Transcript Understanding Financial Statements, Taxes, and Cash Flows

Understanding Financial Statements, Taxes, and
Cash Flows
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Income Statement
Balance Sheet
Taxes
Free Cash Flow (FCF)
Slide 1
Income Statement
SALES
– EXPENSES
= PROFIT
•Cost of Goods Sold
•Operating Expenses
(marketing, administrative)
•Financing Costs
•Taxes
Slide 2
Income Statement (Continued)
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SALES
Cost of Goods Sold
GROSS PROFIT
Operating Activities
Operating Expenses
OPERATING INCOME (EBIT)
Interest Expense
EARNINGS BEFORE TAXES (EBT)
Income Taxes
Financing Activities
EARNINGS AFTER TAXES (EAT)
Preferred Stock Dividends
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
Slide 3
Balance Sheet
Total Assets = Outstanding Debt + Shareholders’ Equity
Assets
Current Assets
Cash
Marketable Securities
Accounts Receivable
Inventories
Prepaid Expenses
Fixed Assets
Machinery & Equipment
Buildings and Land
Other Assets
Investments & patents
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts Payable
Accrued Expenses
Short-term notes
Long-Term Liabilities
Long-term notes
Mortgages
Equity
Preferred Stock
Common Stock (Par value)
Paid in Capital
Retained Earnings
Slide 4
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Assets
Current Assets: assets that are relatively liquid,
and are expected to be converted to cash within a
year
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Cash, marketable securities, accounts receivable,
inventories, prepaid expenses.
Fixed Assets: machinery and equipment,
buildings, and land
Other Assets: any asset that is not a current asset
or fixed asset
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Intangible assets such as patents and copyrights
Slide 5
Financing
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Debt Capital: financing provided by a creditor
Short-Term Debt: borrowed money that must be
repaid within the next 12 months
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Accounts payable, other payables such as interest or
taxes payable, accrued expenses, short-term notes
Long-Term Debt: loans from banks or other
sources that lend money for longer than 12 months
Slide 6
Financing (Continued)
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Equity Capital: shareholders’ investment in the
firm
Preferred Stockholders: receive fixed dividends,
and have higher priority than common
stockholders in event of liquidation of the firm
Common Stockholders: residual owners of a
business. They receive whatever is left after
creditors and preferred stockholders are paid
Slide 7
Corporate Tax Rates
Taxable Income
Corporate Tax Rate
$1 - $50,000
15%
$50,001 - $75,000
25%
$75,001 - $100,000
34%
$100,001 - $335,000
39%
$335,001 - $10,000,000
34%
$10,000,001 - $15,000,000
35%
$15,000,001 - $18,333,333
38%
over $18,333,333
35%
Slide 8
Free Cash Flow (FCF)
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Free Cash Flow: cash flow that is free and available to be
distributed to the firm’s investors (both debt and equity
investors)
Firm’s Operating Free Cash Flow should be equal to
Firm’s Financing Free Cash Flow
Operating Free Cash Flow: Cash flows generated through
the firm’s operations and investments in assets
Financing Free Cash Flow: Cash flows paid to – or
received by – the firm’s investors (creditors &
stockholders)
Slide 9
Operating Free Cash Flow
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Operating Cash Flow (OCF) = EBIT + Depreciation – Taxes
Change in NWC (ΔNWC) = Ending NWC – Beginning NWC
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Net Capital Spending (NCS) = Ending NFA – Beginning NFA +
Depreciation
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NWC = Net Working Capital = Current Assets – Current Liabilities
Note that the Current Liabilities exclude interest bearing Current Liabilities
NFA = Net Fixed Assets
Note that if you are given gross value of Fixed Assets (FA) then the Net
Capital Spending is the difference between Ending FA and Beginning FA
Operating Free Cash Flow (OFCF) = OCF – ΔNWC – NCS
Slide 10
Financing Free Cash Flow
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Cash Flow to Creditors (CFC) = Interest Paid – Net New
Borrowing
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Cash Flow to Shareholders (CFS) = Dividend Paid – Net New
Equity
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Net New Borrowing = (Ending LTD + Ending Interest Bearing Current
Liabilities) – (Beginning LTD + Beginning Interest Bearing Current
Liabilities)
LTD = Long-Term Debt
Net New Equity = Ending Common Stock – Beginning Common Stock
Common Stock excludes Retained Earnings
Addition to Retained Earnings = Net Income – Dividends Paid
Financing Free Cash Flow (FFCF) = Cash Flow to Creditors +
Cash Flow to Shareholders
Slide 11