TKM CH 03

Chapter 3
Understanding
Financial
Statements, Taxes,
and Cash Flows
Copyright 2011 Pearson Prentice Hall. All rights reserved.

Slide Contents
Learning Objectives
Principles Used in This Chapter
1. An Overview of the Firms Financial Statements
2. The Income Statement
3. Corporate Taxes
4. The Balance Sheet
5. The Cash Flow Statement
Key Terms

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Learning Objectives
1. Describe the content of the four basic financial
statements and discuss the importance of
financial statement analysis to the financial
manager.
2. Evaluate firm profitability using the income
statement.
3. Estimate a firms tax liability using the corporate
tax schedule and distinguish between the
average and marginal tax rate.

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Introduction
Use the balance sheet to describe a firms
investments in assets and the way it has
financed them.
Identify the sources and uses of cash flow
for a firm using the firms Cash Flow
Statement.

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Principle 1: Money Has a Time Value.

We need to recognize that financial statements
do not adjust for time value of money.

3-5
(cont.)
Principle 3: Cash Flows Are the Source of
Value.
Financial statements provide an important
starting point in determining the firms cash
flow.
We should be able to distinguish between
reported earnings and cash flow. It is possible
for a firm to report positive earnings but have
no cash!

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(cont.)
Principle 4: Market Prices Reflect
Information.
Firms financial statements provide important
information that is used by investors in forming
expectations about firms future prospects and
subsequently, the market prices.

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3.1 An Overview
of the Firms
Financial
Statements

Basic Financial Statements
Following four types of financial statements

are mandated by the accounting and
financial regulatory authorities:
1. Income statement
2. Balance sheet
3. Cash flow statement
4. Statement of shareholders equity

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Basic Financial Statements (cont.)
1. Income Statement:
An income statement provides the following
information for a specific period of time (for
example, a year or 6 months or 3 months):
Revenue,
Expenses, and
Profit.

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2. Balance sheet:
Balance sheet provides a snap shot of the
following on a specific date (for example, as of
December 31, 2010)
Assets (value of what the firm owns),
Liabilities (value of firms debts), and
Shareholders equity (the money invested by the
company owners).

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3. Cash flow statement:

It reports cash received and cash spent by the
firm over a period of time (for example, over
the last 6 months).

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4. Statement of shareholders equity:

It provides a detailed account of the firms
activities in the following accounts over a
period of time (for example, last six months):
Common stock account,
Preferred stock account,
Retained earnings account, and
Changes to owners equity.

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What is the Focus of this Chapter?
Discuss the basic Content and Format of:

Income statement,
Balance sheet, and
Cash flow statement

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Why Study Financial Statements?
Analyzing a firms financial statement can help
managers carry out three important tasks:
1. Assess current performance through financial
statement analysis,
2. Monitor and control operations, and
3. Forecast future performance.

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(cont.)
1. Financial statement analysis:
Financial statement analysis allows us to
assess the present financial condition of a
firm.
Chapter 4 introduces the tools and techniques
used to carry out financial statement analysis.

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(cont.)
2. Financial control:
Financial statements are used by both insiders
(such as managers, board of directors) and
outsiders (such as suppliers, creditors) to
monitor and control the firms operations.
For example, a creditor may analyze a firms
financial statements to decide whether or not
to renew companys loan.

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(cont.)
3. Financial forecasting and planning:
Financial planning models are typically built
using the financial statements.
Financial planning is covered in chapter 17.

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What are the Accounting Principles Used
to Prepare Financial Statements?
The following three fundamental principles are

adhered to by accountants when preparing
financial statements:
1. The revenue recognition principle,
2. The matching principle, and
3. The historical cost principle.
An understanding of these basic principles allows
us to be a more informed user of financial
statements.

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to Prepare Financial Statements? (cont.)
1. The revenue recognition principle:

It states that the revenue should be included
in the firms income statement for the period
in which:
Its goods and services were exchanged for
cash or accounts receivable; or
The firm has completed what it must do to
be entitled to the cash.

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2. The matching principle:

This principle determines whether specific costs
or expenses can be attributed to this periods
revenues.
The expenses are matched with the revenues
they helped produce.
For example, employees salaries are recognized
when the product produced as a result of that work is
sold, and not when the wages were paid.

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3. The historical cost principle:

This principle provides the basis for
determining the dollar values the firm reports
in its balance sheet.
Most assets and liabilities are reported in the
firms financial statements at historical cost i.e.
the price the firm paid to acquire them. The
historical cost generally does not equal the
current market value of the assets or liabilities.

