Principals of Managerial Finance 9th Edition Chapter 3 Financial Statements, Taxes, Depreciation,...
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Transcript of Principals of Managerial Finance 9th Edition Chapter 3 Financial Statements, Taxes, Depreciation,...
Principals of Managerial Finance
9th Edition
Chapter 3
Financial Statements, Taxes, Depreciation, and Cash Flow
Learning Objectives• Review the format and key components of the
income statement, the balance sheet, the
statement of retained earnings, the statement
of cash flows, and the procedures for
consolidating international financial statements.
• Understand the effect of depreciation and other
non-cash charges on the firm’s cash flows.
Learning Objectives• Determine the amount of depreciation allowed each
year for tax purposes using the modified accelerated
cost recovery system (MACRS).
• Analyze the firm’s cash flows and develop and
interpret the statement of cash flows.
• The income statement provides a financial summary
of a company’s operating results during a specified
period.
• Although they are prepared annually for reporting
purposes, they are generally computed monthly by
management and quarterly for tax purposes.
Financial StatementsThe Income Statement
Financial Statements
• The balance sheet presents a summary of a firm’s
financial position at a given point in time.
• Assets indicate what the firm owns, equity represents
the owners’ investment, and liabilities indicate what
the firm has borrowed.
Financial StatementsThe Balance Sheet
Financial Statements
Financial Statements
• The statement of retained earnings reconciles the net
income earned and dividends paid during the year,
with the change in retained earnings.
Financial StatementsStatement of Retained Earnings
Financial Statements
• The statement of cash flows provides a summary of
the cash flows over the period of concern, typically the
year just ended.
• This statement not only provides insight into a
company’s investment, financing and operating
activities, but also ties together the income statement
and previous and current balance sheets.
Financial StatementsStatement of Cash Flows
Depreciation
• Depreciation is the systematic charging of a portion of
the costs of fixed assets against annual revenues over
time.
• Depreciation for tax purposes is determined by using
the modified accelerated cost recovery system
(MACRS).
Depreciation
• Financial managers are much more concerned with
cash flows rather than profits.
• To adjust the income statement to show cash flows
from operations, all non-cash charges should be
added back to net profit after taxes.
• By lowering taxable income, depreciation and other
non-cash expenses create a tax shield and enhance
cash flow.
Depreciation & Cash Flow
Depreciation
• Under the basic MACRS procedures, the depreciable
value of an asset is its full cost, including outlays for
installation.
• No adjustment is required for expected salvage value.
• For tax purposes, the depreciable life of an asset is
determined by its MACRS recovery predetermined
period.
• MACRS rates are shown in Table 3.8 on the following
slides.
Depreciable Value & Depreciable Life
Depreciation
DepreciationAn Example
Elton Corporation acquired, for an installed cost of
$40,000, a machine having a recovery period of 5 years.
Using the applicable MACRS rates, the depreciation
expense each year is as follows:
Year Cost MACRS Rates Depreciation
1 40,000$ 20% 8,000$
2 40,000$ 32% 12,800$
3 40,000$ 19% 7,600$
4 40,000$ 12% 4,800$
5 40,000$ 12% 4,800$
6 40,000$ 5% 2,000$
Totals 100% 40,000$
Analyzing the Firm’s Cash FlowsClassifying Sources & Uses of Cash
• The statement of cash flows essentially summarizes the
sources and uses of cash during a given period.
Analyzing the Firm’s Cash FlowsInterpreting the Statement of Cash Flows
• The statement of cash flows ties the balance sheet at
the beginning of the period with the balance sheet at
the end of the period after considering the
performance of the firm during the period through the
income statement.
• “Net Increase (decrease) in cash and marketable
securities should be equivalent to the difference
between the cash and marketable securities on the
balance sheet at the beginning of the year and the
end of the year.