The Income Statement •EBT and NI –Earnings-before-taxes (EBT) •EBIT minus interest expense •taxable income –Net income (NI) •EBT minus taxes
Statement of Retained Earnings •Retained earnings –Shows cumulative effect of adjustments to shareholders’ equity resulting from profit, losses, and paying dividends –Shows changes in the account for a period based on profit, loss, or dividend paid
Diaz Manufacturing Statement of Retained Earnings
Cash Flows •Net Cash Flows versus Net Income –Accountants focus on net income and shareholders focus on net cash flows. These are not the same because of delays in inflows and outflows, and non-cash revenues and expenses
Interrelations Among the Financial Statements
Federal Income Tax •Corporate Income Tax –U.S. has a progressive tax with rates ranging from 15 percent to 39 percent •higher taxable income = higher the tax liability
Corporate Tax Rates for 2010
Federal Income Tax •Average versus Marginal Tax Rate –Average tax rate •total taxes paid divided by taxable income for the period –Marginal tax rate •rate paid on the last dollar earned or the next dollar that will be earned
Federal Income Tax •Dividends and Interest are not equal –U.S. tax code •allows interest payments on debt to reduce firms’ taxable income •does not allow dividend payments to equity to reduce firms’ taxable income –debt financing has a lower cost relative to equity financing
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