chapter 3 financial statements and cash flows

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2-1 CHAPTER 3 Financial Statements and Cash Flows Income statement Balance sheet Statement of cash flows Free Cash Flow (FCF)

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CHAPTER 3 Financial Statements and Cash Flows . Income statement Balance sheet Statement of cash flows Free Cash Flow (FCF). Income Statement. Measure of profitability over a period of time. 2012. 2011. Sales. $6,034,000. $3,432,000. COGS. 5,528,000. 2,864,000. Other expenses. - PowerPoint PPT Presentation

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Page 1: CHAPTER 3  Financial Statements and Cash Flows

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CHAPTER 3 Financial Statements and Cash Flows

Income statement Balance sheet Statement of cash flows Free Cash Flow (FCF)

Page 2: CHAPTER 3  Financial Statements and Cash Flows

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Income Statement Measure of profitability over a period of

timeSimplified Income Statement:

Sales(Total revenue)-Cost of Goods Sold(Cost of revenue)

Gross Profit-Expense

Earning Before Interest and Tax(EBIT,Operating income)-Interest

Earning Before Tax (EBT)-Tax

Net Income (NI)

Page 3: CHAPTER 3  Financial Statements and Cash Flows

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Income Statement

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2012 2011 Sales $6,034,000 $3,432,000 COGS 5,528,000 2,864,000

Other expenses 519,988 358,672 Total oper.costs excl.

deprec. & amort. $6,047,988

$3,222,672

Depreciation and amortization 116,960 18,900 EBIT ($ 130,948) $ 190,428

Interest expense 136,012 43,828 EBT ($ 266,960) $ 146,600 Taxes (106,784) 58,640 Net income ($ 160,176) $ 87,960

Page 4: CHAPTER 3  Financial Statements and Cash Flows

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Balance Sheet Balance sheet provides a snap

shot of the firm’s financial condition at one point in time

Assets=Liability+Equity What you have = Where it comes

from

Page 5: CHAPTER 3  Financial Statements and Cash Flows

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Balance Sheet: Assets

CashA/RInventories

Total CAGross FALess: Dep.

Net FATotal Assets

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20127,282

632,1601,287,3601,926,8021,202,950 263,160 939,7902,866,592

201157,600

351,200 715,2001,124,000

491,000 146,200 344,8001,468,800

Page 6: CHAPTER 3  Financial Statements and Cash Flows

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Balance Sheet: Liabilities and Equity

Accts payableNotes payableAccruals

Total CLLong-term debtCommon stockRetained earnings

Total EquityTotal L & E

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2012524,160

636,808 489,6001,650,568

723,432460,000

32,592 492,5922,866,592

2011145,600200,000

136,000481,600323,432460,000

203,768 663,7681,468,800

Page 7: CHAPTER 3  Financial Statements and Cash Flows

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Statement of Stockholders’ Equity (2012)

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Total Common Stock Retained Stockholders’ Shares Amount Earnings Equity

Balances, 12/31/01 100,000 $460,000 $203,768 $663,768 2012 Net income (160,176) Cash dividends (11,000) Addition (subtraction)

to retained earnings (171,176) Balances, 12/31/12 100,000 $460,000 $ 32,592 $492,592

Page 8: CHAPTER 3  Financial Statements and Cash Flows

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Statement of cash flows A report that shows how cash is

obtained and used. Why need it? Cash income and net

income can be very different Depreciation Revenue recognition

Cash are affected by three activities Operating Investing Financing

Page 9: CHAPTER 3  Financial Statements and Cash Flows

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Statement of Cash Flows (2012)

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Operating Activities Net income ($160,176) Depreciation and amortization 116,960 Increase in accounts payable 378,560 Increase in accruals 353,600 Increase in accounts receivable (280,960) Increase in inventories (572,160) Net cash provided by operating activities ($164,176)

Page 10: CHAPTER 3  Financial Statements and Cash Flows

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Statement of Cash Flows (2012)

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Long-Term Investing Activities Additions to property, plant, & equipment ($ 711,950) Net cash used in investing activities ($ 711,950) Financing Activities Increase in notes payable $ 436,808 Increase in long-term debt 400,000 Payment of cash dividends (11,000) Net cash provided by financing activities $ 825,808 Summary Net decrease in cash ($ 50,318) Cash at beginning of year 57,600 Cash at end of year $ 7,282

Page 11: CHAPTER 3  Financial Statements and Cash Flows

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Free Cash flows FCF:The amount of cash that could

be withdrawn from a firm without harming its ability to operate and expand.

FCF=EBIT(1-t)+Dep.-[CapEx+increase in net operating working capital] FCF=[EBIT(1-t)]-increase in Net Fixed

Assets-increase in net operating working capital

FCF=[EBIT(1-t)]-[CapEx-Dep.]-[increase in net operating working capital]

Page 12: CHAPTER 3  Financial Statements and Cash Flows

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Net Working Capital

Working Capital: Current assetsWe are interested to know capital (funds, money)

supplied by investors (share holders and debt holders)NOWC = Current - Non-interest assets bearing CLNOWC=(cash and marketable

security+AR+Inventories)-(AP+AC)Change in NOWC =NOWC1-NOWC0Change is NOWC is how much more money investors

need to put into the working capital of the company.

Page 13: CHAPTER 3  Financial Statements and Cash Flows

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What effect did the expansion have on net working capital?

NOWC = Current assets – (Payables + Accruals)NOWC12 = ($7,282 + $632,160 + $1,287,360) – ($524,160 + $489,600)

= $913,042NOWC11 = $842,400∆NOWC= NOWC12 –NOWC11 = $913,042- $842,400=$70,642

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Page 14: CHAPTER 3  Financial Statements and Cash Flows

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Capital Expenditure Capital expenditure: Fund spent to

acquire fixed assets Cap Exp =(NetFA1-NetFA0)+Dep1 (NetFA1=NetFA0+ Cap Exp -Dep1) Cap Exp2012= ($939,790 –

$344,800)+116,960=$711,950

Page 15: CHAPTER 3  Financial Statements and Cash Flows

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What was the free cash flow (FCF) for 2012?

NOWC

esexpenditurCapital

onamortizati

and Depr. T)EBIT(1 FCF

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FCF12 = [-$130,948(1 – 0.4) + $116,960] – [711,950+ $70,642]= -$744,201