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McGraw-Hill/Irwin
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 firms cash flow
2-2
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
2-3
Sources of Information
Annual reports
Wall Street Journal
Internet
NYSE (www.nyse.com)
NASDAQ (www.nasdaq.com)
Textbook (www.mhhe.com)
SEC
EDGAR
10K & 10Q reports
2-4
2-5
$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
Total assets
$1,879
$1,742
$117
471
$588
$104
458
$562
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
2-6
Liquidity
Debt versus equity
Value versus cost
2-7
Liquidity
Refers to the ease and quickness with which
2-9
2-10
2-11
U.S.C.C. Income
Statement
The operations
section of the
income statement
reports the firms
revenues and
expenses from
principal
operations.
$2,262
1,655
327
90
$190
29
$219
49
$170
84
$86
$43
$43
2-12
U.S.C.C. Income
Statement
The non-operating
section of the
income statement
includes all
financing costs,
such as interest
expense.
$2,262
1,655
327
90
$190
29
$219
49
$170
84
$86
$43
$43
2-13
U.S.C.C. Income
Statement
Usually a separate
section reports the
amount of taxes
levied on income.
$2,262
1,655
327
90
$190
29
$219
49
$170
84
$86
$43
$43
2-14
U.S.C.C. Income
Statement
$2,262
1,655
327
90
$190
29
$219
49
$170
84
$86
$43
$43
2-15
Income Statement
Analysis
There are three things to keep in mind when
analyzing an income statement:
Generally Accepted Accounting Principles
(GAAP)
2. Non-Cash Items
3. Time and Costs
1.
2-16
GAAP
The matching principle of GAAP dictates that
2-17
Non-Cash Items
Depreciation is the most apparent. No firm
2-18
2.3 Taxes
The one thing we can rely on with taxes is
dollar earned
Average the tax bill / taxable income
Other taxes
2-20
2-21
2-22
$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
$1,879
$1,742
2010
Current Liabilities:
Accounts payable
Notes payable
Accrued expenses
Total current liabilities
$213
50
223
$486
2009
$197
53
205
$455
Long-term liabilities:
Deferred taxes
Long-term debt
Total long-term liabilities
$117 to $104
Here we see NWC grow
471
458
$588
$562
$275 million in 2010 from
$252 million
in 2009.
Stockholder's
equity:
Preferred stock
$39
$39
$23
million
Common stock ($1 par value)
55
32
Capital surplus
347
327
Accumulated
retained earnings
390
347
This
increase
of $23 million
Less treasury stock
(26)
(20)
isTotal
anequity
investment of the$805
firm.$725
Total liabilities and stockholder's equity $1,879
$1,742
2-23
2-24
$238
-173
-23
$42
$36
Depreciation
$219
$90
$238
6
$42
2-25
$238
Capital Spending
-173
-23
$42
$198
-$25
Capital Spending
$173
$36
6
$42
2-26
$238
-173
-23
$42
$36
6
$42
2-27
$238
-173
-23
$42
$36
6
$42
2-28
$238
Interest
$49
Retirement of debt
73
$36
$42
Total
$36
2-29
$238
Dividends
$43
Repurchase of stock
-23
$42
Cash to Stockholders 49
Proceeds from new stock issue
-43
$36
Total
$6
6
$42
2-30
C
F
(
A
)
C
F
(B
)
S
$238
-173
-23
$42
$36
6
$42
2-31
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
2-33
-$198
25
-$173
2-34
-$73
86
-3
-43
-6
43
$4
2-35
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
2-36
2-37