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3.2 The Income
Statement

An Income Statement
An income statement is also called a profit

and loss statement.
An income statement measures the

amount of profits generated by a firm over
a given time period (usually a year or a
quarter).

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An Income Statement (cont.)
Income statement can be expressed as

follows:
Revenues (or Sales) Expenses = Profits

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An income statement will contain the
following basic elements:
1. Revenues
2. Expenses
Cost of goods sold, Interest expenses, SGA (selling,
general and administrative) expense, depreciation
expense, Income tax expense
3. Profits
Gross profit, net operating income (also known as
EBIT), earnings before taxes (EBT), and net income

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Sales
Minus Cost of Goods Sold
= Gross Profit
Minus Operating Expenses
Selling expenses
General and Administrative expenses
Depreciation and Amortization Expense
= Operating income (EBIT)
Minus Interest Expense
= Earnings before taxes (EBT)
Minus Income taxes
= Net income (EAT)
EBIT = Earnings before interest and taxes; EBT = Earnings before taxes;
EAT = Earnings after taxes

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Sample Income Statement

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Evaluating a Firms EPS and
Dividends
We can use the income statement to
determine the earnings per share (EPS)
and dividends.
EPS = Net income Number of shares
outstanding

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Dividends (cont.)
Example 1: A firm reports a net income
$90 million and has 35 million shares
outstanding, what will be the earnings per
share (EPS)?
EPS = Net income Number of shares

= $90 million $35 million
= $2.57

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Dividends (cont.)
We can determine the dividends paid by
the firm to each shareholder by dividing
the total amount of dividend (reported on
the income statement) by the total number
of shares outstanding.
Dividends per share = Net income

Number of shares

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Dividends (cont.)
Example 2: A firm reports dividend payment
of $20 million on its income statement and
has 35 million shares outstanding. What will
be the dividends per share?
Dividends per share = Net income

Number of shares
= $20 million $35 million
= $0.57

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Connecting the Income Statement
and the Balance Sheet
What can the firm do with the net
income?:
1. Pay dividends to shareholders, and/or
2. Reinvest in the firm

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Connecting the Income Statement
and the Balance Sheet (cont.)
Example 3: Review examples 1 & 2. How
much was retained or reinvested by the
firm?
Amount retained = Net Income
Dividends
= $90m - $20m = $70m
The firms balance on retained earnings will
increase by $70 million on the balance
sheet.

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Interpreting Firm Profitability using
the Income Statement
What can we learn from H.J. Boswell Inc.s
income statement (Table 3-1)?
1. The firm has been profitable as its revenues

exceeded its expenses.

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the Income Statement (cont.)
2. The gross profit margin (GPM)
= gross profits sales
= $675 million $2,700 million
= 25%
GPM indicates the firms mark-up on its cost of

goods sold per dollar of sales.

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3. The operating profit margin
= net operating income sales
= $382.5 million $2,700 million
= 14.17%
The operating profit margin is equal to the ratio

of net operating income or EBIT divided by firms
sales.

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Net profit margin:
= net profits sales
= $204.75 million $2,700 million
= 7.58%
Net profit margin indicates the percentage of

revenues left after all expenses (including
interest and taxes) have been considered.

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These profit margins (gross profit margin,
operating profit margin, and net profit
margin) should be closely monitored and
compared to previous years and those of
competing firms.

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GAAP and Earnings Management
While the firms must adhere to set of

accounting principles, GAAP (Generally
Accepted Accounting Principles), there is
considerable room for managers to
influence the firms reported earnings.
Managers have an incentive to tamper with
reported earnings as their pay depends
upon it and investors care about it.

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Checkpoint 3.1
Constructing an Income Statement

Use the following information to construct an income statement for
Gap, Inc. (GPS). The Gap is a specialty retailing company that sells
clothing, accessories, and personal care products under the Gap, Old
Navy, Banana Republic, Piperlime, and Athleta brand names. Use the
scrambled information below to calculate the firms gross profits,
operating income, and net income for the year ended January 31,
2009. Calculate the firms earnings per share and dividends per share.

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Checkpoint 3.1

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Checkpoint 3.1

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Checkpoint 3.1: Check Yourself
Reconstruct the Gaps income statement assuming the firm is

able to cut its cost of goods sold by 10% and where the firm
pays taxes at 40% tax rate. What is the firms net income and
earnings per share?

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Step 1: Picture the Problem
The income statement can be expressed as
follows:
Revenues Expenses = Net Income
The template on the next slide can be used to

solve the equation.
We are given information on revenues and
expenses (cost of goods sold, operating expenses,
interest expense and income taxes) to fill the
template.

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Step 1: Picture the Problem (cont.)
Revenues
Less: Cost of goods sold
Equals Gross
profit
Less: Operating expenses
Equals: net
Operating income
Less: Interest expense
Equals: earnings
Before taxes
Less: Income taxes
Equals:
NET INCOME

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Step 2: Decide on a Solution
Strategy
Given the account balances, constructing
the income statement will entail
substituting the appropriate balances into
the template of step 1.

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Step 3: Solve
Revenues = $14,526,000,000
Less: Cost of goods sold

= $8,171,100,000
Equals: profit
=$6,354,900,000
Less: Operating expenses
=$3,899,000,000
Equals: net
Operating income
=$2,455,900,000
Less: Interest expense
=$1,000,000
Equals: earnings
Before taxes
=$2,454,900,000
Less: Income taxes (40%)
=$9,819,600,000
Equals:
NET INCOME
=$1,472,940,000

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Step 3: Solve (cont.)
Earnings per share:
= net income number of shares
= $1,472,940,000 716,296,296
= $2.06
Dividends per share
= dividends number of shares
= $243,000,000 716,296,296 = $0.34

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Step 4: Analyze
The firm is profitable since it earned net

income of $1,472,940,000.
The shareholders were able be earn $2.06

per share. However, the dividends per
share were only $0.34 indicating that the
difference of $1.72 was reinvested in the
corporation.

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3.3 Corporate
Taxes

Corporate Taxes
A firms income tax liability is calculated

using its taxable income and the tax rates
on corporate income.
See the table on next slide for corporate

tax rates.

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Corporate tax rates

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Corporate tax rates
The table reveals the following:

Tax rates range from 15% to 39%
Tax rates are progressive i.e. larger
corporations with higher profits will tend to pay
more taxes compared to smaller firms with
lower profits.
Note: In addition to federal taxes, a firm may

face State and City taxes.

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Marginal and Average Tax Rates
While analyzing the tax consequences of a

new business venture, the appropriate tax
rate is the marginal tax rate.
Marginal tax rate is the tax rate that the
company will pay on its next dollar of
taxable income.
Average tax rate is total taxes paid
divided by the taxable income.

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Example 3: What is the average and

marginal tax liability for a firm reporting
$100,000 as taxable income.

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Average tax rate

= Total tax liability Total taxable income
= $22,250 $100,000
= 22.25%
Marginal tax rate
= 39% as the firm will have to pay 39% on its
next dollar of taxable income i.e. if its taxable
income increases from $100,000 to $100,001.

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Dividend Exclusion for Corporate
Shareholders
The dividend received by corporate
stockholders are partially exempt from
taxation. The rationale is to avoid double
taxation at the corporate level. The
percentage of exempt taxes is based on
the degree of ownership of the firm.
Note dividends for non-corporate
investors, like you and me, are not exempt
from taxation they are actually, double-
taxed.
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Shareholders
Example 4
What will be the taxable income if firm ABC
receives $200,000 in dividends from firm XYZ.
The taxable income will depend on the degree

of ownership of XYZ by ABC.
See next slide.

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Shareholders (cont.)
Ownership Dividend Dividend Taxable

Interest Exclusion Income Income
Less than 70% $200,000 $60,000

20%
20% to 75% $200,000 $50,000
79%
80% or 100% $200,000 $0
more

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3.4 The Balance
Sheet

The Balance Sheet
The balance sheet provides a snapshot of

the firms financial position on a specific
date.
The balance sheet is defined by the

following equation:
Total Assets = Total Liabilities + Total Shareholders Equity

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The Balance Sheet (cont.)
Total assets represents the resources

owned by the firm.
Total liabilities represent the total
amount of money the firm owes its
creditors
Total shareholders equity refers to the
difference in the value of the firms total
assets and the firms total liabilities.

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In general, GAAP requires that the firm

report assets on its balance sheet using
the historical costs.
Cash and assets held for sale (such as
marketable securities) are an exception to
the rule. These assets are reported using
the lower of their cost or current market
value.

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Assets whose value is expected to decline

over time (such as equipment) is reported
as net equipment which is equal to the
historical cost minus accumulated
depreciation.
Note, the net value reported on balance
sheet could be significantly different from
the market value of the asset.

