CHAP2 LECTURE - Chapter 2 Understanding Financial...

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Unformatted text preview: Chapter 2 Understanding Financial Statements, Taxes, and Cash Flows Income Statement SALES - EXPENSES = PROFIT Income Statement SALES - EXPENSES = PROFIT Revenue Income Statement SALES - EXPENSES = PROFIT Cost of Goods Sold Operating Expenses (marketing, administrative) Financing Costs Taxes SALES - Cost of Goods Sold GROSS PROFIT - Operating Expenses Income Statement OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) - Income Taxes EARNINGS AFTER TAXES (EAT) - Preferred Stock Dividends - NET INCOME AVAILABLE SALES - Cost of Goods Sold GROSS PROFIT - Operating Expenses Income Statement OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) - Income Taxes EARNINGS AFTER TAXES (EAT) - Preferred Stock Dividends - NET INCOME AVAILABLE SALES - Cost of Goods Sold GROSS PROFIT - Operating Expenses Income Statement OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) - Income Taxes EARNINGS AFTER TAXES (EAT) - Preferred Stock Dividends - NET INCOME AVAILABLE Balance Sheet Outstanding Debt + Shareholders' Equity Total Assets = Balance Sheet Assets Current Assets Cash Marketable Securities Accounts Receivable Inventories Prepaid Expenses Liabilities (Debt) & Equity Current Liabilities Accounts Payable Accrued Expenses Short-term notes Long-term notes Mortgages Long-Term Liabilities Equity Fixed Assets Machinery & Equipment Buildings and Land Other Assets Investments & patents Preferred Stock Common Stock (Par value) Paid in Capital Retained Earnings Assets Current Assets: assets that are relatively liquid, and are expected to be converted to cash within a year. Cash, marketable securities, accounts receivable, inventories, prepaid expenses. Assets Current Assets: assets that are relatively liquid, and are expected to be converted to cash within a year. Cash, marketable securities, accounts receivable, inventories, prepaid expenses. Fixed Assets: machinery and equipment, buildings, and land. Assets Current Assets: assets that are relatively liquid, and are expected to be converted to cash within a year. Cash, marketable securities, accounts receivable, inventories, prepaid expenses. Fixed Assets: machinery and equipment, buildings, and land. Other Assets: any asset that is not a current asset or fixed asset. Intangible assets, such as patents and copyrights. Financing Debt Capital: financing provided by a creditor. Short-term debt: borrowed money that must be repaid within the next 12 months. Accounts payable, other payables such as interest or taxes payable, accrued expenses, short-term notes. Long-term debt: loans from banks or other sources that lend money for longer than 12 months. Financing Equity Capital: shareholders' investment in the firm. Preferred Stockholders: receive fixed dividends, and have higher priority than common stockholders in event of liquidation of the firm. Common Stockholders: residual owners of a business. They receive whatever is left after creditors and preferred stockholders are paid. Corporate Income Tax Rates Since 1993 Taxable Income $1 - $50,000 $50,001 - $75,000 $75,001 - $100,000 $100,001 - $335,000 $335,001 - $10,000,000 $10,000,001 - $15,000,000 $15,000,001 - $18,333,333 over $18,333,333 Corporate Tax Rate 15% 25% 34% 39% 34% 35% 38% 35% Free Cash Flows Free cash flow: cash flow that is free and available to be distributed to the firm's investors (both debt and equity investors). Free Cash Flows Cash Flows from Assets = Cash Flows from Financing Cash flows generated through the firm's assets = Cash flows paid to - or received from - the firm's investors (creditors & stockholders) Calculating Free Cash Flows: An Asset Perspective After-tax cash flow from operations less investment in net operating working capital less investments in fixed and other assets Calculating Free Cash Flows: An Asset Perspective After-tax cash flow from operations less investment in net operating working capital less investments in fixed and other assets Operating income + depreciation - cash tax payments Calculating Free Cash Flows: An Asset Perspective After-tax cash flow from operations less investment in net operating working capital less investments in fixed and other assets [Change in current assets] - [change in non-interest bearing current liabilities] Calculating Free Cash Flows: An Asset Perspective After-tax cash flow from operations less investment in net operating working capital less investments in fixed and other assets Change in gross fixed assets, and any other assets that are on the balance sheet. Calculating Free Cash Flows: A Financing Perspective Interest payments to creditors = change in debt principal dividends paid to stockholders change in stock Financing Free Cash Flows ...
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