公司金融stephenChap02

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1、2-0Financial Statements and Cash FlowChapter 22-1Key Concepts and SkillsUnderstand the information provided by financial statementsDifferentiate between book and market valuesKnow the difference between average and marginal tax ratesKnow the difference between accounting income and cash flowCalculat

2、e a firms cash flow2-2Chapter Outline2.1 The Balance Sheet2.2 The Income Statement2.3 Taxes2.4 Net Working Capital2.5 Financial Cash Flow2.6 The Accounting Statement of Cash Flows2.7 Cash Flow Management2-3Sources of InformationAnnual reportsWall Street JournalInternetNYSE()NASDAQ()Textbook()SECEDGA

3、R10K&10Q reports2-42.1 The Balance SheetqAn accountants snapshot of the firms accounting value at a specific point in timeqThe Balance Sheet Identity is:Assets Liabilities+Stockholders Equity2-5U.S.Composite Corporation Balance Sheet2010200920102009Current assets:Current Liabilities:Cash and equival

4、ents$140$107 Accounts payable$213$197 Accounts receivable294270 Notes payable5053 Inventories269280 Accrued expenses223205 Other5850 Total current liabilities$486$455 Total current assets$761$707Long-term liabilities:Fixed assets:Deferred taxes$117$104 Property,plant,and equipment$1,423$1,274 Long-t

5、erm debt471458 Less accumulated depreciation(550)(460)Total long-term liabilities$588$562 Net property,plant,and equipment873814 Intangible assets and other245221Stockholders equity:Total fixed assets$1,118$1,035 Preferred stock$39$39 Common stock($1 par value)5532 Capital surplus347327 Accumulated

6、retained earnings390347 Less treasury stock(26)(20)Total equity$805$725Total assets$1,879$1,742Total liabilities and stockholders equity$1,879$1,742The assets are listed in order by the length of time it would normally take a firm with ongoing operations to convert them into cash.Clearly,cash is muc

7、h more liquid than property,plant,and equipment.2-6Balance Sheet AnalysisWhen analyzing a balance sheet,the Finance Manager should be aware of three concerns:1.Liquidity2.Debt versus equity3.Value versus cost2-7Liquidity Refers to the ease and quickness with which assets can be converted to cashwith

8、out 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 obligations.Liquid assets frequently have lower rates of return than fixed assets.2-8Debt versus Equ

9、ityCreditors generally receive the first claim on the firms cash flow.Shareholders equity is the residual difference between assets and liabilities.2-9Value versus CostUnder Generally Accepted Accounting Principles(GAAP),audited financial statements of firms in the U.S.carry assets at cost.Market va

10、lue 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.2-102.2 The Income StatementMeasures financial performance over a specific period of timeThe accounting definition of income is:Revenue Expenses I

11、ncome2-11U.S.C.C.Income Statement Total operating revenuesCost of goods soldSelling,general,and administrative expensesDepreciationOperating incomeOther incomeEarnings before interest and taxesInterest expensePretax incomeTaxes Current:$71 Deferred:$13Net income Addition to retained earnings$43 Divi

12、dends:$43The 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$862-12Total operating revenues$2,262Cost of goods sold 1,655Selling,general,and administrative expenses 327Depreciation 90Operating incom

13、e$190Other income29Earnings before interest and taxes$219Interest expense 49Pretax income$170Taxes 84 Current:$71 Deferred:$13Net income$86 Addition to retained earnings:$43 Dividends:$43The non-operating section of the income statement includes all financing costs,such as interest expense.U.S.C.C.I

14、ncome Statement2-13Total operating revenuesCost of goods soldSelling,general,and administrative expensesDepreciationOperating incomeOther incomeEarnings before interest and taxesInterest expensePretax incomeTaxes Current:$71 Deferred:$13Net income Addition to retained earnings:$43 Dividends:$43Usual

15、ly a separate section reports the amount of taxes levied on income.$2,262 1,655 327 90$19029$219 49$170 84$86U.S.C.C.Income Statement2-14Total operating revenuesCost of goods soldSelling,general,and administrative expensesDepreciationOperating incomeOther incomeEarnings before interest and taxesInte

