Business Activities and Financial Statements
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Transcript of Business Activities and Financial Statements
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7/29/2019 Business Activities and Financial Statements
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Reformulated Balance sheet
Assets
Operating assets
Financial assets
Total Assets
Liabilities and Equity
Operating liabilities
Financial obligations
Common stockholders equity
Total OL + F
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also called incurred for the purpose of operation
borowed capital (debt) + preference shares
OA
FA
A + FA
OL
FO
CSE
+ CSE
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7/29/2019 Business Activities and Financial Statements
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Reformulated Balancesheet
Operating Assets
Operating assetsOperating liabilities
Net operating assets
Financial Obligations & Owne
Financial liabilities
Financial assets
Net financial obligatio
Common equity
Total NFO & Equity
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OA(OL)
NOA
rs Equity
FO
(FA)
s NFO
CSE
NFO + CSE
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7/29/2019 Business Activities and Financial Statements
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Income Statem
Operating income
Operating revenue
Operating expense
Net financial expense
Financial expenseFinancial income
Earnings
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the P and L statementent
OR
(OE) OI
FE(FI) NFE
Earn
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7/29/2019 Business Activities and Financial Statements
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1
Assets 2005 2006 Liability and Equity
Operating Assets 189.90 205.30 Operating LiabilitiesFinancial Assets 42.00 45.70 Financial liabilities
Shareholder's Equity
Total 231.90 251.00 Total
Operating revenue 134.5
Operating Expenses -112.8
Operating income 21.7
Interest revenue 2.50
Interest expense -9.6 -0.07973422
Net income 14.60 if entire incom
Reformulate the balancesheet and answer the following que
1 How much was paid as net dividends in 2006?
2 What is the free cash flow for 2006?
3 What was the return on net operating assets in 2006?
4 What was the firm's net borrowing cost?
Isolate financial from operating activities
Balance Sheet
Income Statement 2006
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regrouping
2005 2006
34.20 40.60 NOA120.40 120.40
77.30 90.00
231.90 251.00
NBC (net b -7.10
To cross check
e is paid as dividendthere wont be any change in equity from 2005 to 2006Therefore only the remainin
stions
1.90 1.90 Netincome - (change i
12.70
earlier FCF it is Operating cash flow - Capex.
Now it can be arived from our regrouping .. Operating
income -(change in net operating assets) Also called capital em
13.18% is the real return from operations
9.505%
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2005 2006 2005 2006
155.70 164.70 NFO 78.40 74.70EQUITY 77.30 90.00
155.70 164.70
To reduce this - borrow thru ECB or Japan where the cost of borrowing is less
or Invest wisely and thereby ur cash is properly investing
Value of firm is going to increase only through operating activities
share holder's equity)
loyed
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7/29/2019 Business Activities and Financial Statements
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Current Assets
Cash and Cash equivalents 828.00
Short term investments 400.80
Accounts receivable 2120.20
Inventories 1633.60Deferred income tax 165.00
Prepaid expenses 364.40
Total current assets 5512.00
Property, Plant and equipment 1586.90
Intangible assets 366.30
Goodwill 135.40
Deferred income tax 291.00
Total assets 7891.60
Current liabilities
Current portion of long term debt 6.60
Notes payable 146.00
Accounts payable 763.80
Accrued liabilities 974.40
Income tax payable 118.20
Total current liabilities 2009.00
Long term debt 682.40
Deferred income taxes 418.20
Preference stock 0.30
Shareholders equity 4781.70
Total liabilities and shareholders equity 7891.60
Reclassify under the following groupings
Net Operating Assets 5481.80
Net financial Obligations 700.10 NFO + Common stock
Common stock holder's equity 4781.70
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another exercise on regrouping
anything invested under financing - that will earn u a revenue or financial assets
OPERATING ASSETS FINANCIAL ASSETS
5111.20
quity = NOA
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Reformulate the following balance sheet and income statement for
manufacturing concern. Amounts are in millions. (Tax rate is 36%)
Assets Liabilities a
Operating Cash 23 Accounts p
Cash equivalents 435 Accrued Ex
Accounts receivable 1827 Deferred T
Inventory 2876
PPE 3567 Long-term
Preferred s
Common e
Total 8728
Revenues 7493
Operating expenses 6321
Interest expense 221
Income before tax 951
Income tax paid 342.36
Net income 608.64
Preferred dividend 26
Net income 582.64
Balance Sheet
Income statement
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Reformulated Balance sheet
nd Equity NOA 4787
or capital employed
ayable 1245
penses 1549 Total 4787
x liability 712
debt 3678
tock 432
quity 1112
8728
reformulating the income statement
Revenue
Operating Expences
Operating Income before Tax
Tax at 36%
Operating Income After Tax or NOPAT
Financial expense or Interest Expense(FE)
Outflowso negative 221
Tax Benefit at 36% ..So subtract it..that gives u t 79.56
So total outflow
Preference shares divident
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NFO 3675
Common stock equity 1112
Total 4787
7493
6321
1172 (-)
421.92
750.08 (-) Key driver of the residual operating incomeSo only we are isolating
141.44
608.64 (-)
26 Shown differently as it wont give u any tax benefitSo only ppl go fo
582.64 (-)
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it
r long term debts.eventhough preference shares are there
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Pepsico reported the following income statement for the year in million dollars
Net sales 20367
Operating Expenses -17484Restructuring charges -65
Operating Profit 2818
Gain on sale of assets 1083
Interest expense -363
Interest income 118
3656
Income tax 1316.16
Net income 2339.84
(Income tax rate 36%)
a Reformulate the statement to distinguish operating items from financing items
and operating income from other income.
