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faculty.winthrop.edu

  1. 1. TOPIC 3 Financial Statements and Cash Flows <ul><li>Balance sheet </li></ul><ul><li>Income statement </li></ul><ul><li>Statement of retained earnings </li></ul><ul><li>Statement of cash flows </li></ul><ul><li>5 Questions about cash </li></ul><ul><li>Federal tax system (continued) </li></ul>
  2. 2. Ratio Analysis Du Pont system Effects of improving ratios Limitations of ratio analysis Qualitative factors
  3. 3. ANNUAL REPORT Primary Purpose—To communicate with stockholders and potential investors. Contains: 1. Balance Sheet 2. Income Statement 3. Statement of Retained Earnings 4. Statement of Cash Flows Usually covers several years. Explains what has happened and why .
  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>2004 7,282 632,160 1,287,360 1,926,802 1,202,950 263,160 939,790 2,866,592 2003 57,600 351,200 715,200 1,124,000 491,000 146,200 344,800 1,468,800
  5. 5. OBSERVATIONS ABOUT THE BALANCE SHEET <ul><li>Assets listed in order of “currency.” </li></ul><ul><li>Current versus fixed assets </li></ul><ul><li>Is depreciation a true expense? </li></ul>
  6. 6. 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>2002 524,160 636,808 489,600 1,650,568 723,432 460,000 32,592 492,592 2,866,592 2001 145,600 200,000 136,000 481,600 323,432 460,000 203,768 663,768 1,468,800
  7. 7. <ul><li>What is the difference between Equity, </li></ul><ul><li>Stockholder’s Equity, and New Worth? </li></ul><ul><li>2. What is “Retained Earnings?” </li></ul>
  8. 8. 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>2004 6,034,000 5,528,000 519,988 (13,988) 116,960 (130,948) 136,012 (266,960) (106,784) (160,176) 2003 3,432,000 2,864,000 358,672 209,328 18,900 190,428 43,828 146,600 58,640 87,960
  9. 9. BOTTOM OF INCOME STATEMENT NET INCOME BEFORE PREFERRED DIVIDENDS $117.5 - PREFERRED DIVIDENDS 4.0 NET INCOME $113.5 - COMMON DIVIDENDS 57.5 ADDITION TO R.E. 56.0 Dividends on CS are paid after taxes and after PS dividends
  10. 10. ANOTHER WAY TO MEASURE PERFORMANCE (t = 40%) CO. A CO. B SALES 10 10 - COSTS 7 7 = EBIT 3 3 - INTEREST 2 1 = EBT 1 2 - TAXES .4 .8 = NET INCOME .6 1.2
  11. 11. NOPAT (NET OPERATING PROFIT AFTER TAXES) (t = 40%) NOPAT = EBIT (1 – t) FOR CO. A: 3 (1 - .4) = 1.8 FOR CO. B: 3 (1 - .4) = 1.8
  12. 12. Statement of Retained Earnings (2004) <ul><li>Balance of retained </li></ul><ul><li>earnings, 12/31/03 </li></ul><ul><li>Add: Net income, 2004 </li></ul><ul><li>Less: Dividends paid </li></ul><ul><li>Balance of retained </li></ul><ul><li>earnings, 12/31/02 </li></ul>$300,000 100,000 40,000 $360,000
  13. 13. <ul><li>WHAT WAS THE “DIVIDEND </li></ul><ul><li>PAYOUT RATIO?” </li></ul><ul><li>WHAT WAS THE “RETENTION” </li></ul><ul><li>OR “PLOWBACK” RATIO? </li></ul>
  14. 14. NET CASH FLOW (Assume sales and expenses are all cash) <ul><li>SALES $10 </li></ul><ul><li>COSTS 8 </li></ul><ul><li>DEPRECIATION 1 </li></ul><ul><li>= NET INCOME 1 </li></ul><ul><li>HOW MUCH CASH WAS GENERATED? </li></ul><ul><li>DOES NOT NECESSARILY SHOW </li></ul><ul><li>THE AMOUNT OF CASH ON THE BALANCE </li></ul><ul><li>SHEET BECAUSE THE CASH FLOW CAN BE </li></ul><ul><li>USED IN A VARIETY OF WAYS. </li></ul>