16、rest expensePretax incomeTaxes Current:$71 Deferred:$13Net income Retained earnings:$43 Dividends:$43Net income is the“bottom line.”$2,262 1,655 327 90$19029$219 49$170 84$86U.S.C.C.Income Statement2-15Income Statement AnalysisThere are three things to keep in mind when analyzing an income statement

17、:1.Generally Accepted Accounting Principles(GAAP)2.Non-Cash Items3.Time and Costs2-16GAAPqThe matching principle of GAAP dictates that revenues be matched with expenses.qThus,income is reported when it is earned,even though no cash flow may have occurred.2-17Non-Cash ItemsqDepreciation is the most a

18、pparent.No firm ever writes a check for“depreciation.”qAnother non-cash item is deferred taxes,which does not represent a cash flow.qThus,net income is not cash.2-18Time and CostsqIn the short-run,certain equipment,resources,and commitments of the firm are fixed,but the firm can vary such inputs as

19、labor and raw materials.qIn the long-run,all inputs of production(and hence costs)are variable.qFinancial 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.2-192.3 TaxesT

20、he one thing we can rely on with taxes is that they are always changingMarginal vs.average tax ratesMarginal the percentage paid on the next dollar earnedAverage the tax bill/taxable incomeOther taxes2-20Marginal versus Average Rates Suppose your firm earns$4 million in taxable income.What is the fi

21、rms tax liability?What is the average 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?2-212.4 Net Working CapitalqNet Working Capital Current Assets Current LiabilitiesNWC u

22、sually grows with the firm 2-22U.S.C.C.Balance Sheet2010200920102009Current assets:Current Liabilities:Cash and equivalents$140$107 Accounts payable$213$197 Accounts receivable294270 Notes payable5053 Inventories269280 Accrued expenses223205 Other5850 Total current liabilities$486$455 Total current

23、assets$761$707Long-term liabilities:Fixed assets:Deferred taxes$117$104 Property,plant,and equipment$1,423$1,274 Long-term debt471458 Less accumulated depreciation(550)(460 Total long-term liabilities$588$562 Net property,plant,and equipment873814 Intangible assets and other245221Stockholders equity

24、:Total fixed assets$1,118$1,035 Preferred stock$39$39 Common stock($1 par value)5532 Capital surplus347327 Accumulated retained earnings390347 Less treasury stock(26)(20)Total equity$805$725Total assets$1,879$1,742Total liabilities and stockholders equity$1,879$1,742Here we see NWC grow to$275 milli

25、on in 2010 from$252 million in 2009.This increase of$23 million is an investment of the firm.$23 million$275m=$761m-$486m$252m=$707-$4552-232.5 Financial Cash FlowIn finance,the most important item that can be extracted from financial statements is the actual cash flow of the firm.Since there is no

26、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 stockholders.CF(A)CF(B)+CF(S)2-24U.S.C.C.Financial Cash FlowCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation m

27、inus taxes)Capital spending-173 (Acquisitions of fixed assets minus sales of fixed assets)Additions to net working capital-23 Total$42Cash Flow of Investors in the FirmDebt$36 (Interest plus retirement of debt minus long-term debt financing)Equity6 (Dividends plus repurchase of equity minus new equi

28、ty financing)Total$42Operating Cash Flow:EBIT$219Depreciation$90Current Taxes-$71OCF$2382-25U.S.C.C.Financial Cash FlowCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spending (Acquisitions of fixed assets minus sales of fixed as

29、sets)Additions to net working capital TotalCash Flow of Investors in the FirmDebt (Interest plus retirement of debt minus long-term debt financing)Equity (Dividends plus repurchase of equity minus new equity financing)TotalCapital SpendingPurchase of fixed assets$198Sales of fixed assets-$25Capital

30、Spending$173-173-23$42$366$422-26U.S.C.C.Financial Cash FlowCash Flow of the FirmOperating cash flow$238 (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 TotalCash Flow of Inv

31、estors in the FirmDebt (Interest plus retirement of debt minus long-term debt financing)Equity (Dividends plus repurchase of equity minus new equity financing)TotalNWC grew from$275 million in 2010 from$252 million in 2009.This increase of$23 million is the addition to NWC.-173-23$42$366$422-27U.S.C

