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Financial Statements

Financial Statements

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Financial Statements

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  1. Financial Statements • Income Statements • Revenues • Expenses (expired costs) • Timing of recording • at time of sale • at time of use • fixed and variable • Non Cash Items

  2. Financial Statements • Prepare an Income Statement • Revenues • Sales • Costs • Operating • Non Cash (Depreciation) • Interest (Finance Charge) • Taxes • Net Income • The bottom line…but we want cash flow!

  3. Financial Statements • The Balance Sheet • Assets • Liabilities • Owner’s Equity • Assets ≡ Liabilities + Owner’s Equity • This is an identity • It always holds and is a check on the fundamental nature of who owns the business (assets)

  4. Financial Statements • Portions of the Balance Sheet • Net Working Capital • Current Assets • Current Liabilities • Liquidity • NWC = Current Assets - Current Liabilities • Debt versus Equity • fixed claims • residual claims

  5. Financial Statements • Market Value versus Book Value

  6. Financial Statements • Build from Current Assets and Claims • Current Assets (In order of conversion to cash) • Long-term Assets • Current Liabilities (In order of anticipated payment of claim) • Long-term Liabilities • Owner’s Equity • Identity Check • Assets = Liabilities + Owner’s Equity

  7. Financial Statements • Cash Flow • the difference between accounting cash flow and financial cash flow • segments of cash flow • operations • capital spending • working capital • shareholders/bondholders • Importance of taxes and depreciation

  8. Textbook uses Net Profit + Depreciation This is a special case when you have no interest expense This later is wrong if you want to do Cash Flow Statements Correct Approach EBIT + Depreciation – Taxes = Cash Flow from Operations Then to get Cash Flow Statement Correct you put Interest Expense with Cash Flow From Financing Activities Cash Flow From Operations

  9. Statement of Cash Flows • Cash Flow Statement in three parts Cash Flow from Operating Activities: Cash Flow from Operations • (EBIT + Depreciation – Taxes) Changes in Net Working Capital Cash Flow from Investing Activities: Net Change in Gross Fixed Assets (Purchases and Sales) Cash Flow from Financing Activities: Net Change in Debt (Sales and Retirements) Net Change in Common Stock (Sales and Purchases) Net Change in Preferred Stock (Sales and Purchases) Dividends Paid Interest Expense

  10. Depreciation and Salvage CF • Depreciation using MACRS • Life of Asset • Depreciation Schedule (page 89) • Assumption: No Salvage Value • Disposal of Asset – Cash Flow • Full Depreciated Asset • Partially Depreciated Asset • Short-cut…book value or basis for gain/loss

  11. Financial Statements • Taxes • Corporate Taxes • Personal Taxes • User Taxes • Sales Taxes • Property Taxes • Average Tax versus Marginal Tax • tax total divided by taxable income • tax on the next dollar of earnings