  15. 15. FREE CASH FLOW THE CASH FLOW ACTUALLY AVAILABLE FOR DISTRIBUTION TO ALL INVESTORS IN THE COMPANY (STOCKHOLDERS AND BONDHOLDERS) FREE CASH FLOW = NOPAT – ALL NECESSARY INVESTMENTS IN INVESTMENTS IN WORKING CAPITAL AND FIXED ASSETS
  16. 16. BALANCE SHEET Left Hand Side shows “ investments” (or where you put your money) Right Hand Side shows “ financing” (or where you get your money)
  17. 17. ANY INCREASE IN AN ITEM ON THE RIGHT HAND SIDE and ANY DECREASE IN AN ITEM ON THE LEFT HAND SIDE INCREASES “FINANCING” OR PROVIDES FUNDS and ANY DECREASE IN AN ITEM ON THE LEFT HAND SIDE e.g., if Accounts Payable increase — or Accounts Receivable decrease — additional funds will be provided ANY INCREASE IN AN ITEM ON THE LEFT HAND SIDE INCREASES “INVESTMENTS” OR USES FUNDS.
  18. 18. A STATEMENT OF CASH FLOWS SHOWS: 1. OPERATING ACTIVITIES (Includes net income, depreciation, and changes in current assets and current liabilities (other than cash and short-term debt) 2. INVESTING ACTIVITIES (Includes investments in or sales of fixed assets) 3. FINANCING ACTIVITIES (Includes cash raised by short-term debt, bonds, and stock. Also includes cash for dividends and buy-backs of stocks and bonds.
  19. 19. Statement of Cash Flows (2004) <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)
  20. 20. Statement of Cash Flows (2004) <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
  21. 21. REVIEW WHICH STATEMENT (OR CONCEPT) SHOWS: <ul><li>HOW MUCH CASH DO WE HAVE? </li></ul><ul><li>HOW MUCH CASH DID WE GENERATE </li></ul><ul><li>DURING THE PERIOD? </li></ul><ul><li>WHAT DID WE DO WITH THE CASH </li></ul><ul><li>WE GENERATED? </li></ul><ul><li>HOW MUCH CASH COULD WE DISTRIBUTE </li></ul><ul><li>TO OUR INVESTORS? </li></ul><ul><li>HOW MUCH CASH DID WE ACTUALLY PAY </li></ul><ul><li>TO OUR STOCKHOLDERS? </li></ul>
  22. 22. Federal Income Tax System
  23. 23. Corporate and Personal Taxes <ul><li>Both have a progressive structure (the higher the income, the higher the marginal tax rate). </li></ul><ul><li>Corporations </li></ul><ul><ul><li>Rates begin at 15% and rise to 35% for corporations with income over $10 million. </li></ul></ul><ul><ul><li>Also subject to state tax (around 5%). </li></ul></ul><ul><li>Individuals </li></ul><ul><ul><li>Rates begin at 10% and rise to 38.6% for individuals with income over $307,050. </li></ul></ul><ul><ul><li>May be subject to state tax. </li></ul></ul>
  24. 24. Tax treatment of various uses and sources of funds <ul><li>Interest paid – tax deductible for corporations (paid out of pre-tax income), but usually not for individuals (interest on home loans being the exception). </li></ul><ul><li>Interest earned – usually fully taxable (an exception being interest from a (muni”). </li></ul><ul><li>Dividends paid – paid out of after-tax income. </li></ul><ul><li>Dividends received – taxed as ordinary income for individuals (“double taxation”). A portion of dividends received by corporations is tax excludable, in order to avoid “triple taxation”. </li></ul>

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