32、.C.Financial Cash FlowCash Flow of the FirmOperating cash flow$238 (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 TotalCash Flow of Investors in the FirmDebt (Interest plus

33、retirement of debt minus long-term debt financing)Equity (Dividends plus repurchase of equity minus new equity financing)Total-173-23$42$366$422-28U.S.C.C.Financial Cash FlowCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spendin

34、g (Acquisitions of fixed assets minus sales of fixed assets)Additions to net working capital TotalCash Flow of Investors in the FirmDebt (Interest plus retirement of debt minus long-term debt financing)Equity (Dividends plus repurchase of equity minus new equity financing)TotalCash Flow to Creditors

35、Interest$49Retirement of debt 73Debt service122Proceeds from new debt sales -86Total$36-173-23$42$366$422-29U.S.C.C.Financial Cash FlowCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spending (Acquisitions of fixed assets minus s

36、ales of fixed assets)Additions to net working capital TotalCash Flow of Investors in the FirmDebt (Interest plus retirement of debt minus long-term debt financing)Equity (Dividends plus repurchase of equity minus new equity financing)TotalCash Flow to StockholdersDividends$43Repurchase of stock 6Cas

37、h to Stockholders 49Proceeds from new stock issue -43Total$6-173-23$42$366$422-30U.S.C.C.Financial Cash FlowCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spending (Acquisitions of fixed assets minus sales of fixed assets)Additi

38、ons to net working capital TotalCash Flow of Investors in the FirmDebt (Interest plus retirement of debt minus long-term debt financing)Equity (Dividends plus repurchase of equity minus new equity financing)Total)()()(SCFBCFACFThe cash flow received from the firms assets must equal the cash flows to

39、 the firms creditors and stockholders:-173-23$42$366$422-312.5 The Statement of Cash FlowsThere 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

40、of cash flows are:Cash flow from operating activitiesCash flow from investing activitiesCash flow from financing activities2-32U.S.C.C.Cash Flow from OperationsTo calculate cash flow from operations,start with net income,add back non-cash items like depreciation and adjust for changes in current ass

41、ets and liabilities(other than cash).OperationsNet IncomeDepreciationDeferred TaxesChanges in Assets and LiabilitiesAccounts ReceivableInventoriesAccounts PayableAccrued ExpensesOtherTotal Cash Flow from Operations$869013-24111618$202-82-33U.S.C.C.Cash Flow from InvestingCash flow from investing act

42、ivities involves changes in capital assets:acquisition of fixed assets and sales of fixed assets(i.e.,net capital expenditures).Acquisition of fixed assetsSales of fixed assetsTotal Cash Flow from Investing Activities-$19825-$1732-34U.S.C.C.Cash Flow from FinancingCash flows to and from creditors an

43、d owners include changes in equity and debt.Retirement of debt(includes notes)Proceeds from long-term debt sales-$73 86Total Cash Flow from Financing$4DividendsRepurchase of stock-43Proceeds from new stock issue 43-6 Change in notes payable-32-35U.S.C.C.Statement of Cash FlowsThe statement of cash f

44、lows is the addition of cash flows from operations,investing,and financing.OperationsNet IncomeDepreciationDeferred TaxesChanges in Assets and LiabilitiesAccounts ReceivableInventoriesAccounts PayableAccrued Expenses$869013-24111618OtherTotal Cash Flow from Operations$202-8Acquisition of fixed asset

45、sSales of fixed assetsTotal Cash Flow from Investing Activities-$19825-$173Investing ActivitiesFinancing ActivitiesRetirement of debt(includes notes)Proceeds from long-term debt sales-$7386DividendsRepurchase of stockProceeds from new stock issueTotal Cash Flow from Financing-4343$4-6Change in Cash(

46、on the balance sheet)$33Notes Payable -32-362.7 Cash Flow ManagementEarnings can be manipulated using subjective decisions required under GAAPTotal cash flow is more objective,but the underlying components may also be“managed”Moving cash flow from the investing section to the operating section may m

47、ake the firms business appear more stable 2-37Quick QuizWhat 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 firms cash flows?What are the equations,and where do we find the information?