Financial statements and cash flow

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 reportsSlide3

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 AssetsSlide6

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

1,468,800Slide7

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

$

8.50Slide9

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 = $114,257Slide10

What effect did the expansion have on net operating working capital?Slide11

What was the free cash flow (FCF) for 2015?

FCF15 = [-$130,948(1 – 0.4) + $116,960] – [($1,202,950 – $491,000) + $70,642]

= -$744,201

Is negative free cash flow always a bad sign?Slide12

Performance Measures for Evaluating Managers

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 SystemSlide15

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

83

Questions: ST-1, ST-2

a,b,c,d

; 3-1 to 3-5; 3-7,3-9,3-10

Problems: 3-1, 3-2, 3-3, 3-5, 3-8,