balance sheet income statement statement of cash flows accounting income versus cash flow

2 - 1

Copyright © 2002 by Harcourt, Inc. All rights reserved.

Balance sheetIncome statementStatement of cash flowsAccounting income versus cash flowMVA and EVA

CHAPTER 2Financial Statements,Cash Flow, and Taxes

2 - 2


Balance Sheets: Assets

2001 2000 Cash 7,282 9,000Short-term inv. 0 48,600AR 632,160 351,200Inventories 1,287,360 715,200 Total CA 1,926,802 1,124,000Gross FA 1,202,950 491,000Less: Depr. 263,160 146,200 Net FA 939,790 344,800Total assets 2,866,592 1,468,800

2 - 3


1,733,760

Liabilities and Equity

2001 2000Accts payable 524,160 145,600Notes payable 720,000 200,000Accruals 489,600 136,000 Total CL 481,600Long-term debt 1,000,000 323,432Common stock 460,000 460,000Retained earnings (327,168) 203,768 Total equity 132,832 663,768Total L&E 2,866,592 1,468,800

2 - 4


(519,936)

Income Statement

Sales 5,834,400 3,432,000COGS 5,728,000 2,864,000Other expenses 680,000 340,000Deprec. 116,960 18,900 Tot. op. costs 6,524,960 3,222,900 EBIT (690,560) 209,100Interest exp. 176,000 62,500 EBT (866,560) 146,600Taxes (40%) (346,624) 58,640Net income 87,960

2001 2000

2 - 5


Other Data

No. of shares 100,000 100,000

EPS ($5.199) $0.88

DPS $0.110 $0.22

Stock price $2.25 $8.50

Lease pmts $40,000 $40,000

2001 2000

2 - 6


Statement of Retained Earnings (2001)

Balance of retained

earnings, 12/31/00 $203,768

Add: Net income, 2001 (519,936)

Less: Dividends paid (11,000)

Balance of retained

earnings, 12/31/01 ($327,168)

2 - 7


Statement of Cash Flows: 2001

OPERATING ACTIVITIESNet Income (519,936)Adjustments: Depreciation 116,960 Change in AR (280,960) Change in inventories (572,160) Change in AP 378,560 Change in accruals 353,600 Net cash provided by ops.

(523,936)

2 - 8


L-T INVESTING ACTIVITIESInvestments in fixed assets (711,950)FINANCING ACTIVITIES Change in s-t investments 48,600 Change in notes payable 520,000 Change in long-term debt 676,568 Payment of cash dividends (11,000)Net cash from financing 1,234,168 Sum: net change in cash (1,718)Plus: cash at beginning of year 9,000 Cash at end of year 7,282

2 - 9


Net cash from operations = -$523,936, mainly because of negative net income.

The firm borrowed $1,185,568 and sold $48,600 in short-term investments to meet its cash requirements.

Even after borrowing, the cash account fell by $1,718.

What can you conclude about the company’s financial condition from its

statement of cash flows?

2 - 10


What effect did the expansion have on net operating working capital (NOWC)?

NOWC01 = ($7,282 + $632,160 + $1,287,360)

- ($524,160 + $489,600)= $913,042.

NOWC00 = $793,800.

= -Operating

CAOperating

CLNOWC

2 - 11


What effect did the expansion have on capital used in operations?

= NOWC + Net fixed assets.

= $913,042 + $939,790

= $1,852,832.

= $1,138,600.

Operatingcapital01

Operatingcapital00

Operatingcapital

2 - 12


Did the expansion create additional net operating profit after taxes (NOPAT)?

NOPAT = EBIT(1 - Tax rate)

NOPAT01 = -$690,560(1 - 0.4)

= -$690,560(0.6)= -$414,336.

NOPAT00 = $125,460.

2 - 13


What is your initial assessment of the expansion’s effect on operations?

2001 2000

Sales $5,834,400 $3,432,000

NOPAT ($414,336) $125,460

NOWC $913,042 $793,800

Operating capital $1,852,832 $1,138,600

2 - 14


What effect did the company’s expansion have on its net cash flow

and operating cash flow?

NCF01 = NI + DEP = -$519,936 + $116,960= -$402,976.

NCF00 = $87,960 + $18,900 = $106,860.

OCF01 = NOPAT + DEP= -$414,336 + $116,960= -$297,376.

OCF00 = $125,460 + $18,900= $144,360.

2 - 15


What was the free cash flow (FCF)for 2001?

FCF = NOPAT - Net capital investment

= -$414,336 - ($1,852,832 - $1,138,600)

= -$414,336 - $714,232

= -$1,128,568.

How do you suppose investors reacted?

2 - 16


What is the company’s EVA?Assume the firm’s after-tax cost of

capital (COC) was 11% in 2000and 13% in 2001.

EVA01 = NOPAT- (COC)(Capital)= -$414,336 - (0.13)($1,852,832)= -$414,336 - $240,868= -$655,204.

EVA00 = $125,460 - (0.11)($1,138,600)= $125,460 - $125,246= $214.

2 - 17


Would you concludethat the expansion increased or

decreased MVA?

MVA = - .

During the last year stock price has decreased 73%, so market value of equity has declined. Consequently, MVA has declined.

Equity capitalsupplied

Market valueof equity

2 - 18


Probably not.

A/P increased 260% over the past year, while sales increased by only 70%.

If this continues, suppliers may cut off trade credit.

Does the company pay its suppliers on time?

2 - 19


No, the negative NOPAT shows that the company is spending more on it’s operations than it is taking in.

Does it appear that the sales price exceeds the cost per unit sold?

2 - 20


1. The company offers 60-day credit terms. The improved terms are matched by its competitors, so sales remain constant.

What effect would each of these actions have on the cash account?

A/R would Cash would

2 - 21


2. Sales double as a result of thechange in credit terms.

Short-run: Inventory and fixed assets to meet increased sales. A/R , Cash . Company may have to seek additional financing.

Long-run: Collections increase and the company’s cash position would improve.

2 - 22


The expansion was financed primarily with external capital.

The company issued long-term debt which reduced its financial strength and flexibility.

How was the expansion financed?

2 - 23


Would external capital have been required if they had broken even in

2001 (Net income = 0)?

Yes, the company would still have to finance its increase in assets.

2 - 24


What happens if fixed assets are depreciated over 7 years (as opposed

to the current 10 years)?

No effect on physical assets.Fixed assets on balance sheet

would decline.Net income would decline.Tax payments would decline.Cash position would improve.

2 - 25


Other policies thatcan affect financial statements

Inventory valuation methods.

Capitalization of R&D expenses.

Policies for funding the company’s retirement plan.

2 - 26


Does the company’s positive stock price ($2.25), in the face of large losses,

suggest that investors are irrational?

No, it means that investors expect things to get better in the future.

2 - 27


Why did the stock price fallafter the dividend was cut?

Management was “signaling” that the firm’s operations were in trouble.

The dividend cut lowered investors’ expectations for future cash flows, which caused the stock price to decline.

2 - 28


What were some other sources of financing used in 2001?

Selling financial assets: Short term investments decreased by $48,600.

Bank loans: Notes payable increased by $520,000.

Credit from suppliers: A/P increased by $378,560.

Employees: Accruals increased by $353,600.

balance sheet income statement statement of cash flows accounting income versus cash flow

Documents