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1、0,Chapter 2,Financial Statements,Taxes,and Cash Flow,1,Chapter Outline,The Balance SheetThe Income StatementTaxesCash Flow,2,Key Concepts and Skills,Know the difference between book value and market valueKnow the difference between accounting income and cash flowKnow the difference between average a
2、nd marginal tax ratesKnow how to determine a firms cash flow from its financial statements,3,The Balance Sheet,The balance sheet is a snapshot of the firms assets and liabilities at a given point in timeAssets are listed in order of decreasing liquidityEase of conversion to cash without significant
3、loss of valueBalance Sheet IdentityAssets=Liabilities+Stockholders Equity,4,Figure 2.1,5,U.S.Corporation Balance Sheet Table 2.1,6,Balance Sheet Analysis,When analyzing a balance sheet,the Finance Manager should be aware of three concerns:Accounting liquidityDebt versus equityValue versus cost,7,Acc
4、ounting Liquidity,Refers to the ease and quickness with which assets can be converted to cashwithout a significant loss in valueCurrent 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 obl
5、igations.Liquid assets frequently have lower rates of return than fixed assets.,8,Debt versus Equity,Creditors generally receive the first claim on the firms cash flow.Shareholders equity is the residual difference between assets and liabilities.,9,Market vs.Book Value,The balance sheet provides the
6、 book value of the assets,liabilities,and equity.Historical Cost Principle:Under Generally Accepted Accounting Principles(GAAP),audited financial statements of firms in the U.S.carry assets at cost.Market value is the price at which the assets,liabilities,or equity can actually be bought or sold,whi
7、ch is a completely different concept from historical cost.,10,Value versus Cost,Market value and book value are often very different.Why?Which is more important to the decision-making process?,11,Klingon Corporation,12,The Income Statement,Measures financial performance over a specific period of tim
8、eThe accounting definition of income is:Revenue Expenses Income,13,Income Statement,The income statement is more like a video of the firms operations for a specified period of timeYou generally report revenues first and then deduct any expenses for the periodMatching principle GAAP says to recognize
9、 revenue when it is fully earned and match expenses required to generate revenue to the period of recognition,14,U.S.Corporation Income Statement-Table 2.2,15,Income Statement Analysis,There are three things to keep in mind when analyzing an income statement:Generally Accepted Accounting Principles(
10、GAAP)Non-Cash ItemsTime and Costs,16,GAAP,The matching principal of GAAP dictates that revenues be matched with expenses.Thus,income is reported when it is earned,even though no cash flow may have occurred.,17,Non-Cash Items,Depreciation is the most apparent.No firm ever writes a check for“depreciat
11、ion.”Another non-cash item is deferred taxes,which does not represent a cash flow.Thus,net income is not cash.,18,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
12、of production(and hence costs)are variable.Financial accountants do not distinguish between variable costs and fixed costs.Instead,accounting costs usually fit into a classification that distinguishes product costs from period costs.,19,Example:Work the Web,Publicly traded companies must file regula
13、r reports with the Securities and Exchange CommissionThese reports are usually filed electronically and can be searched at the SEC public site called EDGARClick on the web surfer,pick a company,and see what you can find!,20,Taxes,The one thing about taxes we can rely on is that they will always be c
