Balance sheet Income statement Statement of cash flows Accounting income versus cash flow - PowerPoint PPT Presentation

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Balance sheet Income statement Statement of cash flows Accounting income versus cash flow

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Balance sheet Income statement Statement of cash flows Accounting income versus cash flow
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Balance sheet Income statement Statement of cash flows Accounting income versus cash flow

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  1. CHAPTER 2 Financial Statements,Cash Flow, and Taxes • Balance sheet • Income statement • Statement of cash flows • Accounting income versus cash flow • MVA and EVA • Corporate tax

  2. Balance Sheets: Assets 1998 1997 Cash 7,282 9,000 Short-term inv. 0 48,600 AR 632,160 351,200 Inventories 1,287,360715,200 Total CA 1,926,802 1,124,000 Gross FA 1,202,950 491,000 Less: Depr. 263,160146,200 Net FA 939,790344,800 Total assets 2,866,592 1,468,800

  3. Liabilities and Equity 1998 1997 Accts payable 524,160 145,600 Notes payable 720,000 200,000 Accruals 489,600 136,000 Total CL 1,733,760 481,600 Long-term debt 1,000,000 323,432 Common stock 460,000 460,000 Retained earnings (327,168) 203,768 Total equity 132,832 663,768 Total L&E 2,866,592 1,468,800

  4. Income Statement 1998 1997 Sales 5,834,400 3,432,000 COGS 5,728,000 2,864,000 Other expenses 680,000 340,000 Deprec. 116,960 18,900 Tot. op. costs 6,524,960 3,222,900 EBIT (690,560) 209,100 Interest exp. 176,000 62,500 EBT (866,560) 146,600 Taxes (40%) (346,624) 58,640 Net income (519,936) 87,960

  5. Other Data 1998 1997 No. of shares 100,000 100,000 EPS ($5.199) $0.88 DPS $0.110 $0.22 Stock price $2.25 $8.50 Lease pmts $40,000 $40,000

  6. Statement of Retained Earnings (1998) Balance of retained earnings, 12/31/97 $203,768 Add: Net income, 1998 (519,936) Less: Dividends paid (11,000) Balance of retained earnings, 12/31/98 ($327,168)

  7. Statement of Cash Flows: 1998 OPERATING ACTIVITIES Net Income (519,936) Adjustments: Depreciation 116,960 Change in AR (280,960) Change in inventories (572,160) Change in AP 378,560 Change in accruals 353,600 Net cash provided by ops. (523,936)

  8. L-T INVESTING ACTIVITIES Investments in fixed assets (711,950) FINANCING ACTIVITIES Change in s-t investments 48,600 Change in notes payable 520,000 Change in long-term debt 676,568 Payment of cash dividends (11,000) Net cash from financing 1,234,168 Sum: net change in cash (1,718) Plus: cash at beginning of year 9,000 Cash at end of year 7,282

  9. What can you conclude about the company’s financial condition from its statement of cash flows? • Net cash from operations = -$523,936, mainly because of negative net income. • The firm borrowed $1,185,568 and sold $48,600 in short-term investments to meet its cash requirements. • Even after borrowing, the cash account fell by $1,718.

  10. What effect did the expansion have on net operating working capital (NOWC)? NOWC98 = ($7,282 + $632,160 + $1,287,360) - ($524,160 + $489,600) = $913,042. NOWC97 = $793,800. Non-interest bearing CA Non-interest bearing CL NOWC = -

  11. What effect did the expansion have on capital used in operations? = NOWC + Net fixed assets. = $913,042 + $939,790 = $1,852,832. = $1,138,600. Operating capital Operating capital98 Operating capital97

  12. Did the expansion create additional net operating profit after taxes (NOPAT)? NOPAT = EBIT(1 - Tax rate) NOPAT98 = -$690,560(1 - 0.4) = -$690,560(0.6) = -$414,336. NOPAT97 = $125,460.

  13. What is your initial assessment of the expansion’s effect on operations? 1998 1997 Sales $5,834,400 $3,432,000 NOPAT ($414,336) $125,460 NOWC $913,042 $793,800 Operating capital $1,852,832 $1,138,600

  14. What effect did the company’s expansion have on its net cash flow and operating cash flow? NCF98 = NI + DEP = -$519,936 + $116,960 = -$402,976. NCF97 = $87,960 + $18,900 = $106,860. OCF98 = NOPAT + DEP = -$414,336 + $116,960 = -$297,376. OCF97 = $125,460 + $18,900 = $144,360.

  15. What was the free cash flow (FCF)for 1998? FCF = NOPAT - Net capital investment = NOPAT - (OC98 - OC97) = -$414,336 - ($1,852,832 - $1,138,600) = -$414,336 - $714,232 = -$1,128,568. How do you suppose investors reacted?

  16. What is the company’s EVA? Assume the firm’s after-tax cost of capital (COC) was 11% in 1997 and 13% in 1998. EVA98 = NOPAT- (COC)(Capital) = -$414,336 - (0.13)($1,852,832) = -$414,336 - $240,868 = -$655,204. EVA97 = $125,460 - (0.11)($1,138,600) = $125,460 - $125,246 = $214.

  17. Would you conclude that the expansion increased or decreased MVA? Market value of equity Equity capital supplied MVA = - . During the last year stock price has decreased 73%, so market value of equity has declined. Consequently, MVA has declined.