ch 2 financial statements, cash flow, and taxes

7/30/2019 Ch 2 Financial Statements, Cash Flow, And Taxes

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FINANCIAL STATEMENTS,

CASH FLOW, AND TAXES

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Financial Statements and Reports

The Need of Financial Statements andReports

The Different between Financial Statements

and Financial ReportingFinancial Statements consist of:

– The Balance Sheet

– The Income Statement – The Statement of Retained Earnings

– The Statement of Cash Flows



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The Balance Sheet

Assets = Liabilities + Equity

Cash versus other assets

Liabilities versus stockholders’ equity

Preferred versus common stock

Breakdown of the common equity accounts

Inventory accounting

Depreciation methods

The time dimension



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Balance Sheet: Assets

Cash 7,282 57,600

AR 632,160 351,200Inventories 1,287,360 715,200

Total CA 1,926,802 1,124,000Gross FA 1,202,950 491,000Less: Deprec. 263,160 146,200

Net FA 939,790 344,800Total Assets 2,866,592 1,468,800

2010 2009



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Liabilities and Equity

2010 2009

Accts payable 524,160 145,600Notes payable 720,000 200,000Accruals 489,600 136,000

Total CL 1,733,760 481,600Long-term debt 1,000,000 323,432

Common stock 460,000 460,000Retained earnings (327,168) 203,768

Total equity 132,832 663,768Total L&E 2,866,592 1,468,800



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The Income Statement

Revenue

Expense Vs Cost

Depreciation; Amortization; DepletionEBITDA

EBIT

Net Income


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Income Statement

Sales 5,834,400 3,432,000COGS 5,728,000 2,864,000

Other expenses 680,000 340,000EBITDA (573,600) 228,000

Depr. & Amort. 116,960 18,900EBIT (690,560) 209,100

Interest exp. 176,000 62,500EBT (866,560) 146,600

Taxes (40%) (346,624) 58,640Net income (519,936) 87,960

2010 2009



Other Data

No. of shares 100,000 100,000EPS ($5.199) $0.88

DPS $0.110 $0.22

Stock price $2.25 $8.50

2010 2009



Statement of Retained Earnings &

Statement of Cash Flow

Statement of Retained Earning – Claim against assets

– Not represent cash available for payment dividend and other else

Net Cash Flow Vs. Accounting Profit – Net cash flow = NI – Noncash revenue + Noncash charges

– Net cash flow = NI + Depreciation and Amortization

Statement of Cash Flow

– Operating Activities – Investing Activities

– Financing Activities



Statement of Retained Earnings (2010)

Balance of retained

earnings, 12/31/2010 $203,768Add: Net income, 2010 (519,936)

Less: Dividends paid (11,000)

Balance of retainedearnings, 12/31/2010 ($327,168)



Statement of Cash Flows (2010)

(523,936)

OPERATING ACTIVITIESNet income (519,936)

Add (Sources of cash):

Depreciation 116,960Increase in A/P 378,560Increase in accruals 353,600

Subtract (Uses of cash):

Increase in A/R (280,960)Increase in inventories (572,160)

Net cash provided by ops.



L-T INVESTING ACTIVITIES

Investment in fixed assets (711,950)FINANCING ACTIVITIES

Increase in notes payable 520,000

Increase in long-term debt 676,568Payment of cash dividends (11,000)Net cash from financing 1,185,568

NET CHANGE IN CASH (50,318)Plus: Cash at beginning of year 57,600Cash at end of year 7,282



Net cash from operations = -$523,936, mainly

because of negative NI.

The firm borrowed $1,185,568 to meet its cash

requirements.

Even after borrowing, the cash account fell by

$50,318.

What can you conclude aboutD’Leon’s financial condition from its

statement of CFs?



Accounting Data for Managerial Decisions

Operating Assets and Operating Capital – Operating Assets; Nonoperating Assets

– Operating Working Capital; Net Operating Working Capital

Net Operating Profit After Taxes (NOPAT)

= EBIT (1 – Tax rate)

Net Operating Working Capital (NOWC) =

Current Asset – Non-interest bearing Current liabilities

Free Cash Flow

= NOPAT - Net Investment in operating capital Market Value Added (MWA)

= Market Value of stock – Equity capital supplied by stockholders

Economic Value Added (EVA)

= NOPAT – (Operating capital)(After-tax percentage cost of capital)



Did the expansion create additionalnet operating profit after taxes

(NOPAT)?

NOPAT = EBIT(1 – Tax rate)

NOPAT10 = -$690,560(1 – 0.4)

= -$690,560(0.6)

= -$414,336.

NOPAT09 = $125,460.



What effect did the expansion have on

net operating working capital(NOWC)?

NOWC = – Current

assets

Non-interest

bearing CL

NOWC10 = ($7,282 + $632,160 + $1,287,360)

– ($524,160 + $489,600)

= $913,042.

NOWC09 = $842,400.



What is your initial assessment of the

expansion’s effect on operations?

2010 2009

Sales $5,834,400 $3,432,000 NOPAT ($414,336) $125,460

NOWC $913,042 $842,400

Operating capital $1,852,832 $1,187,200 Net Income ($519,936) $87,960



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

and operating cash flow?

NCF10 = NI + DEP = ($519,936) + $116,960

= ($402,976).NCF09 = $87,960 + $18,900 = $106,860.

OCF10 = NOPAT + DEP= ($414,336) + $116,960= ($297,376).

OCF09 = $125,460 + $18,900= $144,360.



What was the free cash flow (FCF)

for 2010

FCF = NOPAT – Net capital investment

= -$414,336 – ($1,852,832 – $1,187,200)

= -$414,336 – $665,632

= -$1,079,968.

Is negative free cash flow always a bad

sign?



Economic Value Added (EVA)

EVA = –

= –

= NOPAT – After-Tax Cost

of Capital Used

Operating IncomeAfter Tax

After-Tax Costof Capital Used

Funds Availableto Investors

Cost of Capital Used



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In order to generate positive EVA, a firm

has to more than just cover operating costs.It must also provide a return to those whohave provided the firm with capital.

EVA takes into account the total cost of

capital, which includes the cost of equity.

EVA Concepts



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What is the company’s EVA?

Assume the firm’s after -tax cost of capital was 11% in 2009and 13% in 2010.

EVA10 = NOPAT – (A-T cost of capital)(Capital)= -$414,336 – (0.13)($1,852,832)= -$414,336 – $240,868= -$655,204.

EVA09= $125,460 – (0.11)($1,187,200)= $125,460 – $130,592= -$5,132.



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Would you conclude thatthe expansion increased or

decreased MVA?

MVA = – Market valueof equity Equity capitalsupplied

During the last year stock price has

decreased 73%, so market value of equity has declined. Consequently,MVA has declined.

ch 2 financial statements, cash flow, and taxes

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