Chap002 Financial statements and cash flow_图文

Chapter 2
Financial Statements and Cash Flow

McGraw-Hill/Irwin

Copyright ? 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

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 ? Calculate a firm’s cash flow
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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
2-2

Sources of Information
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Annual reports Wall Street Journal Internet
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NYSE (www.nyse.com) NASDAQ (www.nasdaq.com) Textbook (www.mhhe.com) EDGAR 10K & 10Q reports
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SEC
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2.1 The Balance Sheet
An accountant’s snapshot of the firm’s accounting value at a specific point in time ? The Balance Sheet Identity is: Assets ≡ Liabilities + Stockholder’s Equity
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U.S. Composite Corporation Balance Sheet
2010 Current assets: Cash and equivalents Accounts receivable Inventories Other Total current assets $140 294 269 58 $761 2009 $107 270 280 50 $707

Fixed assets: Property, plant, and equipment $1,423 $1,274 Less accumulated depreciation (550) (460) Net property, plant, and equipment 873 814 Intangible assets and other 245 221 Total fixed assets $1,118 $1,035

The assets are listed in2010 2009 order by Current Liabilities: the length of time it would $197 Accounts payable $213 Notes payable 50 53 normally take a firm with 205 Accrued expenses 223 Total current liabilities $486 $455 ongoing operations to convert Long-term into cash. them liabilities:
Deferred taxes Long-term debt Total long-term liabilities $117 471 $588 $104 458 $562

Total assets

$1,879

$1,742

Stockholder's equity: Preferred stock $39 $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 liabilities and stockholder's equity $1,879 $1,742

Clearly, cash is much more liquid than property, plant, and equipment.

2-5

Balance Sheet Analysis
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When analyzing a balance sheet, the Finance Manager should be aware of three concerns:
1. 2. 3.

Liquidity Debt versus equity Value versus cost

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Liquidity
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Refers to the ease and quickness with which assets can be converted to cash—without a significant loss in value Current assets are the most liquid. Some fixed assets are intangible. The more liquid a firm’s assets, the less likely the firm is to experience problems meeting short-term obligations. Liquid assets frequently have lower rates of return than fixed assets.

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Debt versus Equity
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Creditors generally receive the first claim on the firm’s cash flow. Shareholder’s equity is the residual difference between assets and liabilities.

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Value versus Cost
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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, and equity could actually be bought or sold, which is a completely different concept from historical cost.
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2.2 The Income Statement
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Measures financial performance over a specific period of time The accounting definition of income is: Revenue – Expenses ≡ Income

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U.S.C.C. Income Statement
The operations section of the income statement reports the firm’s revenues and expenses from principal operations.
Total 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 Addition to retained earnings Dividends: $2,262 1,655 327 90 $190 29 $219 49 $170 84

$86 $43 $43
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U.S.C.C. Income Statement
The non-operating section of the income statement includes all financing costs, such as interest expense.
Total 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 Addition to retained earnings: Dividends: $2,262 1,655 327 90 $190 29 $219 49 $170 84

$86 $43 $43
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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 Interest expense Pretax income Taxes Current: $71 Deferred: $13 Net income Addition to retained earnings: Dividends: $2,262 1,655 327 90 $190 29 $219 49 $170 84

Usually a separate section reports the amount of taxes levied on income.

$86 $43 $43
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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 Interest expense Pretax income Taxes Current: $71 Deferred: $13 Net income Retained earnings: Dividends: $2,262 1,655 327 90 $190 29 $219 49 $170 84

Net income is the ―bottom line.‖

$86 $43 $43
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Income Statement Analysis
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There are three things to keep in mind when analyzing an income statement:
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2. 3.

Generally Accepted Accounting Principles (GAAP) Non-Cash Items Time and Costs

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GAAP
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The matching principle 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.

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Non-Cash Items
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Depreciation is the most apparent. No firm ever writes a check for ―depreciation.‖ Another non-cash item is deferred taxes, which does not represent a cash flow. Thus, net income is not cash.

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Time and Costs
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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 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.
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2.3 Taxes
The one thing we can rely on with taxes is that they are always changing ? Marginal vs. average tax rates
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Marginal – the percentage paid on the next dollar earned ? Average – the tax bill / taxable income
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Other taxes

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Marginal versus Average Rates
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Suppose your firm earns $4 million in taxable income.
What is the firm’s tax liability? ? What is the average tax rate? ? What is the marginal tax rate?
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If you are considering a project that will increase the firm’s taxable income by $1 million, what tax rate should you use in your analysis?
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2.4 Net Working Capital
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Net Working Capital ≡ Current Assets – Current Liabilities NWC usually grows with the firm

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U.S.C.C. Balance Sheet
$252m = $707- $455
2010 Current assets: Cash and equivalents Accounts receivable Inventories Other Total current assets $140 294 269 58 $761 2009 $107 270 280 50 $707 Current Liabilities: Accounts payable Notes payable Accrued expenses Total current liabilities Long-term liabilities: Deferred taxes Long-term debt Total long-term liabilities 2010 $213 50 223 $486 2009 $197 53 205 $455