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The Balance
Sheet (cont.)

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The balance sheet includes the following

main components:
1.Assets Found on the left-hand side of
the balance sheet. It includes current
assets and fixed assets.
2.Sources of financing Found on the
right-hand side of the balance sheet. It
includes current liabilities, long-term
liabilities, and owners equity.

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Current assets consists of firms cash

plus other assets the firm expects to
convert to cash within 12 months or less,
such as receivables and inventory.
Fixed assets are assets that the firm

does not expect to sell within one year. For
example, plant and equipment, land.

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Current liabilities represent the amount

that the firm owes to creditors that must
be repaid within a period of 12 months or
less such as accounts payable, notes
payable.
Long-term liabilities refer to debt with

maturities longer than a year such as bank
loans, bonds.

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The stockholders equity is broken down

into two components:
(1) The amount the company received from selling
stock to investors. It may be shown as common
stock in the balance sheet or it may be divided
into two components: par value and additional
paid in capital above par. Par value is the stated or
face value a firm puts on each share of stock. Paid in
capital is the additional amount the firm raised when it sold
the shares.

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For example, DLK corporations par value

per share is $2.00 and the firm has 30
million shares outstanding such that the
par value of the firms common equity is
$60 million. If the stocks were issued to
investors for $240 million, $180 million
represents paid in capital.

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(2) The amount of the firms retained

earnings. Retained earnings are the
portion of net income that has been
retained (i.e. not paid in dividends) from
prior years operations.
Thus stockholders equity

= Par value of common stock + Paid in
Capital + Retained Earnings

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We can also express stockholders equity

as follows:
Shareholders' equity = Total Assets Total

Liabilities

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Firm Liquidity and Net Working
Capital
Liquidity refers to the speed with which
an the asset can be converted to cash
without loss of value.
For example, a firms bank account is

perfectly liquid. Other types of assets are
less liquid as they more difficult to sell and
convert to cash such as PPE (property,
plant and equipment).

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Capital
For the overall firm, liquidity generally
refers to the firms ability to covert its
current assts (accounts receivable and
inventories) into cash so that it can pay its
bills (current liabilities) on time.
We can thus measure a firms liquidity by
computing the net working capital =
current assets current liabilities

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Capital (cont.)
If a firms net working capital is
significantly positive, it is in a good
position to pay its debts on time and is
consequently very liquid.
Lenders consider the net working capital as

an important indicator of firms ability to
repay its loans.

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The
Balance
Sheet

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Checkpoint 3.2
Constructing a Balance Sheet

Construct a balance sheet for Gap, Inc. (GPS) using the following list
of jumbled accounts for January 31, 2009. Identify the firms total
assets and net working capital:

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Checkpoint 3.2

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Checkpoint 3.2

3-80
Checkpoint 3.2

3-81
Reconstruct the Gaps balance sheet to reflect the repayment

of $1 billion in short-term debt using a like amount of the
firms cash. What is the balance for total assets and current
liabilities?

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The firms balance sheet can be expressed

as follows:
Total Shareholders Equity +
Total Liabilities
= Total Assets
The template on the following slide shows
how to construct the balance sheet.

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Current Assets Current Liabilities
Cash Accounts payable
Accounts Receivable Short-term debt
Inventories Other current liabilities
Other current assets
Total current assets Total current liabilities
Long-term (fixed) assets Long-term Liabilities

Gross PPE Long-term debt
Less: Accumulated depreciation
Net property, plant and equip. Owners Equity
Par value of common stock
Other long-term assets Paid-in-capital
Retained earnings
Total long-term assets Total equity
Total Assets Total Liabilities and

Owners equity

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Strategy
We are given the account balances so in
order to construct the balance sheet we
need to substitute the appropriate
balances into the template developed in
step 1.

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Step 3: Solve
Cash Current 1,158,000,000
Inventories 756,000,000 liabilities
Other current 1,506,000,000
assets
743,000,000
Total current 3,005,000,000 Total current 1,158,000,000
assets liabilities
Net Property, 2,993,000,000 Long-term 1,019,000,000
Plant and liabilities
equipment
Other long- 626,000,000 Common Equity 4,387,000,000
term assets
Total Assets $6,564,000,00 Total $6,564,000,00
0 Liabilities 0
and Equity

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Step 4: Analyze
We can make the following observations from
Gaps Balance sheet:
The total assets of $6,564,000,000 is financed
by a combination of current liabilities, long-
term liabilities and owners equity. Owners
equity accounts for $4,387,000,000 of the
total.
The firm has a healthy net working capital of
$1,847,000,000 (3,005,000,000 minus
1,158,000,000).