14、hangingMarginal vs.average tax ratesMarginal the percentage paid on the next dollar earnedAverage the tax bill/taxable incomeOther taxes,21,Corporate Tax Rates,22,Example:Marginal vs.Average Rates,Suppose your firm earns$4 million in taxable income.What is the firms tax liability?What is the average
15、 tax rate?What is the marginal tax rate?If you are considering a project that will increase the firms taxable income by$1 million,what tax rate should you use in your analysis?,23,Example:Marginal vs.Average Rates,24,The Concept of Cash Flow,Cash flow is one of the most important pieces of informati
16、on that a financial manager can derive from financial statementsThe accounting statement of cash flows does not provide us with the same information that we are looking at hereWe will look at how cash is generated from utilizing assets and how it is paid to those who finance the purchase of the asse
17、ts,25,Table 2.5,26,Financial Cash Flows,Three Financial Cash FlowsCash Flow From AssetsCash Flow to CreditorsCash Flow to StockholdersSince there is no magic in finance,it must be the case that the cash flow received from the firms assets must equal the cash flows to the firms creditors and stockhol
18、ders.Cash Flow From Assets(CFFA)=Cash Flow to Creditors+Cash Flow to Stockholders,orCF(A)CF(B)+CF(S),27,Cash Flow From Assets,Cash Flow From Assets=Operating Cash Flow Net Capital Spending Changes in NWCOCF(I/S)=EBIT+depreciation taxesNCS(B/S and I/S)=ending net fixed assets beginning net fixed asse
19、ts+depreciationChanges in NWC(B/S)=ending NWC beginning NWC,28,Cash Flow to Investors,CF to Creditors(B/S and I/S)=interest paid net new borrowing CF to Stockholders(B/S and I/S)=dividends paid net new equity raised,29,U.S.Corporation Balance Sheet Table 2.1,30,U.S.Corporation Income Statement-Table
20、 2.2,31,U.S.C.C.Financial Cash Flow,Operating Cash Flow:EBIT$694+Depreciation 65-Current Taxes-212 OCF$547,32,U.S.C.C.Financial Cash Flow,Capital Spending Ending net fixed assets$1,709-Beginning net fixed assets-1,644+Depreciation 65 Capital Spending$130,33,U.S.C.C.Financial Cash Flow,Change in Net
21、Working Capital(NWC)Ending NWC$1,014-Beginning NWC-684 Change in NWC$330,34,U.S.C.C.Financial Cash Flow,35,U.S.C.C.Financial Cash Flow,Cash Flow to Creditors Interest Paid$70-Net new borrowings 46 Cash flow to creditors 24,36,U.S.C.C.Financial Cash Flow,Cash Flow to Stockholders Dividends paid$103-N
22、et new equity raised 40 Cash to Stockholders 63,37,U.S.C.C.Financial Cash Flow,The cash flow received from the firms assets must equal the cash flows to the firms creditors and stockholders:,38,Example:Balance Sheet and Income Statement Information,Current Accounts2007:CA=$1,500;CL=$1,3002008:CA=$2,
23、000;CL=$1,700Fixed Assets and Depreciation2007:NFA=$3,000;2008:NFA=$4,000Depreciation expense=$300LT Liabilities and Equity2007:LTD=$2,200;Common Stock=$500;RE=$5002008:LTD=$2,800;Common Stock=$750;RE=$750Income Statement InformationEBIT=$2,700;Interest Expense=$200;Taxes=$1,000;Dividends=$1,250,39,
24、Example:Cash Flows,OCF=$2,700+$300$1,000=$2,000NCS=$4,000$3,000+$300=$1,300Changes in NWC=($2,000$1,700)($1,500$1,300)=$100CFFA=$2,000$1,300$100=$600CF to Creditors=$200($2,800$2,200)=-$400CF to Stockholders=$1,250($750$500)=$1,000CFFA=-$400+$1,000=$600The CF identity holds.,40,2.6 The Statement of
25、Cash Flows,There is an official accounting statement called the statement of cash flows.This helps explain the change in accounting cash.The three components of the statement of cash flows are:Cash flow from operating activitiesCash flow from investing activitiesCash flow from financing activities,4
26、1,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 sh
27、ould 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?,42,Comprehensive Problem,Current Accounts2007:CA=$4,400;CL=$1,5002006:CA=$3,500;CL=$1,200Fixed Assets and Depreciation2007:NFA=$3,400;2006:NFA=$3,100Depreciation Expense=$400Long-term Debt and Equity(R.E.not given)2007:LTD=$4,000;Common stock Dividends=$500Compute the CFFA,
