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1、Financial Statements and Cash Flow,Chapter 2,Key Concepts and Skills,Understand the information provided by financial statements Differentiate between book and market values Know the difference between average and marginal tax rates Know the difference between accounting income and cash flow Calcula
2、te a firms cash flow,Chapter Outline,2.1 The Balance Sheet 2.2 The Income Statement 2.3 Taxes 2.4 Net Working Capital 2.5 Financial Cash Flow 2.6 The Accounting Statement of Cash Flows 2.7 Cash Flow Management,Sources of Information,Annual reports Wall Street Journal Internet NYSE () NASDAQ () Textb
3、ook () SEC EDGAR 10K & 10Q reports,2.1 The Balance Sheet,An accountants snapshot of the firms accounting value at a specific point in time The Balance Sheet Identity is: Assets Liabilities + Stockholders Equity,U.S. Composite Corporation Balance Sheet,2010,2009,2010,2009,Current assets:,Current Liab
4、ilities:,Cash and equivalents,$140,$107,Accounts payable,$213,$197,Accounts receivable,294,270,Notes payable,50,53,Inventories,269,280,Accrued expenses,223,205,Other,58,50,Total current liabilities,$486,$455,Total current assets,$761,$707,Long-term liabilities:,Fixed assets:,Deferred taxes,$117,$104
5、,Property, plant, and equipment,$1,423,$1,274,Long-term debt,471,458,Less accumulated depreciation,(550),(460),Total long-term liabilities,$588,$562,Net property, plant, and equipment,873,814,Intangible assets and other,245,221,Stockholders equity:,Total fixed assets,$1,118,$1,035,Preferred stock,$3
6、9,$39,Common stock ($1 par value),55,32,Capital surplus,347,327,Accumulated retained earnings,390,347,Less treasury stock,(26),(20),Total equity,$805,$725,Total assets,$1,879,$1,742,Total liabilities and stockholders equity,$1,879,$1,742,The assets are listed in order by the length of time it would
7、normally take a firm with ongoing operations to convert them into cash. Clearly, cash is much more liquid than property, plant, and equipment.,Balance Sheet Analysis,When analyzing a balance sheet, the Finance Manager should be aware of three concerns: Liquidity Debt versus equity Value versus cost,
8、Liquidity,Refers to the ease and quickness with which assets can be converted to cashwithout a significant loss in value Current assets are the most liquid. Some fixed assets are intangible. The more liquid a firms assets, the less likely the firm is to experience problems meeting short-term obligat
9、ions. Liquid assets frequently have lower rates of return than fixed assets.,Debt versus Equity,Creditors generally receive the first claim on the firms cash flow. Shareholders equity is the residual difference between assets and liabilities.,Value versus Cost,Under Generally Accepted Accounting Pri
10、nciples (GAAP), audited financial statements of firms in the U.S. carry assets at cost. Market value is the price at which the assets, liabilities, and equity could actually be bought or sold, which is a completely different concept from historical cost.,2.2 The Income Statement,Measures financial p
11、erformance over a specific period of time The accounting definition of income is: Revenue Expenses Income,U.S.C.C. Income Statement,Total operating revenues,Cost of goods sold,Selling, general, and administrative expenses,Depreciation,Operating income,Other income,Earnings before interest and taxes,
12、Interest expense,Pretax income,Taxes,Current: $71,Deferred: $13,Net income,Addition to retained earnings $43,Dividends: $43,The operations section of the income statement reports the firms revenues and expenses from principal operations.,$2,262,1,655,327,90,$190,29,$219,49,$170,84,$86,Total operatin
13、g revenues,$2,262,Cost of goods sold,1,655,Selling, general, and administrative expenses,327,Depreciation,90,Operating income,$190,Other income,29,Earnings before interest and taxes,$219,Interest expense,49,Pretax income,$170,Taxes,84,Current: $71,Deferred: $13,Net income,$86,Addition to retained ea
14、rnings: $43,Dividends: $43,The non-operating section of the income statement includes all financing costs, such as interest expense.,U.S.C.C. Income Statement,Total operating revenues,Cost of goods sold,Selling, general, and administrative expenses,Depreciation,Operating income,Other income,Earnings
15、 before interest and taxes,Interest expense,Pretax income,Taxes,Current: $71,Deferred: $13,Net income,Addition to retained earnings: $43,Dividends: $43,Usually a separate section reports the amount of taxes levied on income.,$2,262,1,655,327,90,$190,29,$219,49,$170,84,$86,U.S.C.C. Income Statement,T
16、otal operating revenues,Cost of goods sold,Selling, general, and administrative expenses,Depreciation,Operating income,Other income,Earnings before interest and taxes,Interest expense,Pretax income,Taxes,Current: $71,Deferred: $13,Net income,Retained earnings: $43,Dividends: $43,Net income is the “b
