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Robert C. Higgins

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  • 1/ At my point, the production is in the left side from the circle, and when starting the operation, most companies must have production first to earn money. 2/ initial cash that means the owner’s equity. 3/ working capital is some kinda cash that support for operation, like tax, changes in equity, changes in liabilities, interest, etc. 4/ the investment capital is some kinda money that support for buying tangible assets, that mainly in the left side in the circle.
  • 1/ the depreciation is concerned to assets while amortization is concerned to some kinda loans. And depreciation is relevant to deduct assets thorough its operation. In business’s views, they quite like depreciation, coz it will influenced to income tax. 2/ the AP is accounts payable and it fit for the left side like buying fixed assets and production. 3/ the profits and the cash flow does not the same cos the profits are burdened
  • Chap001

    1. 1. Interpreting Financial Statements CHAPTER 1 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
    2. 2. Key Points <ul><li>Accounting is the scorecard of business. </li></ul><ul><li>Managers who understand accounting can diagnose ills and prescribe remedies. </li></ul><ul><li>Chapter 1 is a review of basic accounting. </li></ul>
    3. 3. The Cash Flow Cycle <ul><li>Finance and operations are integrated. </li></ul><ul><li>Cash  Fixed Assets  Inventory  AR  Cash </li></ul><ul><li>Where is production (operations) in this cycle? </li></ul><ul><li>Where does the initial cash come from? </li></ul><ul><li>Where is the working capital cycle? </li></ul><ul><li>Where is investment in this cycle? </li></ul>
    4. 4. Figure 1.1 The Cash Flow-Production Cycle
    5. 5. More Questions <ul><li>What is depreciation? </li></ul><ul><li>Did we miss AP? If so, where does it fit in? </li></ul><ul><ul><li>Cash  Fixed Assets  Inventory  AR  Cash </li></ul></ul><ul><li>Are profits and cash flow the same? </li></ul><ul><li>Does depreciation have anything to do with this question? </li></ul>
    6. 6. The Balance Sheet <ul><li>The balance sheet is a financial snapshot. </li></ul><ul><li>Assets = Liabilities + Shareholders’ Equity </li></ul><ul><li>What do these items measure? </li></ul><ul><li>What is double entry bookkeeping? </li></ul><ul><li>What happens to the numbers in a balance sheet when a company borrows money from a bank? </li></ul><ul><li>What’s Worldwide Sports? Story in Table 1.1? </li></ul>
    7. 7. TABLE 1-1 Worldwide Sports Financial Transactions 2008 ($ thousands)
    8. 8. Questions? <ul><li>How much did WS sell? </li></ul><ul><li>What was the value of WS merchandise purchases? </li></ul><ul><li>How much did WS borrow, and what rate of interest did they pay? </li></ul><ul><li>Are assets equal to the sum of liabilities and shareholders’ equity? </li></ul><ul><li>Move from snapshots to videos  income statement and statement of cash flows. </li></ul>
    9. 9. FIGURE 1.2 Ties among Financial Statements
    10. 10. TABLE 1-2 Scotts Miracle-Gro Co., Balance Sheets ($ millions)
    11. 11. TABLE 1-3 Scotts Miracle-Gro Co., Income Statement ($ millions)
    12. 12. Measuring Earnings <ul><li>Accrual accounting and matching principle. </li></ul><ul><li>Depreciation. </li></ul><ul><ul><li>Straight-line vs. accelerated. </li></ul></ul><ul><li>Taxes </li></ul><ul><ul><li>2 sets of books, one to report financial condition of company to investors and the second to compute taxes. </li></ul></ul>
    13. 13. Tax Arithmetic <ul><li>Provision for income taxes on income statement </li></ul><ul><li>+ increase in prepaid income taxes on asset side of balance sheet </li></ul><ul><li>+ reduction in income taxes payable and deferred income taxes on liabilities side of balance sheet </li></ul><ul><li>= Taxes paid </li></ul>
    14. 14. Check Out the Numbers <ul><li>2007. </li></ul><ul><li>Income statement 2007. </li></ul><ul><li>Change in balance sheet entries from 2006 to 2007. </li></ul><ul><li>74.7 + 17.0 + 9.8 -18.7 = 82.8 </li></ul><ul><li>is the amount of taxes paid. </li></ul>
    15. 15. R&D <ul><li>Expense it all! </li></ul><ul><li>Why? </li></ul><ul><li>Difficult to estimate effective time horizon. </li></ul><ul><li>Result? Earnings understate profitability. </li></ul>
    16. 16. Sources & Uses <ul><li>Income statement only pertains to items sold. </li></ul><ul><li>Income statement included non-cash expenses. </li></ul><ul><li>For cash flows, need something else. </li></ul><ul><li>From where does a company get its cash, and where does it spend its cash? </li></ul>
    17. 17. TABLE 1-4 Scotts Miracle-Gro Co., Sources and Uses Statement, 2007 ($ millions)
    18. 18. Statement of Cash Flows <ul><li>Rearrangement of sources and uses. </li></ul><ul><li>In practice, there are additional issues. </li></ul><ul><li>Tax benefit from exercise of stock options. </li></ul><ul><ul><li>When employees exercise stock options and incur a tax liability, the company gets to take this tax as a deduction. </li></ul></ul><ul><ul><li>E.g. Cisco Systems’ tax benefit exceeded its net income in 2000. </li></ul></ul>
    19. 19. Cash Flow and Net Income <ul><li>Which is the better measure of performance? </li></ul><ul><li>Net income includes estimates, allocations, and approximations. </li></ul><ul><li>Cash flow from operations is actual cash. </li></ul><ul><li>Low or negative cash flow does not necessarily imply poor performance. </li></ul><ul><li>Cash flow statements might shift cash flows from operations to investment or financing: see the next slide. </li></ul>
    20. 20. TABLE 1-5 Scotts Miracle-Gro Co., Cash Flow Statement, 2007 ($ millions)
    21. 21. Fair Value Accounting <ul><li>The financial statements are a mix of historical amounts and mark-to-market amounts. </li></ul><ul><li>Book values are historical. </li></ul><ul><li>Market values are forward looking. </li></ul><ul><li>Intangible assets not appearing in the financial statements include patents, brand reputation, superior technology, human capital of workforce, etc. </li></ul>
    22. 22. TABLE 1-6 The Book Value of Equity is a Poor Surrogate for the Market Value of Equity, December 31, 2007
    23. 23. Goodwill <ul><li>Intangible on the balance sheet. </li></ul><ul><li>Goodwill is the difference between acquisition price and the amount the books show as the value of the asset acquired. </li></ul><ul><ul><li>Amount corresponds to either the book value or fair value of the target. </li></ul></ul>
    24. 24. Economic Income and Accounting Income <ul><li>Realized vs. unrealized income. </li></ul><ul><li>Marketable securities are marked to market, but not others. </li></ul><ul><li>Imputed costs: economic income recognizes the cost of equity as well as the cost of debt, while accounting income does not. </li></ul>