cffm6 ch 03 slides

8/6/2019 CFFM6 Ch 03 Slides

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Financial Statements, CashFlow, and Taxes

Key Financial StatementsBalance Sheet Income Statement Statement of Stockholders EquityStatement of Cash Flows

Free Cash Flow

Federal Tax System

Chapter 3

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The Annual Report

Balance sheet provides a snapshot of afirm s financial position at one point in time.Income statement summarizes a firm srevenues and expenses over a given period of time.Statement of stockholders equity showshow much of the firm s earnings wereretained, rather than paid out as dividends.Statement of cash flows reports the impact of a firm s activities on cash flows over a

given period of time. 3-2


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Balance Sheet: Assets

Cash A/RInventories

Total CAGross FA

Less: Dep.Net FATotal Assets

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20087,282

632,1601,287,3601,926,8021,202,950

263,160939,790

2,866,592

200757,600

351,200715,200

1,124,000491,000

146,200344,800

1,468,800


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Balance Sheet: Liabilities and Equity

Accts payableNotes payable

AccrualsTotal CL

Long-term debt

Common stockRetained earningsTotal Equity

Total L & E3-4

2008524,160636,808489,600

1,650,568723,432

460,00032,592492,592

2,866,592

2007145,600200,000136,000481,600323,432

460,000203,768663,768

1,468,800


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Income Statement

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2008 2007Sa e $6,034,000 $3,432,000CO S 5,528,000 2,864,000Ot er ex en e 519,988 358,672

ota o er.co t exc .e rec. & amort. $6,047,988 $3,222,672

De rec at on an amort zat on 116,960 18,900E I ($ 130,948) $ 190,428

Intere t ex en e 136,012 43,828E ($ 266,960) $ 146,600

axe (106,784) 58,640et ncome ($ 160,176) $ 87,960


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O ther Data

No. of shares

EPSDPSStock price

Lease pmts

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2008100,000

-$1.602$0.11$2.25

$40,000

2007100,000

$0.88$0.22$8.50

$40,000


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Statement of Stockholders Equity 2008

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TotalCommon Stock Retained Stockholders

Shares Amount Earnings EquityBalances, 12/31/07 100,000 $460,000 $203,768 $663,7682008 Net income 160,176Cash dividends 11,000

Addition subtractionto retained earnings 171,176

Balances, 12/31/08 100,000 $460,000 $ 32,592 $492,592


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Statement of Cash Flows 2008

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Long-Term Investing Activities Additions to property, plant, & equipment $ 711,950

Net cash used in investing activities $ 711,950

Financing ActivitiesIncrease in notes payable $ 436,808Increase in long-term debt 400,000Payment of cash dividends 11,000

Net cash provided by financing activities $ 825,808SummaryNet decrease in cash $ 50,318Cash at beginning of year 57,600Cash at end of year $ 7,282


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Conclusions about D Leon s FinancialCondition from Its Statement of CFs

Net cash from operations = -$164,176,mainly because of negative NI.

The firm borrowed $825,808 to meet its cashrequirements.

Even after borrowing, the cash account fell by$50,318.

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Did the expansion create additionalafter-tax operating income?

AT operating income = EBIT 1 Tax rate

AT operating income 08 = -$130,948 1 0.4= -$130,948 0.6= -$78,569

AT operating income 07 = $114,257

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W hat effect did the expansion have onnet working capital?

NW C = Current assets Payables + Accruals

NW

C08 = $7,282 + $632,160 + $1,287,360 $524,160 + $489,600= $913,042

NW C07 = $842,400

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Assessment of the Expansion s Effect on O perations

Sales

AT oper. inc.NW CNet income

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2008$6,034,000

-78,569913,042

-160,176

2007$3,432,000

114,257842,400

87,960


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W hat was the free cash flow FCF for2008?

(

! NW Cesexpenditur

Capital onamortizatiandDepr. TEBIT 1FCF

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FCF08 = [-$130,948 1 0.4 + $116,960] [ $1,202,950 $491,000 + $70,642]

= -$744,201

Is negative free cash flow always a bad sign?


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Does D Leon pay its suppliers on time?

Probably not.

A/P increased 260%, over the past year,while sales increased by only 76%.

If this continues, suppliers may cut off D Leon s trade credit.

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Does it appear that D Leon s sales priceexceeds its cost per unit sold?

NO , the negative after-tax operating incomeand decline in cash position shows that D Leon is spending more on its operations

than it is taking in.

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W hat if D Leon s sales manager decided to offer60-day credit terms to customers, rather than30-day credit terms?

If competitors match terms, and sales remainconstant...

A/R would .Cash would .

If competitors don t match, and sales double...Short-run: Inventory and fixed assets tomeet increased sales. A/R , Cash .Company may have to seek additionalfinancing.Long-run: Collections increase and thecompany s cash position would improve.

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H ow did D Leon finance its expansion?

D Leon financed its expansion with externalcapital.D Leon issued long-term debt which reducedits financial strength and flexibility.

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W ould D Leon have required external capital if they had broken even in 2008 Net income = 0 ?

YES, the company would still have to financeits increase in assets. Looking to theStatement of Cash Flows, we see that the

firm made an investment of $711,950 in net fixed assets. Therefore, they would haveneeded to raise additional funds.

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W hat happens if D Leon depreciates fixed assetsover 7 years as opposed to the current 10 years ?

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No effect on physicalassets.

Fixed assets on the balancesheet would decline.Net income would decline.Tax payments woulddecline.Cash position wouldimprove.


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Federal Income Tax System

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Corporate and Personal Taxes

Both have a progressive structure the higherthe income, the higher the marginal tax rate .Corporations

Rates begin at 15% and rise to 35% forcorporations with income over $10 million,although corporations with income between$15 million and $18.33 million pay amarginal tax rate of 38%.

Also subject to state tax around 5% .

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Corporate and Personal Taxes

IndividualsRates begin at 10% and rise to 35% forindividuals with income over $349,700.May be subject to state tax.


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Tax Treatment of Various Uses andSources of Funds

Interest paid tax deductible for corporationspaid out of pre-tax income , but usually not

for individuals interest on home loans being

the exception .Interest earned usually fully taxable anexception being interest from a muni .Dividends paid paid out of after-tax income.

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Tax Treatment of Various Uses andSources of Funds

Dividends received Most investors pay 15%taxes.

Investors in the 10% or 15% tax bracket pay 0% on dividends in 2008-2010.Dividends are paid out of net income whichhas already been taxed at the corporatelevel, this is a form of double taxation .

A portion of dividends received bycorporations is tax excludable, in order toavoid triple taxation .


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More Tax Issues

Tax Loss Carry-Back and Carry-Forward sincecorporate incomes can fluctuate widely, theTax Code allows firms to carry losses back to

offset profits in previous years or forward tooffset profits in the future.Capital gains defined as the profits from thesale of assets not normally transacted in the

normal course of business, capital gains forindividuals are generally taxed as ordinaryincome if held for less than a year, and at thecapital gains rate if held for more than a year.Corporations face somewhat different rules.

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cffm6 ch 03 slides

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