gbus502 vicentiu covrig 1 financial statements and cash flow (chapter 3)

GBUS502Vicentiu Covrig

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Financial statements and Financial statements and cash flowcash flow

(chapter 3)(chapter 3)


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Sources of InformationSources of Information

Annual reports Wall Street Journal Internet

- www.yahoo.com

- www.smartmoney.com Mergent online SEC

- EDGAR

- 10K & 10Q reports


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Financial statementsFinancial statements Balance sheet – provides a snapshot of a firm’s financial position at one

point in time. Income statement – summarizes a firm’s revenues and expenses over a

given period of time. Statement of retained earnings – shows how much of the firm’s

earnings were retained, 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

I’ll review most of the concepts for this chapter using the integrated case D’Leon from page 80 in your text


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Balance Sheet: AssetsBalance Sheet: Assets

CashA/RInventories

Total CAGross FALess: Dep.

Net FATotal Assets

20087,282

632,1601,287,3601,926,8021,202,950 263,160 939,7902,866,592

200757,600

351,200 715,2001,124,000

491,000 146,200 344,8001,468,800


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Balance sheet: Balance sheet: Liabilities and EquityLiabilities and Equity

Accts payableNotes payableAccruals

Total CLLong-term debtCommon stockRetained earnings

Total EquityTotal L & E

2008524,160

636,808 489,6001,650,568

723,432460,000

32,592 492,5922,866,592

2007145,600200,000

136,000481,600323,432460,000

203,768 663,7681,468,800


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Income statementIncome statement

SalesCOGSOther expenses

EBITDADepr. & Amort.

EBITInterest Exp.EBTTaxesNet income

20086,034,000

5,528,000 519,988

(13,988) 116,960(130,948) 136,012(266,960) (106,784) (160,176)

20073,432,0002,864,000 358,672

209,328 18,900

190,428 43,828

146,600 58,640

87,960


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Other dataOther data

No. of sharesEPSDPSStock priceLease pmts

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 Retained Earnings Statement of Retained Earnings (2008)(2008)

Balance of retained

earnings, 12/31/07

Add: Net income, 2008

Less: Dividends paid

Balance of retained

earnings, 12/31/08

$203,768

(160,176)

(11,00

0)

$32,592


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What effect did the expansion have on What effect did the expansion have on net and total operating working capital?net and total operating working capital?

Net operating working capital (NOWC) = All current assets – All current liabilities that do not charge interest = (Cash and marketable securities + Accounts receivable + Inventories) – - (Account payable +Accruals)

NOWC2008 = $913,042NOWC2007 = $842,400

Total Operating capital = NOWC + Net Fixed Assets

Total Operating Capital2008 = $1,852,832Total Operating Capital2007 = $1,187,200


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Did the expansion create additional net Did the expansion create additional net operating after taxes (NOPAT)?operating after taxes (NOPAT)?

NOPAT = EBIT (1 – Tax rate)

NOPAT08 = -$130,948(1 – 0.4)

= -$130,948(0.6)= -$78,569

NOPAT07 = $114,257


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What is your assessment of the What is your assessment of the expansion’s effect on operations?expansion’s effect on operations?

Sales

NOPAT

NOWC

Operating capital

Net Income

2008 $6,034,000

-$78,569$913,042

$1,852,832-$160,176

2007 $3,432,00

0$114,257$842,400$1,187,20

0$87,960


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What effect did the expansion have on What effect did the expansion have on operating cash flow?operating cash flow?

OCF08 = NOPAT + Dep

= ($78,569) + $116,960

= $38,391

OCF07 = $114,257 + $18,900

= $133,157


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What was the free cash flow What was the free cash flow (FCF) for 2008?(FCF) for 2008?

FCF = the cash flow available for distribution to all investors after the company has made all investments in fixed assets, new products, working capital necessary to sustain the ongoing operations

FCF = OCF – Gross capital investment

- OR -

FCF08 = NOPAT – Net capital investment

= NOPAT – (Total Operating Capital08 - Total Operating Capital07 )

= -$78,569 – ($1,852,832 - $1,187,200)

= -$744,201

Is negative free cash flow always a bad sign?


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Does D’Leon pay its suppliers on time?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.

Does it appear that D’Leon’s sales price Does it appear that D’Leon’s sales price exceeds its cost per unit sold? exceeds its cost per unit sold?


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What if D’Leon’s sales manager decided to What if D’Leon’s sales manager decided to offer 60-day credit terms to customers, rather offer 60-day credit terms to customers, rather

than 30-day credit terms?than 30-day credit terms?

If competitors match terms, and sales remain constant …- A/R would - Cash would

If competitors don’t match, and sales double …- Short-run: Inventory and fixed assets to meet

increased sales. A/R , Cash . Company may have to seek additional financing.

- Long-run: Collections increase and the company’s cash position would improve.


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How did D’Leon finance its How did D’Leon finance its expansion?expansion?

D’Leon financed its expansion with external capital. D’Leon issued long-term debt which reduced its financial

strength and flexibility.


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What happens if D’Leon depreciates fixed What happens if D’Leon depreciates fixed assets over 7 years (as opposed to the assets over 7 years (as opposed to the

current 10 years)?current 10 years)?

No effect on physical assets.

Fixed assets on the balance sheet would decline.

Net income would decline.

Tax payments would decline.


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Federal Income Tax SystemFederal Income Tax System


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Corporate and Personal TaxesCorporate and Personal Taxes Both have a progressive structure (the higher the income, the

higher the marginal tax rate). Corporations

- Rates begin at 15% and rise to 35% for corporations with income over $10 million.

- Also subject to state tax (around 5%). Individuals

- Rates begin at 10% and rise to 35% for individuals with income over $349,700.

- May be subject to state tax.


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Tax treatment of various uses and Tax treatment of various uses and sources of fundssources of funds

Interest paid – tax deductible for corporations (paid out of pre-tax income), but usually not for individuals (interest on home loans being the exception).

Interest earned – usually fully taxable (an exception being interest from a (muni”).

Dividends paid – paid out of after-tax income. Dividends received – taxed as ordinary income for

individuals (“double taxation”). A portion of dividends received by corporations is tax excludable, in order to avoid “triple taxation”.


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More tax issuesMore tax issues Tax Loss Carry-Back and Carry-Forward – since corporate

incomes can fluctuate widely, the tax code allows firms to carry losses back to offset profits in previous years or forward to offset profits in the future.

Capital gains – defined as the profits from the sale of assets not normally transacted in the normal course of business, capital gains for individuals are generally taxed as ordinary income if held for less than a year, and at the capital gains rate if held for more than a year. Corporations face somewhat different rules.

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