FIN3002_lecture02_financial_statements_and_cash_flow.ppt

1 Lecture2 FinancialStatements TaxesandCashFlows 2 KeyConceptsandSkills KnowthedifferencebetweenbookvalueandmarketvalueKnowthedifferencebetweenaccountingincomeandcashflowKnowthedifferencebetweenaverageandmarginaltaxratesKnowhowtodetermineafirm scashflowfromitsfinancialstatements 3 LectureOutline TheBalanceSheetTheIncomeStatementTaxesNetWorkingCapitalFinancialCashFlow 4 TheBalanceSheet Anaccountant ssnapshotofthefirm saccountingvalueataspecificpointintimeAssetsarelistedinorderofdecreasingliquidity Easeofconversiontocashwithoutsignificantlossofvalue TheBalanceSheetIdentityis Assets Liabilities Stockholder sEquity TheBalanceSheet 5 Figure2 1 TheBalanceSheet 6 U S CorporationBalanceSheet Table2 1 TheBalanceSheet 7 BalanceSheetAnalysis Whenanalyzingabalancesheet theFinanceManagershouldbeawareofthreeconcerns LiquidityDebtversusequityValueversuscost TheBalanceSheet 8 Liquidity Referstotheeaseandquicknesswithwhichassetscanbeconvertedtocash withoutasignificantlossinvalue Currentassetsarethemostliquid Somefixedassetsareintangible Themoreliquidafirm sassets thelesslikelythefirmistoexperienceproblemsmeetingshort termobligations Liquidassetsfrequentlyhavelowerratesofreturnthanfixedassets TheBalanceSheet 9 DebtversusEquity Creditorsgenerallyreceivethefirstclaimonthefirm scashflow Shareholder sequityistheresidualdifferencebetweenassetsandliabilities TheBalanceSheet 10 ValueversusCost UnderGenerallyAcceptedAccountingPrinciples GAAP orFinancialReportingStandards FRS auditedfinancialstatementsoffirmscarryassetsatcost Marketvalueisthepriceatwhichtheassets liabilities andequitycouldactuallybeboughtorsold whichisacompletelydifferentconceptfromhistoricalcost TheBalanceSheet 11 Marketvs BookValue Thebalancesheetprovidesthebookvalueoftheassets liabilities andequity Marketvalueisthepriceatwhichtheassets liabilities orequitycanactuallybeboughtorsold Marketvalueandbookvalueareoftenverydifferent Why Whichismoreimportanttothedecision makingprocess TheBalanceSheet 12 KlingonCorporation TheBalanceSheet 13 TheIncomeStatement MeasuresfinancialperformanceoveraspecificperiodoftimeTheaccountingdefinitionofincomeis Revenue Expenses Income TheIncomeStatement 14 IncomeStatement Theincomestatementismorelikeavideoofthefirm soperationsforaspecifiedperiodoftimeYougenerallyreportrevenuesfirstandthendeductanyexpensesfortheperiodMatchingprinciple GAAPsaystorecognizerevenuewhenitisfullyearnedandmatchexpensesrequiredtogeneraterevenuetotheperiodofrecognition TheIncomeStatement 15 U S CorporationIncomeStatement Table2 2 TheIncomeStatement 16 IncomeStatementAnalysis Therearethreethingstokeepinmindwhenanalyzinganincomestatement GenerallyAcceptedAccountingPrinciples GAAP Non CashItemsTimeandCosts TheIncomeStatement 17 GAAP ThematchingprincipalofGAAPdictatesthatrevenuesbematchedwithexpenses Thus incomeisreportedwhenitisearned eventhoughnocashflowmayhaveoccurred TheIncomeStatement 18 Non CashItems Depreciationisthemostapparent Nofirmeverwritesacheckfor depreciation Anothernon cashitemisdeferredtaxes whichdoesnotrepresentacashflow Thus netincomeisnotcash TheIncomeStatement 19 TimeandCosts Intheshort run certainequipment resources andcommitmentsofthefirmarefixed butthefirmcanvarysuchinputsaslaborandrawmaterials