2The Balance SheetThe balance sheet is a snapshot of the firms assets and liabilities at a given point in timeAssets are listed in order of decreasing liquidityEase of conversion to cash without significant loss of valu
3、eBalance Sheet IdentityAssets=Liabilities+Stockholders Equity3Figure 2.14U.S.Corporation Balance Sheet Table 2.15Balance Sheet AnalysisWhen analyzing a balance sheet,the Finance Manager should be aware of three concerns:1.Accounting liquidity2.Debt versus equity3.Value versus cost6Accounting Liquidi
4、ty Refers to the ease and quickness with which assets can be converted to cashwithout a significant loss in valueCurrent assets are the most liquid.Some fixed assets are intangible.The more liquid a firms assets,the less likely the firm is to experience problems meeting short-term obligations.Liquid
5、 assets frequently have lower rates of return than fixed assets.7Debt versus EquityCreditors generally receive the first claim on the firms cash flow.Shareholders equity is the residual difference between assets and liabilities.8Market vs.Book ValueThe balance sheet provides the book value of the as
6、sets,liabilities,and equity.Historical Cost Principle:Under Generally Accepted Accounting Principles(GAAP),audited financial statements of firms in the U.S.carry assets at cost.Market value is the price at which the assets,liabilities,or equity can actually be bought or sold,which is a completely di
7、fferent concept from historical cost.9Value versus CostMarket value and book value are often very different.Why?Which is more important to the decision-making process?10Klingon CorporationKLINGON CORPORATIONBalance SheetsMarket Value versus Book ValueBookMarketBookMarketAssetsLiabilities and Shareho
8、lders EquityNWC$400$600 LTD$500$500NFA 700 1,000 Equity6001,1001,1001,6001,1001,60011The Income StatementMeasures financial performance over a specific period of timeThe accounting definition of income is:Revenue Expenses Income12Income StatementThe income statement is more like a video of the firms
9、 operations for a specified period of timeYou generally report revenues first and then deduct any expenses for the periodMatching principle GAAP says to recognize revenue when it is fully earned and match expenses required to generate revenue to the period of recognition13U.S.Corporation Income Stat
10、ement-Table 2.214Income Statement AnalysisThere are three things to keep in mind when analyzing an income statement:1.Generally Accepted Accounting Principles(GAAP)2.Non-Cash Items3.Time and Costs15GAAPqThe matching principal of GAAP dictates that revenues be matched with expenses.qThus,income is re
11、ported when it is earned,even though no cash flow may have occurred.16Non-Cash ItemsqDepreciation is the most apparent.No firm ever writes a check for“depreciation.”qAnother non-cash item is deferred taxes,which does not represent a cash flow.qThus,net income is not cash.17Time and CostsqIn the shor
12、t-run,certain equipment,resources,and commitments of the firm are fixed,but the firm can vary such inputs as labor and raw materials.qIn the long-run,all inputs of production(and hence costs)are variable.qFinancial accountants do not distinguish between variable costs and fixed costs.Instead,account
13、ing costs usually fit into a classification that distinguishes product costs from period costs.18Example:Work the WebPublicly traded companies must file regular reports with the Securities and Exchange CommissionThese reports are usually filed electronically and can be searched at the SEC public sit
14、e called EDGARClick on the web surfer,pick a company,and see what you can find!19TaxesThe one thing about taxes we can rely on is that they will always be changingMarginal vs.average tax ratesMarginal the percentage paid on the next dollar earnedAverage the tax bill/taxable incomeOther taxes20Corpor
15、ate Tax RatesTaxable IncomeTax Rate$0-50,00015%50,001-75,0002575,001-100,00034100,001-335,00039335,001-10,000,0003410,000,001-15,000,0003515,000,001-18,333,33338 18,333,334+3521Example:Marginal vs.Average RatesSuppose your firm earns$4 million in taxable income.What is the firms tax liability?What i
16、s the average tax rate?What is the marginal tax rate?If you are considering a project that will increase the firms taxable income by$1 million,what tax rate should you use in your analysis?22Example:Marginal vs.Average Rates(1)Taxable Income(2)Marginal Tax Rate(3)Total Tax(3)/(1)Average Tax Rate$45,
17、00015%$6,75015.00%70,0002512,50017.8695,0003420,55021.63250,0001,000,00017,500,00050,000,000100,000,00023The Concept of Cash FlowCash flow is one of the most important pieces of information that a financial manager can derive from financial statementsThe accounting statement of cash flows does not p
