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Statement of Cash Flows: 1998

OPERATING ACTIVITIESNet Income (519,936)Adjustments: Depreciation 116,960 Change in AR (280,960) Change in inventories (572,160) Change in AP 378,560 Change in accruals 353,600 Net cash provided by ops. (523,936)

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L-T INVESTING ACTIVITIESInvestments in fixed assets(711,950)FINANCING ACTIVITIES Change in s-t investments48,600 Change in notes payable520,000 Change in long-term debt676,568 Payment of cash dividends(11,000)Net cash from financing1,234,168 Sum: net change in cash (1,718)Plus: cash at beginning of year9,000 Cash at end of year 7,282

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What were the major sources and uses of cash?

What % of inflows and outflows came from the three areas?

What lifecycle stage is the firm in?

Is cash being created internally or externally?

Is the pattern typical (and sustainable), or not?

Analysis of Statement of Cash Flows

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Net cash from operations = -$523,936, mainly because of negative net income.

The firm borrowed $1,185,568 and sold $48,600 in short-term investments to meet its cash requirements.

Even after borrowing, the cash account fell by $1,718.

What can you conclude about the company’s financial

condition from its statement of cash flows?

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Balance Sheet is “Stock” (as of)

Other Statements are “Flow” (through time)

When analyzing, keep “unusual events” in mind”

NOTES

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INCOME TAXES

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1997 Tax Year Single IndividualTax Rates

Taxable IncomeTax on Base Rate*

0 - 24,650 0 15%24,650 - 59,750 3,697.50 28%59,750 - 124,650 13,525.50 31%124,650 - 271,05033,644.50 36%Over 271,050 86,3480.5039.6%

*Plus this percentage on the amount over the bracket base.

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Assume your salary is $45,000, and you received $3,000 in

dividends.You are single, so your personal exemption is $2,650 and your

itemized deductions are $4,550.

On the basis of the information above and the 1997 tax year tax rate schedule, what is your tax liability?

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Calculation of Taxable Income

Salary $45,000

Dividends 3,000

Personal exemptions (2,650)

Deductions (4,550)

Taxable Income $40,800

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Tax Liability:TL = $3,697.50 + 0.28($16,150)

= $8,219.50.Marginal Tax Rate = 28%.Average Tax Rate:

Tax rate = = 20.15%.

$40,800 - $24,650

$8,219.5 $40,800

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1997 Corporate Tax Rates

Taxable IncomeTax on Base Rate*

0 - 50,000 0 15%50,000 - 75,000 7,500 25%75,000 - 100,000 13,750 34%100,000 - 335,00022,250 39%

Over 18.3M 6.4M 35%

*Plus this percentage on the amount over the bracket base.

... ... ...

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Assume a corporation has $100,000 of taxable income from

operations, $5,000 of interest income, and $10,000 of dividend

income.

What is its tax liability?

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Operating income $100,000Interest income 5,000Taxable dividendincome 3,000*Taxable income $108,000

Tax = $22,250 + 0.39 ($8,000)= $25,370.

*Dividends - Exclusion = $10,000 - 0.7($10,000) = $3,000.

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State and local government bonds (municipals, or “munis”) are generally exempt from federal taxes.

Taxable versus Tax Exempt Bonds

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Exxon bonds at 10% versus California muni bonds at 7%.

T = Tax rate = 28%.After-tax interest income: Exxon = 0.10($5,000) - 0.10($5,000)

(0.28) = 0.10($5,000)(0.72) = $360.

CAL = 0.07($5,000) - 0 = $350.

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Solve for T in this equation:

Muni yield = Corp Yield(1-T) 7.00% = 10.0%(1-T)

T = 30.0%.

At what tax rate would you be indifferent between the muni

and the corporate bonds?

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If T > 30%, buy tax exempt munis.If T < 30%, buy corporate bonds.Only high income, and hence high

tax bracket, individuals should buy munis.

Implications

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Only Marginal Tax Rates Matter (not average rates)

After tax return matters, not pre-tax

After tax return = Pre-tax return x (1 - marginal effective tax rate)

General Concepts (Taxes)

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