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CHAPTER 2 Financial Statements_ Cash Flow_ and Taxes

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CHAPTER 2 Financial Statements_ Cash Flow_ and Taxes Powered By Docstoc
					CHAPTER 3
Financial Statements, Cash Flow,
 and Taxes




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Outline


n   The Annual Report
n   Balance Sheet
n   Income statement
n   Statement of cash flows
n   Statement of Stockholder’s Equity
n   Free Cash Flow
n   Income Taxes

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    The Annual Report

   A report issued annually by a corporation
    to its stockholders. It contains basic
    financial statements as well as
    management’s analysis of the firm’s past
    operations and future prospects.




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    The Annual Report

 Balance sheet – shows what assets company owns
  and who has claims on those assets as of a given
  date.
 Income statement – shows firm’s sales and costs
  (and thus profit) during some past period.
 Statement of stockholder’s equity – shows how
  the amount of equity changed during the period.
 Statement of cash flows – shows what affected
  the change in the amount of cash.


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Net Working Capital

   Current Assets are often called working capital
    because they are used and replaced (“turned
    over”) throughout the year.
   Net working capital = Current assets –
    (Payables + Accruals)
    ◦ Payables and Accruals are like “free” loans since they
      don’t bear any interest.
    ◦ NWC is the amount of money company must obtain
      from non-free sources to fund its current assets.
    ◦ Allied Food: $1000 - ($60 + $140) = $800


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Market Value VS Book Value
 Book Values are the values of assets
  calculated using methods of GAAP and
  put in the balance sheet.
 Market Values are the current price of
  an asset in the market if it were to put up
  for sale.




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Sources of Funds
   Debt or Liabilities:
    ◦ Long-term debt – Interest bearing. Ex: bonds, loans
    ◦ Current debt – Non-interest bearing. Ex: payables, accruals
 Preferred Stock - Part of equity that is a hybrid of
  debt and common stock
 Common Stock – Portions of ownership of a
  company
 In the event of bankruptcy priority of payback are as
  follows: debt-preferred stocks-common stocks



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Income at different stages
   Operating Income: Income from firm’s
    regular core business. It is also called
    Earnings Before Interest and Tax (EBIT).
    ◦ Companies can have same EBIT but different
      Net Income because of different Interest
      amount. The more debt a firm has the more
      interest they have to pay which changes the
      Net Income.



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Income at different stages
   Depreciation: The charge to reflect the cost
    of assets used up in the production process.
    Depreciation is not a cash outflow.
   Amortization: A noncash charge similar to
    depreciation except that it is used to write off
    the costs of intangible assets.
   Since these are non-cash so Earnings Before
    Interest Tax Depreciation and Amortization
    (EBITDA) is also an important indicator of firm
    performance

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    Statement of Cash Flows

 Operating Activities: Deals with items
  that occur as part of normal ongoing
  operation.
 Investing Activities: Activities involving
  long-term assets.
 Financing Activities: Activities involving
  long-term debt or equity financing.

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    Statement of Stockholder’s Equity




   Retained Earnings represent a claim against
    assets. It does not represent cash and are not
    available for dividends or anything else, only for
    investing activities
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Free Cash Flow (FCF)
 FCF is the amount of cash that could be
  withdrawn from a firm without harming
  it’s ability to operate and to produce
  future cash flow.
 FCF = EBIT(1-T) + Depreciation –
  (Capital expenditure + Increase in NWC)




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    Free Cash Flow

   EBIT(1-T) = Net Operating Profit After Tax (NOPAT)

   Capital Expenditure = Change in Long-term assets

   Increase in NWC = Change in current assets – Change in
    payables and accruals

   FCF = $283.8(1-0.4) + $100 – ([$1000 - $870] + [($1000
    - $810) – ($200 - $160)]) = -$9.72



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