Financial Statements

# Financial Statements - Finance 4310 Financial Statements...

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1 Finance 4310 Financial Statements Lecture Major Objectives • Consider the balance sheet as an equation • Consider the income statement as an equation • Consider the effect of non cash expenses, like depreciation, on cash flow • Consider how the firm gets and how it uses funds (sources and uses of funds funds (sources and uses of funds)

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2 Equations of the Firm’s Financial Statements Balance sheet equation • Balance sheet equation • Income statement equation Balance Sheet Equation Assets = Debt + Equity (The balance sheet must balance).
3 Equation of the Income Statement Sales - COGS = Gross Profit Operating Expenses (incl Depreciation) - Operating Expenses (incl. Depreciation) = EBIT - Interest Expense = Taxable Income - Taxes = Net Income Net Income - Dividend = Addition to Retained Earnings Operating Cash Flow Begin with operating cash flow (EBIT • Begin with operating cash flow (EBIT) • Subtract taxes • Does not consider financing costs (interest) • Does not consider changes in working capita capital • Does not consider changes in capital spending

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4 Operating Cash Flow + + = + + = + = = + = Dep t(Int t EBIT(1 OCF Depr t(Int) t(EBIT) - EBIT OCF Depr Int) - t(EBIT - EBIT OCF Int) - t(EBIT Taxes But Depr Taxes - EBIT OCF = = + + = Int) - Depr - t(NR Taxes Depr - NR EBIT then Expenses, Operating Cash - Revenues as Revenue Net define we If : Form Another Depr Shield Tax Interest EBIT Aftertax OCF Depr t(Int) t) - + + = + + = + + + = + = + = Shield Tax Interest Shield Tax Depr Revenue Net Aftertax OCF t(Int) t(Depr) t) - NR(1 OCF Depr t(Int) t(Depr) t(NR) - Depr - NR OCF Depr Int) - Depr - t(NR - Depr) - (NR OCF Depr Taxes - EBIT OCF Free Cash Flow • Operating cash flow only considers cash flows that are part of the income statemen flows that are part of the income statement • There can also be balance sheet changes and financing costs that will affect cash flow – Changes in Net Working Capital – Changes in capital spending – Financing costs (outflows) and inflows • Free cash flow is the sum of OCF and these balance sheet and financing changes
5 Changes in Net Working Capital Δ Δ = Δ s Liabilitie Current - Assets Current Capital Working Net Changes in Capital Spending from Revenues Aftertax of Cost Aftertax Capital

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## This note was uploaded on 02/24/2010 for the course FINA 4310 taught by Professor Impson during the Spring '10 term at North Texas.

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Financial Statements - Finance 4310 Financial Statements...

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