18、rovide 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 who finance the purchase of the assets24Table 2.525Financial Cash FlowsThree Financial Cash FlowsCash Flow From AssetsCash Flow to CreditorsCash Flow
19、 to StockholdersSince there is no magic in finance,it must be the case that the cash flow received from the firms assets must equal the cash flows to the firms creditors and stockholders.Cash Flow From Assets(CFFA)=Cash Flow to Creditors+Cash Flow to Stockholders,orCF(A)CF(B)+CF(S)26Cash Flow From A
20、ssetsCash Flow From Assets=Operating Cash Flow Net Capital Spending Changes in NWCOCF(I/S)=EBIT+depreciation taxesNCS(B/S and I/S)=ending net fixed assets beginning net fixed assets+depreciationChanges in NWC(B/S)=ending NWC beginning NWC27Cash Flow to InvestorsCF to Creditors(B/S and I/S)=interest
21、paid net new borrowing CF to Stockholders(B/S and I/S)=dividends paid net new equity raised28U.S.Corporation Balance Sheet Table 2.129U.S.Corporation Income Statement-Table 2.230U.S.C.C.Financial Cash FlowOperating Cash Flow:EBIT$694+Depreciation 65-Current Taxes -212 OCF$547Cash Flow From the Asset
22、sOperating cash flow$547Capital spending Additions to net working capital TotalCash Flow to InvestorsCreditorStockholder Total31U.S.C.C.Financial Cash FlowCash Flow From the AssetsOperating cash flow$547Capital spending-130Additions to net working capital TotalCash Flow to InvestorsCreditorStockhold
23、er TotalCapital Spending Ending net fixed assets$1,709-Beginning net fixed assets -1,644+Depreciation 65 Capital Spending$13032U.S.C.C.Financial Cash FlowCash Flow From the AssetsOperating cash flow$547Capital spending-130Additions to net working capital-330 TotalCash Flow to InvestorsCreditorStockh
24、older TotalChange in Net Working Capital(NWC)Ending NWC$1,014 -Beginning NWC -684 Change in NWC$33033U.S.C.C.Financial Cash FlowCash Flow From the AssetsOperating cash flow$547Capital spending-130Additions to net working capital-330 Total$87Cash Flow to InvestorsCreditorStockholder Total34U.S.C.C.Fi
25、nancial Cash FlowCash Flow From the AssetsOperating cash flow$547Capital spending-130Additions to net working capital-330 Total$87Cash Flow to InvestorsCreditor$24Stockholder TotalCash Flow to Creditors Interest Paid$70-Net new borrowings 46 Cash flow to creditors 2435U.S.C.C.Financial Cash FlowCash
26、 Flow From the AssetsOperating cash flow$547Capital spending-130Additions to net working capital-330 Total$87Cash Flow to InvestorsCreditor$24Stockholder63 TotalCash Flow to Stockholders Dividends paid$103-Net new equity raised 40 Cash to Stockholders 6336U.S.C.C.Financial Cash FlowCash Flow From As
27、setsOperating cash flow$547Capital spending-130Additions to net working capital-330 Total$87Cash Flow to InvestorsCreditor$24Stockholder63 Total$87The cash flow received from the firms assets must equal the cash flows to the firms creditors and stockholders:37Example:Balance Sheet and Income Stateme
28、nt InformationCurrent Accounts2007:CA=$1,500;CL=$1,3002008:CA=$2,000;CL=$1,700Fixed Assets and Depreciation2007:NFA=$3,000;2008:NFA=$4,000Depreciation expense=$300LT Liabilities and Equity2007:LTD=$2,200;Common Stock=$500;RE=$5002008:LTD=$2,800;Common Stock=$750;RE=$750Income Statement InformationEB
29、IT=$2,700;Interest Expense=$200;Taxes=$1,000;Dividends=$1,25038Example:Cash FlowsOCF=$2,700+$300$1,000=$2,000NCS=$4,000$3,000+$300=$1,300Changes in NWC=($2,000$1,700)($1,500$1,300)=$100CFFA=$2,000$1,300$100=$600CF to Creditors=$200 ($2,800$2,200)=-$400CF to Stockholders=$1,250 ($750$500)=$1,000CFFA=
30、-$400+$1,000=$600The CF identity holds.392.6 The Statement of Cash FlowsThere is an official accounting statement called the statement of cash flows.This helps explain the change in accounting cash.The three components of the statement of cash flows are:Cash flow from operating activitiesCash flow f
31、rom investing activitiesCash flow from financing activities40Quick QuizWhat 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
32、difference between average and marginal tax rates?Which should we use when making financial decisions?How do we determine a firms cash flows?What are the equations and where do we find the information?41Comprehensive ProblemCurrent Accounts2007:CA=$4,400;CL=$1,5002006:CA=$3,500;CL=$1,200Fixed Assets and Depreciation2007:NFA=$3,400;2006:NFA=$3,100Depreciation Expense=$400Long-term Debt and Equity(R.E.not given)2007:LTD=$4,000;Common stock&APIC=$4002006:LTD=$3,950;Common stock&APIC=$400Income StatementEBIT=$2,000;Taxes=$300Interest Expense=$350;Dividends=$500Compute the CFFA42