17、ottom line.”,$2,262,1,655,327,90,$190,29,$219,49,$170,84,$86,U.S.C.C. Income Statement,Income Statement Analysis,There are three things to keep in mind when analyzing an income statement: Generally Accepted Accounting Principles (GAAP) Non-Cash Items Time and Costs,GAAP,The matching principle of GAA
18、P dictates that revenues be matched with expenses. Thus, income is reported when it is earned, even though no cash flow may have occurred.,Non-Cash Items,Depreciation is the most apparent. No firm ever writes a check for “depreciation.” Another non-cash item is deferred taxes, which does not represe
19、nt a cash flow. Thus, net income is not cash.,Time and Costs,In the short-run, certain equipment, resources, and commitments of the firm are fixed, but the firm can vary such inputs as labor and raw materials. In the long-run, all inputs of production (and hence costs) are variable. Financial accoun
20、tants do not distinguish between variable costs and fixed costs. Instead, accounting costs usually fit into a classification that distinguishes product costs from period costs.,2.3 Taxes,The one thing we can rely on with taxes is that they are always changing Marginal vs. average tax rates Marginal
21、the percentage paid on the next dollar earned Average the tax bill / taxable income Other taxes,Marginal versus Average Rates,Suppose your firm earns $4 million in taxable income. What is the firms tax liability? What is the average tax rate? What is the marginal tax rate? If you are considering a p
22、roject that will increase the firms taxable income by $1 million, what tax rate should you use in your analysis?,2.4 Net Working Capital,Net Working Capital Current Assets Current Liabilities NWC usually grows with the firm,U.S.C.C. Balance Sheet,2010,2009,2010,2009,Current assets:,Current Liabiliti
23、es:,Cash and equivalents,$140,$107,Accounts payable,$213,$197,Accounts receivable,294,270,Notes payable,50,53,Inventories,269,280,Accrued expenses,223,205,Other,58,50,Total current liabilities,$486,$455,Total current assets,$761,$707,Long-term liabilities:,Fixed assets:,Deferred taxes,$117,$104,Prop
24、erty, plant, and equipment,$1,423,$1,274,Long-term debt,471,458,Less accumulated depreciation,(550),(460,Total long-term liabilities,$588,$562,Net property, plant, and equipment,873,814,Intangible assets and other,245,221,Stockholders equity:,Total fixed assets,$1,118,$1,035,Preferred stock,$39,$39,
25、Common stock ($1 par value),55,32,Capital surplus,347,327,Accumulated retained earnings,390,347,Less treasury stock,(26),(20),Total equity,$805,$725,Total assets,$1,879,$1,742,Total liabilities and stockholders equity,$1,879,$1,742,Here we see NWC grow to $275 million in 2010 from $252 million in 20
26、09.,This increase of $23 million is an investment of the firm.,2.5 Financial Cash Flow,In finance, the most important item that can be extracted from financial statements is the actual cash flow of the firm. Since there is no magic in finance, it must be the case that the cash flow received from the
27、 firms assets must equal the cash flows to the firms creditors and stockholders. CF(A) CF(B) + CF(S),U.S.C.C. Financial Cash Flow,Cash Flow of the Firm,Operating cash flow,$238,(Earnings before interest and taxes,plus depreciation minus taxes),Capital spending,-173,(Acquisitions of fixed assets,minu
28、s sales of fixed assets),Additions to net working capital,-23,Total,$42,Cash Flow of Investors in the Firm,Debt,$36,(Interest plus retirement of debt,minus long-term debt financing),Equity,6,(Dividends plus repurchase of,equity minus new equity financing),Total,$42,Operating Cash Flow: EBIT $219 Dep
29、reciation $90 Current Taxes -$71 OCF $238,U.S.C.C. Financial Cash Flow,Cash Flow of the Firm,Operating cash flow,$238,(Earnings before interest and taxes,plus depreciation minus taxes),Capital spending,(Acquisitions of fixed assets,minus sales of fixed assets),Additions to net working capital,Total,
30、Cash Flow of Investors in the Firm,Debt,(Interest plus retirement of debt,minus long-term debt financing),Equity,(Dividends plus repurchase of,equity minus new equity financing),Total,Capital Spending Purchase of fixed assets $198 Sales of fixed assets -$25 Capital Spending $173,-173,-23,$42,$36,6,$
31、42,U.S.C.C. Financial Cash Flow,Cash Flow of the Firm,Operating cash flow,$238,(Earnings before interest and taxes,plus depreciation minus taxes),Capital spending,(Acquisitions of fixed assets,minus sales of fixed assets),Additions to net working capital,Total,Cash Flow of Investors in the Firm,Debt
32、,(Interest plus retirement of debt,minus long-term debt financing),Equity,(Dividends plus repurchase of,equity minus new equity financing),Total,NWC grew from $275 million in 2010 from $252 million in 2009. This increase of $23 million is the addition to NWC.,-173,-23,$42,$36,6,$42,U.S.C.C. Financia