Fixed assets: Property, plant, and equipment $1,423 $1,274 Less accumulated depreciation (550) (460 Net property, plant, and equipment 873 814 Intangible assets and other 245 221 Total fixed assets $1,118 $1,035

$275m = $761m- $486m
Total assets $1,879 $1,742

$117 Here we see NWC grow to $104 471 458 $275 million in 2010 from $562 $588 $252 million in 2009. Stockholder's equity: Preferred stock $39 $39 $23 million value) Common stock ($1 par 55 32 Capital surplus 347 327 Accumulated retained earnings 390 This increase of $23 million 347 Less treasury stock (26) (20) isTotal equity an investment of the$805 $725 firm. Total liabilities and stockholder's equity $1,879 $1,742
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2.5 Financial Cash Flow
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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 firm’s assets must equal the cash flows to the firm’s creditors and stockholders. CF(A)≡ CF(B) + CF(S)
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U.S.C.C. Financial Cash Flow
Cash Flow of the Firm Operating cash flow (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 retirement of debt minus long-term debt financing) Equity (Dividends plus repurchase of equity minus new equity financing) Total $238

Operating Cash Flow: EBIT $219 $90

-173

Depreciation

-23 $42 $36

Current Taxes -$71

OCF
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$238

$42
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U.S.C.C. Financial Cash Flow
Cash Flow of the Firm Operating cash flow (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 retirement of debt minus long-term debt financing) Equity (Dividends plus repurchase of equity minus new equity financing) Total $238

Capital Spending
-173

Purchase of fixed assets Sales of fixed assets

$198 -$25 $173

-23 $42 $36

Capital Spending

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$42
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U.S.C.C. Financial Cash Flow
Cash Flow of the Firm Operating cash flow (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 retirement of debt minus long-term debt financing) Equity (Dividends plus repurchase of equity minus new equity financing) Total $238

-173

NWC grew from $275 million in 2010 from $252 million in 2009. This increase of $23 million is the addition to NWC.

-23 $42 $36

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$42
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U.S.C.C. Financial Cash Flow
Cash Flow of the Firm Operating cash flow (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 retirement of debt minus long-term debt financing) Equity (Dividends plus repurchase of equity minus new equity financing) Total $238

-173

-23 $42 $36

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$42
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U.S.C.C. Financial Cash Flow
Cash Flow of the Firm Operating cash flow (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 retirement of debt minus long-term debt financing) Equity (Dividends plus repurchase of equity minus new equity financing) Total $238

Cash Flow to Creditors
-173

Interest
Retirement of debt

$49
73

-23 $42 $36

Debt service 122
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Proceeds from new debt sales -86 Total $36
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$42

U.S.C.C. Financial Cash Flow
Cash Flow of the Firm Operating cash flow (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 retirement of debt minus long-term debt financing) Equity (Dividends plus repurchase of equity minus new equity financing) Total $238

Cash Flow to Stockholders
-173

Dividends Repurchase of stock

$43 6

-23 $42 $36

Cash to Stockholders 49
Proceeds from new stock issue -43 Total $6

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$42
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U.S.C.C. Financial Cash Flow
Cash Flow of the Firm Operating cash flow (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 retirement of debt minus long-term debt financing) Equity (Dividends plus repurchase of equity minus new equity financing) Total $238

-173

-23 $42 $36

The cash flow received from the firm’s assets must equal the cash flows to the firm’s creditors and stockholders:

CF ( A) ? CF ( B ) ? CF ( S )

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$42
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2.5 The Statement of Cash Flows
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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 million in 2010. The three components of the statement of cash flows are:
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Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities
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U.S.C.C. Cash Flow from Operations
To calculate cash flow from operations, start with net income, add back non-cash items like 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 18 -8 $202

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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).
Acquisition of fixed assets Sales of fixed assets
Total Cash Flow from Investing Activities

-$198 25 -$173

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U.S.C.C. Cash Flow from Financing
Cash flows to and from creditors and owners include changes in equity and debt.
Retirement of debt (includes notes) Proceeds from long-term debt sales Change in notes payable Dividends Repurchase of stock Proceeds from new stock issue Total Cash Flow from Financing -$73 86 -3 -43 -6 43 $4

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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 Liabilities Accounts Receivable Inventories Accounts Payable Accrued Expenses Other Total Cash Flow from Operations Investing Activities Acquisition of fixed assets Sales of fixed assets Total Cash Flow from Investing Activities Financing Activities Retirement of debt (includes notes) Proceeds from long-term debt sales Notes Payable Dividends Repurchase of stock Proceeds from new stock issue Total Cash Flow from Financing Change in Cash (on the balance sheet) $86 90 13 -24 11 16 18 -8 $202 -$198 25 -$173 -$73 86 -3 -43 -6 43 $4 $33
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2.7 Cash Flow Management
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Earnings can be manipulated using subjective decisions required under GAAP Total cash flow is more objective, but the underlying components may also be ―managed‖
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Moving cash flow from the investing section to the operating section may make the firm’s business appear more stable
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Quick Quiz
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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 firm’s cash flows? What are the equations, and where do we find the information?

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