Inthelong run allinputsofproduction andhencecosts arevariable Financialaccountantsdonotdistinguishbetweenvariablecostsandfixedcosts Instead accountingcostsusuallyfitintoaclassificationthatdistinguishesproductcostsfromperiodcosts TheIncomeStatement 20 Taxes TheonethingabouttaxeswecanrelyonisthattheywillalwaysbechangingMarginalvs averagetaxratesMarginal thepercentagepaidonthenextdollarearnedAverage thetaxbill taxableincomeOthertaxes Taxes 21 TaxRateTable Table2 3 Taxes 22 Example Marginalvs AverageRates Supposeyourfirmearns 4millionintaxableincome Whatisthefirm staxliability Whatistheaveragetaxrate Whatisthemarginaltaxrate Ifyouareconsideringaprojectthatwillincreasethefirm staxableincomeby 1million whattaxrateshouldyouuseinyouranalysis Taxes 23 NetWorkingCapital NetWorkingCapital CurrentAssets CurrentLiabilitiesNWCusuallygrowswiththefirm NetWorkingCapital 24 AnIllustration 2007 2006 2007 2006 Currentassets CurrentLiabilities Cashandequivalents 140 107 Accountspayable 213 197 Accountsreceivable 294 270 Notespayable 50 53 Inventories 269 280 Accruedexpenses 223 205 Other 58 50 Totalcurrentliabilities 486 455 Totalcurrentassets 761 707 Long termliabilities Fixedassets Deferredtaxes 117 104 Property plant andequipment 1 423 1 274 Long termdebt 471 458 Lessaccumulateddepreciation 550 460 Totallong termliabilities 588 562 Netproperty plant andequipment 873 814 Intangibleassetsandother 245 221 Stockholder sequity Totalfixedassets 1 118 1 035 Preferredstock 39 39 Commonstock 1parvalue 55 32 Capitalsurplus 347 327 Accumulatedretainedearnings 390 347 Lesstreasurystock 26 20 Totalequity 805 725 Totalassets 1 879 1 742 Totalliabilitiesandstockholder sequity 1 879 1 742 HereweseeNWCgrowto 275millionin2006from 252millionin2005 Thisincreaseof 23millionisaninvestmentofthefirm NetWorkingCapital 25 TheConceptofCashFlow CashflowisoneofthemostimportantpiecesofinformationthatafinancialmanagercanderivefromfinancialstatementsThestatementofcashflowsdoesnotprovideuswiththesameinformationthatwearelookingathereWewilllookathowcashisgeneratedfromutilizingassetsandhowitispaidtothosewhofinancethepurchaseoftheassets FinancialCashFlow 26 CashFlowFromAssets CashFlowFromAssets CFFA CashFlowtoCreditors CashFlowtoStockholdersCashFlowFromAssets OperatingCashFlow NetCapitalSpending ChangesinNWC FinancialCashFlow 27 Example U S Corporation OCF I S EBIT depreciation taxes 547NCS B SandI S endingnetfixedassets beginningnetfixedassets depreciation 130ChangesinNWC B S endingNWC beginningNWC 330CFFA 547 130 330 87CFtoCreditors B SandI S interestpaid netnewborrowing 24CFtoStockholders B SandI S dividendspaid netnewequityraised 63CFFA 24 63 87 FinancialCashFlow 28 Table2 5 FinancialCashFlow 29 Example BalanceSheetandIncomeStatementInformation CurrentAccounts2007 CA 1 500 CL 1 3002008 CA 2 000 CL 1 700FixedAssetsandDepreciation2007 NFA 3 000 2008 NFA 4 000Depreciationexpense 300LTLiabilitiesandEquity2007 LTD 2 200 CommonStock 500 RE 5002008 LTD 2 800 CommonStock 750 RE 750IncomeStatementInformationEBIT 2 700 InterestExpense 200 Taxes 1 000 Dividends 1 250 FinancialCashFlow 30 Example CashFlows OCF 2 700 300 1 000 2 000NCS 4 000 3 000 300 1 300ChangesinNWC 2 000 1 700 1 500 1 300 100CFFA 2 000 1 300 100 600CFtoCreditors 200 2 800 2 200 400C