Professional Documents
Culture Documents
McGraw-Hill/Irwin
Slide 2
Slide 3
Chapter Outline
2.1 The Balance Sheet 2.2 The Income Statement 2.3 Taxes
Slide 4
Sources of Information
Annual reports Wall Street Journal Internet
NYSE (www.nyse.com) NASDAQ (www.nasdaq.com) Textbook (www.mhhe.com)
SEC
EDGAR 10K & 10Q reports
McGraw-Hill/Irwin
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved
Slide 5
McGraw-Hill/Irwin
Slide 6
Fixed assets: Property, plant, and equipment $1,423 $1,274 Less accumulated depreciation (550) (460) Net property, plant, and equipment 873 814 Intangible assets and other 245 221 Total fixed assets $1,118 $1,035
The assets are listed in2007 order by 2006 Current Liabilities: the length Accounts payable of time it would $213 $197 Notes payable 50 53 normally take a firm with Accrued expenses 223 205 Total currentoperations liabilities $486 $455 ongoing to convert Long-term liabilities: them into cash.
Deferred taxes Long-term debt Total long-term liabilities $117 471 $588 $104 458 $562
Total assets
$1,879
$1,742
Stockholder's equity: Preferred stock $39 $39 Common stock ($1 per value) 55 32 Capital surplus 347 327 Accumulated retained earnings 390 347 Less treasury stock (26) (20) Total equity $805 $725 Total liabilities and stockholder's equity $1,879 $1,742
Clearly, cash is much more liquid than property, plant, and equipment.
McGraw-Hill/Irwin
Slide 7
McGraw-Hill/Irwin
Slide 8
Liquidity
Refers to the ease and quickness with which assets can be converted to cash without a significant loss in value Current assets are the most liquid. Some fixed assets are intangible. The more liquid a firms assets, the less likely the firm is to experience problems meeting short-term obligations. Liquid assets frequently have lower rates of return than fixed assets.
McGraw-Hill/Irwin
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved
Slide 9
McGraw-Hill/Irwin
Slide 10
Slide 11
McGraw-Hill/Irwin
Slide 12
McGraw-Hill/Irwin
Slide 13
McGraw-Hill/Irwin
Slide 14
McGraw-Hill/Irwin
Slide 15
McGraw-Hill/Irwin
Slide 16
McGraw-Hill/Irwin
Slide 17
GAAP
The matching principal of GAAP dictates that revenues be matched with expenses. Thus, income is reported when it is earned, even though no cash flow may have occurred.
McGraw-Hill/Irwin
Slide 18
Non-Cash Items
Depreciation is the most apparent. No firm ever writes a check for depreciation. Another non-cash item is deferred taxes, which does not represent a cash flow. Thus, net income is not cash.
McGraw-Hill/Irwin
Slide 19
Slide 20
2.3 Taxes
The one thing we can rely on with taxes is that they are always changing Marginal vs. average tax rates
Marginal the percentage paid on the next dollar earned Average the tax bill / taxable income
Other taxes
McGraw-Hill/Irwin
Slide 21
If you are considering a project that will increase the firms taxable income by $1 million, what tax rate should you use in your analysis?
McGraw-Hill/Irwin
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved
Slide 22
McGraw-Hill/Irwin
Slide 23
Fixed assets: Property, plant, and equipment $1,423 $1,274 Less accumulated depreciation (550) (460 Net property, plant, and equipment 873 814 Intangible assets and other 245 221 Total fixed assets $1,118 $1,035
Here we see NWC grow $117 to $104 471 458 $275 million in 2006 from $588 $562 $252 million in 2005. Stockholder's equity: Preferred stock $39 $39 $23 million Common stock ($1 par value) 55 32 Capital surplus 347 327 This increase of $23 million is Accumulated retained earnings 390 347 Less treasury stock (26) (20) an investment of the firm.
Total equity $805 $725 $1,742 Total liabilities and stockholder's equity $1,879
McGraw-Hill/Irwin
Slide 24
Slide 25
$238
-173
Depreciation
$90
$42
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved
Slide 26
Capital Spending
-173
-23 $42
Capital Spending
Cash Flow of Investors in the Firm Debt (Interest plus retirement of debt minus long-term debt financing) Equity (Dividends plus repurchase of equity minus new equity financing) Total
McGraw-Hill/Irwin
$36
$42
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved
Slide 27
$238
-173
NWC grew from $275 million in 2007 from $252 million in 2006. This increase of $23 million is the addition to NWC.
$42
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved
Slide 28
$238
-173
$42
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved
Slide 29
$238
$49 73
$42
Total
$36
Slide 30
$238
Dividends
Repurchase of stock
$43
6
$42
Slide 31
The cash flow received from the firms assets must equal the cash flows to the firms creditors and stockholders:
CF ( A) CF ( B ) CF ( S )
$42
McGraw-Hill/Irwin
Slide 32
Slide 33
Operations Net Income Depreciation Deferred Taxes Changes in Assets and Liabilities Accounts Receivable Inventories Accounts Payable Accrued Expenses Notes Payable Other
$86 90 13
-24 11 16 18 -3 -8 $199
Slide 34
Cash flow from investing activities involves changes in capital assets: acquisition of fixed assets and sales of fixed assets (i.e., net capital expenditures).
-$198 25 -$173
McGraw-Hill/Irwin
Slide 35
Retirement of debt (includes notes) Proceeds from long-term debt sales Dividends Repurchase of stock Proceeds from new stock issue Total Cash Flow from Financing
-$73 86 -43 -6 43 $7
McGraw-Hill/Irwin
Slide 36
McGraw-Hill/Irwin
Slide 37
Quick Quiz
What is the difference between book value and market value? Which should we use for decision making purposes? What is the difference between accounting income and cash flow? Which do we need to use when making decisions? What is the difference between average and marginal tax rates? Which should we use when making financial decisions? How do we determine a firms cash flows? What are the equations, and where do we find the information?
McGraw-Hill/Irwin
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved