Financial Statements
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Transcript of Financial Statements
Financial StatementsFinancial Statements
Income StatementsIncome Statements RevenuesRevenues Expenses (expired costs)Expenses (expired costs) Timing of recordingTiming of recording
at time of saleat time of sale
at time of useat time of use
fixed and variablefixed and variable Non Cash ItemsNon Cash Items
Financial Statements Financial Statements
Prepare an Income StatementPrepare an Income Statement RevenuesRevenues
Sales Sales CostsCosts
OperatingOperatingNon Cash (Depreciation)Non Cash (Depreciation)Interest (Finance Charge)Interest (Finance Charge)TaxesTaxes
Net IncomeNet IncomeThe bottom line…but we want cash flow!The bottom line…but we want cash flow!
Financial StatementsFinancial Statements
The Balance SheetThe Balance Sheet AssetsAssets LiabilitiesLiabilities Owner’s EquityOwner’s Equity Assets Assets ≡≡ Liabilities + Owner’s Equity Liabilities + Owner’s Equity
This is an identityThis is an identity
It always holds and is a check on the It always holds and is a check on the fundamental nature of who owns the fundamental nature of who owns the business (assets)business (assets)
Financial StatementsFinancial Statements
Portions of the Balance SheetPortions of the Balance Sheet
Net Working CapitalNet Working Capital Current AssetsCurrent Assets Current LiabilitiesCurrent Liabilities LiquidityLiquidity NWC = Current Assets - Current LiabilitiesNWC = Current Assets - Current Liabilities
Debt versus EquityDebt versus Equity fixed claimsfixed claims residual claimsresidual claims
Financial StatementsFinancial Statements
Market Value versus Book ValueMarket Value versus Book Value
Financial StatementsFinancial Statements
Build from Current Assets and ClaimsBuild from Current Assets and Claims Current Assets (In order of conversion to Current Assets (In order of conversion to
cash)cash) Long-term Assets Long-term Assets Current Liabilities (In order of anticipated Current Liabilities (In order of anticipated
payment of claim)payment of claim) Long-term LiabilitiesLong-term Liabilities Owner’s EquityOwner’s Equity Identity CheckIdentity Check
Assets = Liabilities + Owner’s EquityAssets = Liabilities + Owner’s Equity
Financial StatementsFinancial Statements
Cash FlowCash Flow the difference between accounting cash flow the difference between accounting cash flow
and financial cash flowand financial cash flow segments of cash flowsegments of cash flow
operationsoperations
capital spendingcapital spending
working capitalworking capital
shareholders/bondholdersshareholders/bondholders Importance of taxes and depreciationImportance of taxes and depreciation
Cash Flow From OperationsCash Flow From Operations
Textbook usesTextbook uses
Net Profit + Net Profit + DepreciationDepreciation
This is a special case This is a special case when you have no when you have no interest expenseinterest expense
This later is wrong if This later is wrong if you want to do Cash you want to do Cash Flow StatementsFlow Statements
Correct ApproachCorrect Approach
EBIT + Depreciation – EBIT + Depreciation – Taxes = Cash Flow Taxes = Cash Flow from Operationsfrom Operations
Then to get Cash Then to get Cash Flow Statement Flow Statement Correct you put Correct you put Interest Expense with Interest Expense with Cash Flow From Cash Flow From Financing ActivitiesFinancing Activities
Statement of Cash FlowsStatement of Cash Flows
Cash Flow Statement in three partsCash Flow Statement in three partsCash Flow from Operating Activities:Cash Flow from Operating Activities:
Cash Flow from Operations Cash Flow from Operations (EBIT + Depreciation – Taxes)(EBIT + Depreciation – Taxes)Changes in Net Working CapitalChanges in Net Working Capital
Cash Flow from Investing Activities:Cash Flow from Investing Activities:Net Change in Gross Fixed Assets (Purchases and Sales)Net Change in Gross Fixed Assets (Purchases and Sales)
Cash Flow from Financing ActivitiesCash Flow from Financing Activities::Net Change in Debt (Sales and Retirements)Net Change in Debt (Sales and Retirements)Net Change in Common Stock (Sales and Purchases)Net Change in Common Stock (Sales and Purchases)Net Change in Preferred Stock (Sales and Purchases)Net Change in Preferred Stock (Sales and Purchases)Dividends PaidDividends PaidInterest ExpenseInterest Expense
Depreciation and Salvage CFDepreciation and Salvage CF
Depreciation using MACRSDepreciation using MACRS Life of AssetLife of Asset Depreciation Schedule (page 89)Depreciation Schedule (page 89) Assumption: No Salvage ValueAssumption: No Salvage Value
Disposal of Asset – Cash FlowDisposal of Asset – Cash Flow Full Depreciated AssetFull Depreciated Asset Partially Depreciated AssetPartially Depreciated Asset Short-cut…book value or basis for gain/lossShort-cut…book value or basis for gain/loss
Financial StatementsFinancial Statements
TaxesTaxes Corporate TaxesCorporate Taxes Personal TaxesPersonal Taxes User TaxesUser Taxes Sales TaxesSales Taxes Property TaxesProperty Taxes
Average Tax versus Marginal TaxAverage Tax versus Marginal Tax tax total divided by taxable incometax total divided by taxable income tax on the next dollar of earningstax on the next dollar of earnings