economics 410 managerial economics thursday september 30, 1999
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Announcements
• No class on Tuesday, October 5th
• Exam Scheduled on Thurs, Oct 28th
• Class Lunch Wednesday, Oct 6th
II. Financial Accounting
• The Search for Value
• Accounting is the “language of business”
• Main Concept
– Present Value
– Of Future Benefits
Balance Sheet
Date: September 28, 1999
Assets Liabilities
Net Worth
Assets = Liabilities + Net Worth
Balance Sheet
Assets Liabilities
Net Worth
Cash….$ 1,000
$ 1,000
Buy Equipment for $ 500 !
Cash….$ 500
Eqpt….$ 500
Balance Sheet
Assets Liabilities
Net Worth
$ 1,000
Cash….$ 500
Eqpt….$ 500
Finance the equipment!
Owed to bank…$ 400
Balance Sheet
Assets Liabilities
Net Worth
$ 1,000
Cash….$ 900
Eqpt….$ 500
Finance the equipment!
Owed to bank…$ 400
Balance Sheet
Assets Liabilities
Net Worth
$ 1,000
Cash….$ 900
Eqpt….$ 500
Owed to bank…$ 400
Go Public ! Sell $ 10,000 in stock!
+ $ 10,000
Cash + $ 10,000
Balance Sheet
Assets Liabilities
Net Worth
$ 11,000
Cash….$ 10,900
Eqpt….$ 500
Owed to bank…$ 400
Suppose a year goes by !
Balance Sheet
Assets Liabilities
Net Worth
$ 11,000
Cash….$ 10,900
Eqpt….$ 500
Owed to bank…$ 400
Suppose a year goes by !
Less Depr $ 100
Less $ 100
Balance Sheet
Assets Liabilities
Net Worth
$ 10,900
Cash….$ 10,900
Eqpt….$ 500
Less $ 100 Depr
Owed to bank…$ 400
Buy another company for $ 2,000
- $ 2,000 Cash
+ $ 2,000 ?
Balance Sheet
Assets Liabilities
Net Worth
$ 10,900
Cash….$ 10,900
Eqpt….$ 500
Less Depr $ 100
Owed to bank…$ 400
Buy another company for $ 2,000
- $ 2,000 Cash
+ $ 1,000 Eqpt
+ $ 1,000 Goodwill?
Balance Sheet
Assets Liabilities
Net Worth
$ 10,900
Cash….$ 8,900
Eqpt….$ 1,500
Less Depr $ 100
Goodwill $ 1,000
Owed to bank…$ 400
Balance Sheet
Assets Liabilities
Net Worth
$ 10,900
Cash….$ 18,900
Eqpt….$ 1,500
Less Depr $ 100
Goodwill $ 1,000
Owed to bank…$ 400
Let a year go by
Balance Sheet
Assets Liabilities
Net Worth
$ 10,900
Cash….$ 18,900
Eqpt….$ 1,500
Less $ 300 Depr
Goodwill $ 1,000
Less $ 100 Amort
Owed to bank…$ 400
Let a year go by
$ 200 in Depr and $ 100 in Amortization !
Goodwill and Depreciable Assets Create Expense Items
• Reduce reported income each period
• But no effect on cash flow
• How to minimize these items on the books is a big issue for public companies
The Income Statementfor Quarter Ending Sept 30, 1999
• Revenues– Less Expenses (Normal Operating Expenses)
• Gross Operating Profit (Before Taxes)– Less Depreciation and Amortization– Less Interest– Less Taxes
• Net Income– Adjustment for Extraordinary Items– Gains or Losses on Portfolio
• Adusted Net Income
Getting to Net Income
• Less S, G & A• Less
– Depreciation
– Amortization
• Less– Interest Expense
• Less– Taxes
So Far
• Revenue– Less Operating Expenses
• Gross Operating Profit– Less: SG&A,D, A, I, T
• Net Operating Income (********)– Less Extraordinary
• Net Income
Summary
• Net Income After Adjustments– Add: Interest and Taxes
• EBIT– Add: Depreciation and Amortization
• EBITDA (Some call this “cash flow”)– Less Necessary Capital Expenditures
• FREE CASH FLOW
Back, to the Balance Sheet
Last one was as of June 30, 1999
Assets Liabilities
Net WorthRetained Earnings
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