CHAPTER 3 Financial Statements, Cash Flow, and Taxes <ul><li>Key Financial Statements </li></ul><ul><ul><li>Balance sheet ...
Video:  Olson Smart Finance
The annual report <ul><li>Balance sheet – provides a snapshot of a firm’s financial position at one point in time. </li></...
Balance sheet: Assets <ul><li>  </li></ul><ul><li>Cash </li></ul><ul><li>A/R </li></ul><ul><li>Inventories </li></ul><ul><...
Balance sheet:  Liabilities and Equity <ul><li>Accts payable </li></ul><ul><li>Notes payable </li></ul><ul><li>Accruals </...
Income statement <ul><li>Sales </li></ul><ul><li>COGS </li></ul><ul><li>Other expenses </li></ul><ul><li>EBITDA </li></ul>...
Other data <ul><li>No. of shares </li></ul><ul><li>EPS </li></ul><ul><li>DPS </li></ul><ul><li>Stock price </li></ul><ul><...
Statement of Retained Earnings (2005) <ul><li>Balance of retained </li></ul><ul><li>earnings, 12/31/04 </li></ul><ul><li>A...
Statement of Cash Flows (2005) <ul><li>OPERATING ACTIVITIES </li></ul><ul><li>Net income </li></ul><ul><li>Add (Sources of...
Statement of Cash Flows (2005) <ul><li>L-T INVESTING ACTIVITIES </li></ul><ul><li>Investment in fixed assets </li></ul><ul...
What can you conclude about D’Leon’s financial condition from its statement of CFs? <ul><li>Net cash from operations = -$1...
Did the expansion create additional net operating after taxes (NOPAT)? <ul><li>NOPAT  = EBIT (1 – Tax rate) </li></ul><ul>...
What effect did the expansion have on net cash flow and operating cash flow? <ul><li>NCF 05  = NI + Dep = ($160,176) + $11...
What was the free cash flow (FCF) for 2005? <ul><li>FCF 05 = [-$130,948(1 – 0.4) + $116,960] –  </li></ul><ul><li>  [($1,2...
Economic value added (EVA) <ul><li>EVA = NOPAT – Annual dollar cost of capital  </li></ul><ul><li>In order to generate pos...
What is the firm’s EVA? Assume the firm’s after-tax percentage cost of capital was 10% in 2004 and 13% in 2005. <ul><li>EV...
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Chapter 3

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Chapter 3

  1. 1. CHAPTER 3 Financial Statements, Cash Flow, and Taxes <ul><li>Key Financial Statements </li></ul><ul><ul><li>Balance sheet </li></ul></ul><ul><ul><li>Income statements </li></ul></ul><ul><ul><li>Statement of retained earnings </li></ul></ul><ul><ul><li>Statement of cash flows </li></ul></ul><ul><li>Accounting income vs. cash flow </li></ul><ul><li>Federal tax system </li></ul>
  2. 2. Video: Olson Smart Finance
  3. 3. The annual report <ul><li>Balance sheet – provides a snapshot of a firm’s financial position at one point in time. </li></ul><ul><li>Income statement – summarizes a firm’s revenues and expenses over a given period of time. </li></ul><ul><li>Statement of retained earnings – shows how much of the firm’s earnings were retained, rather than paid out as dividends. </li></ul><ul><li>Statement of cash flows – reports the impact of a firm’s activities on cash flows over a given period of time. </li></ul>
  4. 4. Balance sheet: Assets <ul><li> </li></ul><ul><li>Cash </li></ul><ul><li>A/R </li></ul><ul><li>Inventories </li></ul><ul><li>Total CA </li></ul><ul><li>Gross FA </li></ul><ul><li>Less: Dep. </li></ul><ul><li>Net FA </li></ul><ul><li>Total Assets </li></ul>2005 7,282 632,160 1,287,360 1,926,802 1,202,950 263,160 939,790 2,866,592 2004 57,600 351,200 715,200 1,124,000 491,000 146,200 344,800 1,468,800
  5. 5. Balance sheet: Liabilities and Equity <ul><li>Accts payable </li></ul><ul><li>Notes payable </li></ul><ul><li>Accruals </li></ul><ul><li>Total CL </li></ul><ul><li>Long-term debt </li></ul><ul><li>Common stock </li></ul><ul><li>Retained earnings </li></ul><ul><li>Total Equity </li></ul><ul><li>Total L & E </li></ul>2005 524,160 636,808 489,600 1,650,568 723,432 460,000 32,592 492,592 2,866,592 2004 145,600 200,000 136,000 481,600 323,432 460,000 203,768 663,768 1,468,800
