Download Presentation - The PPT/PDF document "Financial statements and cash flow" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Presentation on theme: "Financial statements and cash flow"— Presentation transcript:
Slide1
Financial statements and cash flow
(chapter 3)
Slide2
Sources of Information
Annual reports
Wall Street Journal
Internet
www.yahoo.com
www.smartmoney.com
Mergent online
SEC
EDGAR
10K & 10Q reports
Slide3
The Annual Report
Balance sheet – provides a snapshot of a firm’s financial position at one point in time.Income statement – summarizes a firm’s revenues and expenses over a given period of time.Statement of cash flows – reports the impact of a firm’s activities on cash flows over a given period of time.Statement of stockholders’ equity – shows how much of the firm’s earnings were retained, rather than paid out as dividends.
Slide4
Overview of D’Leon Inc.
Snack food company that underwent major expansion in 2014. So far, expansion results have been unsatisfactory.Company’s cash position is weak.Suppliers are being paid late.Bank has threatened to cut off credit.Board of Directors has ordered that changes must be made!
Slide5
Balance Sheet: Assets
2015
7,282
632,160
1,287,360
1,926,802
1,202,950
263,160
939,790
2,866,592
2014
57,600
351,200
715,200
1,124,000
491,000
146,200
344,800
1,468,800
Cash
A/R
Inventories
Total CA
Gross FA
Less: Dep.
Net FA
Total Assets
Slide6
Balance Sheet: Liabilities and Equity
Accts payable
Notes payable
Accruals
Total CL
Long
-
term debt
Common stock
Retained earnings
Total Equity
Total L & E
2015
524,160
636,808
489,600
1,650,568
723,432
460,000
32,592
492,592
2,866,592
2014
145,600
200,000
136,000
481,600
323,432
460,000
203,768
663,768
1,468,800
Slide7
Income Statement
2015
2014
Sales
$6,034,000
$3,432,000
COGS
5,528,000
2,864,000
Other expenses
519,988
358,672
Total oper. costs excl.
deprec. & amort.
$
6,047,988
$3,222,672
Deprec
iation
and amort
ization
116,960
18,900
EBIT
(
$
1
30,948)
$
190,428
Interest expense
136,012
43,828
EBT
($
266,960)
$
146,600
Taxes
(106,784
)
58,640
Net income
(
$
160,176
)
$
87,960
Slide8
Other Data
No. of sharesEPSDPSStock price
2015
100,000-$1.602
$0.11
$
2.25
2014
100,000
$0.88
$0.22
$
8.50
Slide9
Did the expansion create additional after-tax operating income?
AT operating income = EBIT(1 – Tax rate) AT operating income15 = -$130,948(1 – 0.4) = -$130,948(0.6) = -$78,569
AT operating income
14 = $114,257
Slide10
What effect did the expansion have on net operating working capital?
Accounting statements insufficient for evaluating managers’ performance because they do not reflect market values.Performance MeasuresMVA = Difference between market value and book value of a firm’s common equity.P0 x Number of shares – Book value.
EVA = Estimate of a business’ true economic
profit for a given year.Investor-supplied capital
Cost of capital
EBIT(1 – T) –
x
Slide13
What was D’Leon’s MVA in 2014 and 2015?
MVA14 = ($8.50 x 100,000) – $663,768 = $186,232.MVA15 = ($2.25 x 100,000) – $492,592 = -$267,592.
Shareholder wealth has been destroyed!
Slide14
Federal Income Tax System
Slide15
Corporate and Personal Taxes
Both have a progressive structure (the higher the income, the higher the marginal tax rate).CorporationsRates begin at 15% and rise to 35% for corporations with income over $10 million, although corporations with income between $15 million and $18.33 million pay a marginal tax rate of 38%.Also subject to state tax (around 5%).
Slide16
Tax treatment of various uses and sources of funds
Interest paid – tax deductible for corporations (paid out of pre-tax income), but usually not for individuals (interest on home loans being the exception).
Interest earned – usually fully taxable (an exception being interest from a (muni”).
Dividends paid – paid out of after-tax income.
Dividends received – taxed as ordinary income for individuals (“double taxation”). A portion of dividends received by corporations is tax excludable, in order to avoid “triple taxation”.
Slide17
Tax Treatment of Various Uses and Sources of Funds
Dividends received: most investors pay 15% taxes.Investors in the 10% or 15% tax bracket pay 0% on qualified dividends.Single individuals with incomes over $400,000 and married couples filing jointly with incomes over $450,000 pay 20% taxes on dividends.Dividends are paid out of net income which has already been taxed at the corporate level, this is a form of “double taxation”. A portion of dividends received by corporations is tax excludable, in order to avoid “triple taxation.”
Slide18
More Tax Issues
Tax Loss Carry-Back and Carry-Forward – since corporate incomes can fluctuate widely, the Tax Code allows firms to carry losses back to offset profits in previous years or forward to offset profits in the future.Capital gains – defined as the profits from the sale of assets not normally transacted in the normal course of business, capital gains for individuals are generally taxed as ordinary income if held for a year or less, and at the capital gains rate if held for more than a year. Corporations face somewhat different rules.Most taxpayers pay 15% taxes on long-term capital gains.Single individuals with incomes over $400,000 and married couples filing jointly with incomes over $450,000 pay 20% taxes on long-germ capital gains.
Slide19
After tax calculationAT Income =BT Income x(1-T)AT Interest rate= BT Interest rate x(1-T)
Example:BT mortgage rate is 4%; T=25%AT mortgage= 3%
Slide20
Learning
objectives
Annual report; Balance sheet; Income Statement items you see on the slides
You DO NOT need to know the Statement of Cash Flows (3.4)
Free Cash Flow
MVA and EVA (no numerical problems)
Taxes
All the numerical problems on the slides and recommended below from end of chapter
You need to know to do After Tax Income problems and remember the formula from page