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3 things in reformulating income - 1) NOPAT distinction
2) Other income to be shown separately
3) Financial income
NOPAT
Revenue
Operating ExpencesOperating Income before Tax
Tax at 36%
Operating Income After Tax or NOPAT
Other Income Category
Gain on sale of Asset
Restructuring charges
Other Income before Tax
Less Tax at 36%
Other Income after Tax
Financial Income (also called the Net Borrowing cost)
Net Financial Expense -245
Tax Benefit at 36% -88.2
So total outflow or Net Borrowing COST -156.8
Total (should be equal to the NET Income as given in the case)
Essentially what we saw given is regrouped under 3 categories now
cross verifying the tax components
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20367
-174842883
1037.88
1845.12
1083
-65
1018
366.48
651.52 (-)
-156.8
2339.84
1316.16 got as the same as in the given case
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HP reported earnings that were consistently growing at 20% per year. The growth rate
slowed down in 1990s. Earnings for the third quarter of 1998 were reported flat when
compared with the same period during the previous year. The income statement for HP
1998 third quarter was as under:
1998 1997
Net revenueProducts 9213 8900
Services 1766 1571
Total 10979 10471
Cost and expenses
COGS 7505 7053
R & D 815 777
S,G & A 1885 1816
10205 9646
Earnings from operations 774 825
Interest income 154 109
Interest Expense 54 53
Earnings Before tax 874 881
Provision for tax 253 264
Net earnings 621 617
Income tax rate 38%
a What is wrong with the interpretation that earnings were flat in 1998?
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Year Ending 31st March 2006 2007 2008 2009 2010
SOURCES OF FUNDS
Equity 376 376 377 377 382Reserves and Surplus 8686 10061 11681 13358 13683
Shareholders Funds 9061 10437 12058 13735 14064
Loan Funds 120 201 214 178 108
Deferred Tax Net 325 473 545 867 785
FUNDS EMPLOYED 9506 11111 12817 14780 14957
APPLICATION OF FUNDS
Fixed Assets (Gross) 6471 8000 10087 11773 12977
Depreciation 2065 2390 2791 3287 3825
Fixed Assets (Net) 4405 5611 7296 8486 9151
Investments 3517 3068 2935 2838 5727
Net Current Assets 1584 2432 2587 3456 79
NET ASSETS EMPLOYED 9506 11111 12817 14780 14957
Operating income after tax 6654 7778 8972 10346 10470
Show the trends in RNOA
Given below are the data pertaining to ITC Ltd
Reformulate the balancesheet on the lines of Business activities
(Rupees Crores)
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Consider the following Comparative Balancesheets
for the Liquidity company
2007
Operating cash 435000
Accounts receivable 40000
Inventories 100000
Land 400000Plant 200000
Less depreciation -100000
100000
Total 1075000
Accounts payable 25000
Equity capital 1050000
1075000
The company paid a dividend of 150000 during 2007 and
there were no equity contributions or stock repurchase
a. Calcualte Free cash flow generated during 2007
b. Where did the increase in cash come from?
Explain the change in cash balance
c. How would your calculation in part (a) change
if the firm invested in short term deposits
than paying a dividend?
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2006
50000
0
0
800000200000
0
200000
1050000
0
1050000
1050000