  6. 6. Income statement <ul><li>Sales </li></ul><ul><li>COGS </li></ul><ul><li>Other expenses </li></ul><ul><li>EBITDA </li></ul><ul><li>Depr. & Amort. </li></ul><ul><li>EBIT </li></ul><ul><li>Interest Exp. </li></ul><ul><li>EBT </li></ul><ul><li>Taxes </li></ul><ul><li>Net income </li></ul>2005 6,034,000 5,528,000 519,988 (13,988) 116,960 (130,948) 136,012 (266,960) (106,784) (160,176) 2004 3,432,000 2,864,000 358,672 209,328 18,900 190,428 43,828 146,600 58,640 87,960
  7. 7. Other data <ul><li>No. of shares </li></ul><ul><li>EPS </li></ul><ul><li>DPS </li></ul><ul><li>Stock price </li></ul><ul><li>Lease pmts </li></ul>2005 100,000 -$1.602 $0.11 $2.25 $40,000 2004 100,000 $0.88 $0.22 $8.50 $40,000
  8. 8. Statement of Retained Earnings (2005) <ul><li>Balance of retained </li></ul><ul><li>earnings, 12/31/04 </li></ul><ul><li>Add: Net income, 2005 </li></ul><ul><li>Less: Dividends paid </li></ul><ul><li>Balance of retained </li></ul><ul><li>earnings, 12/31/05 </li></ul>$203,768 (160,176) (11,000) $32,592
  9. 9. Statement of Cash Flows (2005) <ul><li>OPERATING ACTIVITIES </li></ul><ul><li>Net income </li></ul><ul><li>Add (Sources of cash): </li></ul><ul><li>Depreciation </li></ul><ul><li>Increase in A/P </li></ul><ul><li>Increase in accruals </li></ul><ul><li>Subtract (Uses of cash): </li></ul><ul><li>Increase in A/R </li></ul><ul><li>Increase in inventories </li></ul><ul><li>Net cash provided by ops. </li></ul>(160,176) 116,960 378,560 353,600 (280,960) (572,160) (164,176)
  10. 10. Statement of Cash Flows (2005) <ul><li>L-T INVESTING ACTIVITIES </li></ul><ul><li>Investment in fixed assets </li></ul><ul><li>FINANCING ACTIVITIES </li></ul><ul><li>Increase in notes payable </li></ul><ul><li>Increase in long-term debt </li></ul><ul><li>Payment of cash dividend </li></ul><ul><li>Net cash from financing </li></ul><ul><li>NET CHANGE IN CASH </li></ul><ul><li>Plus: Cash at beginning of year </li></ul><ul><li>Cash at end of year </li></ul>(711,950) 436,808 400,000 (11,000) 825,808 (50,318) 57,600 7,282
  11. 11. What can you conclude about D’Leon’s financial condition from its statement of CFs? <ul><li>Net cash from operations = -$164,176, mainly because of negative NI. </li></ul><ul><li>The firm borrowed $825,808 to meet its cash requirements. </li></ul><ul><li>Even after borrowing, the cash account fell by $50,318. </li></ul>
  12. 12. Did the expansion create additional net operating after taxes (NOPAT)? <ul><li>NOPAT = EBIT (1 – Tax rate) </li></ul><ul><li>NOPAT 05 = -$130,948(1 – 0.4) </li></ul><ul><li>= -$130,948(0.6) </li></ul><ul><li>= -$78,569 </li></ul><ul><li>NOPAT 04 = $114,257 </li></ul>
  13. 13. What effect did the expansion have on net cash flow and operating cash flow? <ul><li>NCF 05 = NI + Dep = ($160,176) + $116,960 </li></ul><ul><li> = -$43,216 </li></ul><ul><li>NCF 04 = $87,960 + $18,900 = $106,860 </li></ul><ul><li>OCF 05 = NOPAT + Depreciation and amortization </li></ul><ul><li> = ($78,569) + $116,960 </li></ul><ul><li> = $38,391 </li></ul><ul><li>OCF 04 = $114,257 + $18,900 </li></ul><ul><li> = $133,157 </li></ul>
  14. 14. What was the free cash flow (FCF) for 2005? <ul><li>FCF 05 = [-$130,948(1 – 0.4) + $116,960] – </li></ul><ul><li> [($1,202,950 – $491,000) + $70,642] </li></ul><ul><li>= -$744,201 </li></ul><ul><li>Is negative free cash flow always a bad sign? </li></ul>
  15. 15. Economic value added (EVA) <ul><li>EVA = NOPAT – Annual dollar cost of capital </li></ul><ul><li>In order to generate positive EVA, a firm has to more than just cover operating costs. It must also provide a return to those who have provided the firm with capital. </li></ul><ul><li>EVA takes into account the total cost of capital, which includes the cost of equity. </li></ul>
  16. 16. What is the firm’s EVA? Assume the firm’s after-tax percentage cost of capital was 10% in 2004 and 13% in 2005. <ul><li>EVA 05 = NOPAT – (A-T cost of capital) (Capital) </li></ul><ul><li>= -$78,569 – (0.13)($1,852,832) </li></ul><ul><li>= -$78,569 – $240,868 </li></ul><ul><li>= -$319,437 </li></ul><ul><li>EVA 04 = $114,257 – (0.10)($1,187,200) </li></ul><ul><li>= $114,257 – $118,720 </li></ul><ul><li>= -$4,463 </li></ul>
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