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Debt and Equity Financing
The right-hand side of the balance sheet

reveals the sources of money used to
finance the purchase of the firms assets
listed on the left-hand side of the balance
sheet.
It shows how much was borrowed (debt
financing) and how much was provided by
firms owners (equity financing, through
the sale of equity or retention of prior
years earnings).
3-88
Debt versus Equity
Payment: Payment for debt holders is

generally fixed (in the form of interest);
Payment for equity holders (dividends) is
not fixed nor guaranteed.
Seniority: Debt holders are paid before
equity holders in the event of bankruptcy.
Maturity: Debt matures after a fixed period
while equity securities do not mature.

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Book Values, Historical Costs, and
Market Values
Book values (based on historical cost)
reported in the balance sheet can differ
from market values.
The gap between book value and market
value is likely to be higher for fixed assets
relative to current assets for two reasons:
Inflation affects the market price of asset; and
Depreciation adjustments in the balance sheet
do not reflect actual changes in market values.

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3.5 The Cash
Flow Statement

The Cash Flow Statement
The Cash Flow Statement is used by

firms to explain changes in their cash
balances over a period of time by
identifying all of the sources and uses of
cash.

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Sources and Uses of Cash
Source of cash is any activity that brings

cash into the firm. For example, sale of
equipment.
Use of cash is any activity that causes cash

to leave the firm. For example, payment of
taxes.

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Balance Sheet for
H.J. Boswell, Inc.

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Cash Flow Analysis
Why did the cash balance decline by $4.5

million from 2009 to 2010?
1.Accounts receivable increased by $22.5
million representing an increase in
uncollected cash from credit sales. Thus it
represents $22.5m of use of cash to
invest in accounts receivable.

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Cash Flow Analysis (cont.)
2. Inventory increased by $148.50 million

indicating use of cash to procure
inventory.
3. Equipment increased by $175.50 million
indicating use of cash to invest in
equipment.
In general,
an increase in an asset account = use of cash
a decrease in an asset account = source of
cash
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4. Accounts Payable, credit extended to the

firm, increased by $4.5million. Thus
source of cash increased by $4.5million
due to accounts payable.
5. Long-term debt increased by $51.75
million indicating a source of cash.
6. Short-term debt decreased by $9 million
indicating use of cash to pay off the debt.

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7. Retained earnings increased by $159.75

million representing a source of cash to the
firm from the firms operations.
In general,
An increase in a liability account = source of
cash
A decrease in a liability account = use of cash

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Change in cash balance = Sources of cash
Use of Cash = $216 - $220.50 = -$4.50
Sources of Cash Uses of Cash
Increase in Accounts Increase in Accounts
Payable = $4.50 Receivable $22.50
Increase in long-term Increase in inventory =

debt =$51.75 $148.50
Increase in retained Increase in net plant
earnings = $159.75 and equipment = $40.50
Decrease in short-term
notes = $9
Total Sources of cash Total Uses of cash =
= $216.00 $220.50

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An analysis of H.J. Boswells operations reveals
the following for 2010:
The firm used more cash than it generated,
resulting in a deficit of $4.5 million
The primary source of cash flow was retained
earnings ($159.75 million) followed by long-
term debt ($51.75 million)
The largest use of cash was for acquiring
inventory at $148.5 million.

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Cash Flow Analysis Summary
Sources of Cash Uses of Cash
Decrease in an asset Increase in an asset

account account
Increase in a Decrease in a
liability account liability account
Increase in an Decrease in an
owners equity owners equity
account account

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Cash Flow Statement
The format for a traditional cash flow

statement is as follows:
Beginning Cash Balance
Plus: Cash Flow from Operating Activities
Plus: Cash Flow from Investing Activities
Plus: Cash Flow from Financing Activities
Equals: Ending Cash Balance

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Cash Flow Statement (cont.)
Operating activities represent the

companys core business including sales
and expenses. Basically any activity that
affects net income for the period.
Investing activities include the cash flows

that arise out of the purchase and sale of
long-term assets such as plant and
equipment.

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Cash Flow Statement (cont.)
Financing activities represent changes in

the firms use of debt and equity such as
issue of new shares, payment of dividends.

