4. Financial Statement, Cash Flows And Taxes

FINANCIAL STEMENTS, CASH FLOWS, AND TAXES

FINANCIAL STATEMENTS History of Accounting and Financial Statements Journal and Ledger Trial Balance Balance Sheet Profit and Loss Account Statement of Retained Earnings Notes to the Accounts CEO Report

BALANCE SHEET Definition? (YOU do not actually know it if you can not define it)

Micro Drive Inc. Balance Sheet December 31, 1998 Assets

1998

1997

Liabilities and Equity

1998

1997

Cash & Equivalent

$10

$15

Accounts Payable

$60

$30

Notes Payable

110

60

Accruals

140

130

310

220

Long Term Bonds

754

580

Total debts

1064

800

Preferred Stock

40

40

Common Stock

130

130

Retained earnings

766

710

Total Common Equity Total Liabilities & Equity

896 2000

840 1680

Short Term Investments

0

65

Accounts Receivables

375

315

Inventories

615

415

Total Current Assets

1000

810

Net Plant & Equivalents 1000

Total Assets

2000

Total Current Liabilities

870

1680

THE BALANCE SHEET (Order Of Liquidity)

Assets o Receivables o Inventories o Plant and Equipment

Liabilities o o o o o o

Accounts Payable Notes Payable Accruals Long term Financing Preferred Stock Common Stock

Certain Important concepts • Preferred Vs Common stock • Liabilities Vs Stockholders Equity • Stock Holder’s Equity Equation is: Assets-Liabilities-Preferred Stock=C.E • Break down of the CE Account o Paid Up Capital o Retained Earning

• Inventory Accounting • Depreciation Methods o Tangible assets o Intangible assets

• The Time Dimension

The Income Statement Definition?

Micro Drive Inc Income Statement For the Period Ending on December 31, 1998 1998($M) 3000

1997($M) 2850

Expenses (Excluding Depreciation)

2616.2

2497

Depreciation Total Operating Costs

100 2716.2

90 2587.0

Earning Before Interest and Taxes (EBIT) Less Interest

283.8 88

263 60

Earning Before Taxes (EBT) Taxes(40%)

195.8 78.3

203 81.0

Net Income Before Preferred Dividends

177.5

122

Preferred Dividends Net Income Available to Common Stock Holders Common Dividends Addition to Retained Earnings

4.00 113.5 57.5 56.0

4.00 118 53.0 65.0

Net Sales

PER- SHARE DATA 1998

1997

$23

$26

Earning Per Share (EPS)

$2.27

$2.36

Dividends Per Share (DPS) Book Value Per Share (BVPS)

$1.15

$1.06

$17.92

$16.80

Common Stock Price

Calculation of Certain Concepts •

EPS = Net Income/(Common Stock Outstanding) = $113,500,000/50,000,000 = $2.27 per share

•

DPS = Dividends Paid to Common Stock Holders Common Stock Outstanding

•

= $57,500,000/ 50,000,000 = $1.15 per share BVPS = Total Common Equity Common Shares Out Standing = $896’000’000/50,000,000 = $17.92 per share

Statement of Retained Earnings Definition?

Micro Drive Inc. Statement of Retained Earning For the Period ending on December 31, 1998 Balance of Retained Earning, December 31, 1997

$710.00

Add: net Income, 1998

$113.50

Less: Dividends to Common stockholders

($57.50)

Balance of Retained earnings, December, 1998

$766.00

STATEMENT OF CASH FLOW Definition? Net Cash Flow = Net Income – Non cash revenues+ Non Cash charges However practically it is : Net Cash Flow = Net Income + Depreciation and Amortization

Remember Effects of:  Net Income  Non Cash Adjustments to Net Income  Changes to Working Capital  Fixed Assets  Security Transactions Hence cash Flow is affected by three activities:  Operating Activities  Investing Activities  Financing Activities

Micro Drive Inc. Statement of Cash Flow For the Period ending on December 31, 1998 Cash Provided Operating Activity Net Income

$ 117.50

Adjustments Non Cash Adjustments: Depreciation

$ 100.00

Due to Changes in Working Capital Increase in Accounts Receivables

($ 60.00)

Increase in Inventories

($ 200.00)

Increase in Accounts Payable

$ 30.00

Increase in Accruals

$ 10.00

Net Cash Provided by Operating Activities

($ 2.500)

Investing Activities

(230)

(Cash used acquire fixed assets)

Financing Activities Sale of Short Term Investments

$ 65.00

Increase in Notes Payable

$ 50.00

Increase in Bond Outstanding

$ 174.00

Payments of Dividends

($ 61.50)

Net Cash Flow Provided by Financing Activities

227.50

SUMMARY Net Change in Cash{ ($ 2.50) + ($ 230.00) + $ 227.50) }

($ 5.00)

Cash at the Beginning of Year

$ 15.00

Cash at the end of Year

$ 10.00

Cash provided by Operations Net Income Non Cash Expenses Depreciation Deferred Income Taxes Deferred Income Taxes Other, Including amortization

Changes in working capital Decrease (Increase) in inventories Decrease (Increase) in accounts receivables Decrease (Increase) in other current assets Decrease (Increase) in accounts payables Decrease (Increase) in other current liabilities

Cash provided by Operations

Cash Provided (used) by Inventories Additions to property, plant and equipment Additions to other noncurrent assets

Cash provided (used) by investments Cash provided (used) by financing Additions (reductions) to debt Dividend Other

Cash provided (used) by financing Net increase in cash and marketable securities

MODIFYING ACCOUNTING DATA FOR MANAGERIAL DECISIONS • Operating Assets & Non Operating Assets (Cash, A/R, Inv. necessary to operate business and like marketable Securities, investment in subsidiaries, land held for future) • Working Capital & Plant and Equipment • Operating Working Capital & Net Operating Working Capital Net Operating Working Capital = (All Current assets that do not pay Interest) – (All Current Liabilities that do not Charge Interest)

In 1998 in the case of Micro Drive Inc. the NOWC is: = ( Cash + A/ R + Inventories) – (A/P + Accruals) = (10+375+615) – (60 + 140) = $ 800.00 Total Operating Capital =NOWC+FA = $ 800 + $ 1000 = $ 1800.00

• Net Operating Profit After Taxes ( NOPAT) The amount of profit a company would generate if it had no debt and held no financial assets(?). NOPAT = EBIT (1- Tax Rate) = 283.81(1-0.40) = $ 170.30 • Free Cash Flow (FCF) The cash flow actually available for distribution to investors after the company has made all the investment in fixed assets and working capital necessary to sustain ongoing operations Operating Cash Flow = NOPAT + Depreciation = 170.3 + 100 = 270.30 Also: Gross Investment( GI) = Net Investment +Depreciation= 345 +100=445 FCF = Operating Cash Flow - GI = 270.3 – 445 = - 174.7 FCF = NOPAT – Net Investment in Operating Capital = 170.5 – 345 = - 174.7

Taxation System • Indirect Taxation o Customs Duties o Sales Tax o Central Excise

• Direct Taxation (Income Tax) o o o o o o o

Progressive Taxable Income Marginal Tax rate Average Tax Rate Bracket Creep Tax on Dividend (Double Taxation?) Difference in Taxation of Persons