33、l Cash Flow,Cash Flow of the Firm,Operating cash flow,$238,(Earnings before interest and taxes,plus depreciation minus taxes),Capital spending,(Acquisitions of fixed assets,minus sales of fixed assets),Additions to net working capital,Total,Cash Flow of Investors in the Firm,Debt,(Interest plus reti
34、rement of debt,minus long-term debt financing),Equity,(Dividends plus repurchase of,equity minus new equity financing),Total,-173,-23,$42,$36,6,$42,U.S.C.C. Financial Cash Flow,Cash Flow of the Firm,Operating cash flow,$238,(Earnings before interest and taxes,plus depreciation minus taxes),Capital s
35、pending,(Acquisitions of fixed assets,minus sales of fixed assets),Additions to net working capital,Total,Cash Flow of Investors in the Firm,Debt,(Interest plus retirement of debt,minus long-term debt financing),Equity,(Dividends plus repurchase of,equity minus new equity financing),Total,Cash Flow
36、to Creditors Interest $49 Retirement of debt 73 Debt service 122 Proceeds from new debt sales -86 Total $36,-173,-23,$42,$36,6,$42,U.S.C.C. Financial Cash Flow,Cash Flow of the Firm,Operating cash flow,$238,(Earnings before interest and taxes,plus depreciation minus taxes),Capital spending,(Acquisit
37、ions of fixed assets,minus sales of fixed assets),Additions to net working capital,Total,Cash Flow of Investors in the Firm,Debt,(Interest plus retirement of debt,minus long-term debt financing),Equity,(Dividends plus repurchase of,equity minus new equity financing),Total,Cash Flow to Stockholders D
38、ividends $43 Repurchase of stock 6 Cash to Stockholders 49 Proceeds from new stock issue -43 Total $6,-173,-23,$42,$36,6,$42,U.S.C.C. Financial Cash Flow,Cash Flow of the Firm,Operating cash flow,$238,(Earnings before interest and taxes,plus depreciation minus taxes),Capital spending,(Acquisitions o
39、f fixed assets,minus sales of fixed assets),Additions to net working capital,Total,Cash Flow of Investors in the Firm,Debt,(Interest plus retirement of debt,minus long-term debt financing),Equity,(Dividends plus repurchase of,equity minus new equity financing),Total,The cash flow received from the f
40、irms assets must equal the cash flows to the firms creditors and stockholders:,-173,-23,$42,$36,6,$42,2.5 The Statement of Cash Flows,There is an official accounting statement called the statement of cash flows. This helps explain the change in accounting cash, which for U.S. Composite is $33 millio
41、n in 2010. The three components of the statement of cash flows are: Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities,U.S.C.C. Cash Flow from Operations,To calculate cash flow from operations, start with net income, add back non-cash items li
42、ke depreciation and adjust for changes in current assets and liabilities (other than cash).,Operations,Net Income,Depreciation,Deferred Taxes,Changes in Assets and Liabilities,Accounts Receivable,Inventories,Accounts Payable,Accrued Expenses,Other,Total Cash Flow from Operations,$86,90,13,-24,11,16,
43、18,-8,U.S.C.C. Cash Flow from Investing,Cash flow from investing activities involves changes in capital assets: acquisition of fixed assets and sales of fixed assets (i.e., net capital expenditures).,U.S.C.C. Cash Flow from Financing,Cash flows to and from creditors and owners include changes in equ
44、ity and debt.,Retirement of debt (includes notes),Proceeds from long-term debt sales,-$73,86,U.S.C.C. Statement of Cash Flows,The statement of cash flows is the addition of cash flows from operations, investing, and financing.,Operations,Net Income,Depreciation,Deferred Taxes,Changes in Assets and L
45、iabilities,Accounts Receivable,Inventories,Accounts Payable,Accrued Expenses,$86,90,13,-24,11,16,18,Other,Total Cash Flow from Operations,$202,-8,Acquisition of fixed assets,Sales of fixed assets,Total Cash Flow from Investing Activities,-$198,25,-$173,Investing Activities,Financing Activities,Retir
46、ement of debt (includes notes),Proceeds from long-term debt sales,-$73,86,2.7 Cash Flow Management,Earnings can be manipulated using subjective decisions required under GAAP Total cash flow is more objective, but the underlying components may also be “managed” Moving cash flow from the investing sec
47、tion to the operating section may make the firms business appear more stable,Quick Quiz,What is the difference between book value and market value? Which should we use for decision making purposes? What is the difference between accounting income and cash flow? Which do we need to use when making decisions? What is the difference between average and marginal tax rates? Which should we use when making financial decisions? How do we determine a firms cash flows? What are the equations, and where do we find the information?,