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H.J. Boswell,
Inc.
Statement of
Cash Flows

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Checkpoint 3.3
Interpreting the Statement of Cash Flow
You are in your second rotation in the management training program at a regional
brokerage firm and your supervisor calls you into her office on Monday morning to discuss
your next training rotation. When you enter her office you are surprised to learn that you
will be responsible for compiling a financial analysis of Chesapeake Energy Inc. (CHK).
Chesapeake is the largest producer of natural gas in the United States and is
headquartered in Oklahoma City. Your boss suggests that you begin your analysis by
reviewing the firms cash flow statements for 2004 through 2007 (found below):

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Checkpoint 3.3

3-107
Checkpoint 3.3

3-108
Checkpoint 3.3

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Checkpoint 3.3

3-110
Go to http:finance.google.com/finance and get the

cash flow statements for the most recent four-year
period for Exco Resources (XCO). How does their cash
from investing activities compare to their cash flow
from operating activities in 2009.

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The cash flow statement uses information

from the firms balance sheet and income
statement to identify the net sources and
uses of cash for a specific period of time.
The sources and uses of cash are
organized into cash from operating
activities, investing activities, and
financing activities.

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The format for a traditional cash flow statement is
as follows:
Beginning Cash Balance
Plus: Cash Flow from Operating Activities
Plus: Cash Flow from Investing Activities
Plus: Cash Flow from Financing Activities
Equals: Ending Cash Balance

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Here we have to compare the cash flow

from operating activities and investment
activities in 2007 for Exco Resources
(XCO).

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Strategy
We can compare the cash flow from
operating activities and cash flow from
investing activities by looking at the cash
flow statement.
The cash flow statement can be retrieved

from http://finance.google.com/finance

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Step 3: Solve
Cash flow from operating activities

EXCO had a positive cash flow from operating
activities of $577.83 million in 2007. In 2006,
the cash flow from operating activities was
much lower at $227.86.
The primary contributors to the operating cash
flows in 2007 were the firms
depreciation/depletion expense and non-cash
expense. Net working capital is a use of cash.

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Step 3: Solve (cont.)
Cash flow from investing activities:
Cash flow from investing activities were

($2,396.44) million in 2007.
EXCO had invested heavily in capital

expenditures in 2007 with a total expense of
$2,846.97 million.

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Step 4: Analyze
The cash flow statement for 2007 depicts a
profitable firm with positive cash flow from
operations.
The firm has been aggressively investing in fixed
assets to the tune of almost 4 times its operating
cash flows.
The firm has been able to successfully raise
money from capital markets by issuing stocks of
nearly $2,000 million.

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Key Terms
Accounts receivable
Accounts payable
Accumulated depreciation
Paid-in-capital
Average tax rate
Balance sheet
Cash flow statement

3-119
Key Terms (cont.)
Cost of goods sold

Current assets
Current liabilities
Depreciation expense
Dividends per share
Earnings before interest and taxes (EBIT)
Earnings per share

3-120
Key Terms (cont.)
Fixed assets
Gross plant and equipment
Gross profit margin
Income statement
Inventories
Liquidity
Long-term debt

3-121
Key Terms (cont.)
Marginal tax rate

Market value
Net operating income
Net income
Net plant and equipment
Net profit margin
Net working capital

3-122
Key Terms (cont.)
Operating profit margin

Par value
Profits
Retained earnings
Revenues
Source of cash
Stockholders equity

3-123
Key Terms (cont.)
Taxable income
Total assets
Total liabilities
Total shareholders equity
Uses of cash

3-124

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Chapter 3

Copyright 2011 Pearson Prentice Hall. All rights reserved.

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Copyright 2011 Pearson Prentice Hall. All rights reserved.

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Principle 1: Money Has a Time Value.

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Following four types of financial statements

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3. Cash flow statement:

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4. Statement of shareholders equity:

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Discuss the basic Content and Format of:

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The following three fundamental principles are

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1. The revenue recognition principle:

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2. The matching principle:

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3. The historical cost principle:

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An income statement is also called a profit

An income statement measures the

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Income statement can be expressed as

Revenues (or Sales) Expenses = Profits

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EPS = Net income Number of shares

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Dividends per share = Net income

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Dividends per share = Net income

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1. The firm has been profitable as its revenues

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GPM indicates the firms mark-up on its cost of

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The operating profit margin is equal to the ratio

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Net profit margin indicates the percentage of

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While the firms must adhere to set of

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Constructing an Income Statement