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Financial Statements, Taxes, and Cash Flow

Chapter 2

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 2: Outline

• Financial Statements:a) The Balance Sheetb) The Income Statement

• Taxes

• Financial Cash Flows

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The Balance Sheet• The balance sheet can be defined as a

of the firm’s assets and liabilities at a given point in time

• Balance Sheet Identity: = +

• Assets are listed in order of

• Liabilities are listed in the order of

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The Balance Sheet

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The Balance Sheet for the Miller Corporation (as of Dec 31)

2010 2011 cash 400 424 accounts receivable 700 705 inventory 1105 1300 total current assets 2205 2429net fixed assets 7344 7650total assets 9549 10079

current liabilities 1003 1255 long-term debt 3106 2085total debt 4109 3340equity ? ?total debt & equity 9549 10079

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Income Statement• The incomes statement can be thought

of as a of the firm’s operations over a specified period of time.

• Be aware of three things:

1. GAAP matching principle 2. Non-cash items3. Costs variable vs. fixedproduct & period

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The Income Statement for the Miller Corporation

(Jan 1 – Dec 31, 2011)

sales 4507

- COGS -2633

- depreciation -952

EBIT 922

- interest -196

taxable income (EBT) 726

- taxes (@ 35%) ?

net income (NI) ?

dividends 250

addition to retained earnings ?7

Taxes

• Marginal vs. average tax rates– Marginal : the percentage paid on the

next dollar earned– Average: the tax bill / taxable income

• Example: Taxable income is $150,000.What are the average and marginal tax rates (given the tax rates on the next slide)? 8

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Corporate Tax Rates

Financial Cash Flow

• Accounting vs. Financial Cash Flow

Accounting CF: Statement of CF (shows uses and sources of cash in detail)

Financial CF: how cash is generated from utilizing assets and how it is paid to those that finance the purchase of the assets

CF from assets = CF to creditors + CF to shareholders

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Cash Flow From Assets

• CF From Assets = Operating Cash Flow (EBIT + depr – taxes) – Net Capital Spending (end NFA – beg NFA + depr)

– Changes in NWC (end NWC – beg NWC)

• CF to Creditors = Interest Paid - New Borrowing (end long-term debt – beg long-term debt)

• CF to Shareholders = Dividends Paid- New Equity Raised (end equity – beg equity

– addition to retained earnings)

=

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