Professional Documents
Culture Documents
FINANCIAL STATEMENTS,
CASH
FLOW, AND TAXES
Balance sheet
Income statement
Statement of cash flows
Accounting income vs. cash flow
MVA and EVA
Federal tax system
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2.
the
the
the
the
balance sheet,
income statement,
statement of retained earnings, and
statement of cash flows.
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Example
For illustrative purposes, we shall use data taken from Allied
Management reported that the drop resulted from losses associated with a
the future, stating that full operations had been resumed, that several
unprofitable businesses had been eliminated, and that 2002 profits were
expected to rise sharply.
Of course, an increase in profitability may not occur, and analysts should
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HE BALANCE SHEET
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Continued
Allied can write checks for a total of $10 million (versus
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saves a part of its earnings rather than paying all earnings out as
dividends.
The breakdown of the common equity accounts is important for
some purposes but not for others.
For example, a potential stockholder would want to know whether
the company actually earned the funds reported in its equity
accounts or whether the funds came mainly from selling stock.
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5. Inventory accounting.
Allied uses the FIFO (first-in, first-out) method to
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6. Depreciation methods.
Most companies prepare two sets of financial statements
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Intangible Assets
Assets such as patents, copyrights, trademarks, and
goodwill.
Amortization
A noncash charge similar to depreciation except that it
is used to write off the costs of intangible assets.
EBITDA
Earnings before interest, taxes, depreciation, and
amortization.
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Where
Noncash revenues = deferred taxes
Noncash charges = Depreciation and amortization
Net cash flow = Net income + Depreciation and amortization.
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(stockholders and debt holders) after the company has made all
the investments in fixed assets, new products, and working
capital necessary to sustain ongoing operations.
CALCULATING FREE CASH FLOW
1.Operating Cash Flow
Equal to NOPAT plus any noncash adjustments, calculated on
an after-tax basis.
Operating cash flow = NOPAT + Depreciation
Operating cash flow = $170.3 + $100
Operating cash flow = $270.3 million.
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year.
EVA = (Net operating profit after taxes, or NOPAT) (After-tax
dollar cost of capital used to support operations)
EVA = (EBIT(1- Corporate tax rate)) ((Total investor-supplied
operating capital)(After-tax percentage cost of capital))
EVA = EBIT(1- tax rate)) (Total operating capital)(After-tax % cost of capital)
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Progressive Tax
A tax system where the tax rate is higher on higher incomes. The
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Reason:
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