Financial Statements and Cash Flow Analysis
Explore the importance of financial statements and cash flow analysis, along with sources of information, in evaluating a company's financial health. Dive into D. Leon Inc.'s case, a snack food company facing challenges due to unsatisfactory expansion results. Analyze its balance sheet, income statement, and other relevant data to understand its current situation and the necessary changes to be implemented.
Download Presentation
Please find below an Image/Link to download the presentation.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author. If you encounter any issues during the download, it is possible that the publisher has removed the file from their server.
You are allowed to download the files provided on this website for personal or commercial use, subject to the condition that they are used lawfully. All files are the property of their respective owners.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author.
E N D
Presentation Transcript
FIN303 Vicentiu Covrig Financial statements and cash flow (chapter 3) 1
FIN303 Vicentiu Covrig Sources of Information Annual reports Wall Street Journal Internet - www.yahoo.com - www.smartmoney.com Mergent online SEC - EDGAR - 10K & 10Q reports 2
FIN303 Vicentiu Covrig The Annual Report Balance sheet provides a snapshot of a firm s financial position at one point in time. Income statement summarizes a firm s revenues and expenses over a given period of time. Statement of cash flows reports the impact of a firm s activities on cash flows over a given period of time. Statement of stockholders equity shows how much of the firm s earnings were retained, rather than paid out as dividends. 3
FIN303 Vicentiu Covrig Overview of D Leon Inc. Snack food company that underwent major expansion in 2014. So far, expansion results have been unsatisfactory. - Company s cash position is weak. - Suppliers are being paid late. - Bank has threatened to cut off credit. Board of Directors has ordered that changes must be made! 4
FIN303 Vicentiu Covrig Balance Sheet: Assets 2014 57,600 351,200 715,200 1,124,000 491,000 146,200 344,800 1,468,800 2015 7,282 632,160 1,287,360 1,926,802 1,202,950 263,160 939,790 2,866,592 Cash A/R Inventories Total CA Gross FA Less: Dep. Net FA Total Assets 5
FIN303 Vicentiu Covrig Balance Sheet: Liabilities and Equity 2015 524,160 636,808 489,600 1,650,568 723,432 460,000 32,592 492,592 2,866,592 2014 145,600 200,000 136,000 481,600 323,432 460,000 203,768 663,768 1,468,800 Accts payable Notes payable Accruals Total CL Long-term debt Common stock Retained earnings Total Equity Total L & E 6
FIN303 Vicentiu Covrig Income Statement 2015 $6,034,000 5,528,000 519,988 2014 $3,432,000 2,864,000 358,672 Sales COGS Other expenses Total oper. costs excl. deprec. & amort. Depreciation and amortization EBIT Interest expense EBT Taxes Net income $6,047,988 116,960 ($ 130,948) 136,012 ($ 266,960) (106,784) ($ 160,176) $3,222,672 18,900 $ 190,428 43,828 $ 146,600 58,640 $ 87,960 7
FIN303 Vicentiu Covrig Other Data 2015 100,000 -$1.602 $0.11 $2.25 2014 100,000 $0.88 $0.22 $8.50 No. of shares EPS DPS Stock price 8
FIN303 Vicentiu Covrig Did the expansion create additional after-tax operating income? AT operating income = EBIT(1 Tax rate) AT operating income15 = -$130,948(1 0.4) = -$130,948(0.6) = -$78,569 AT operating income14 = $114,257 9
FIN303 Vicentiu Covrig What effect did the expansion have on net operating working capital? Current Current Notes = NOWC assets liabilitie s payable = + + ($ , 7 282 632 $ 160 , , 1 $ 287 360 , ) NOWC 15 = ($ , 1 650 568 , 636 $ 808 , ) 913 $ 042 , = 842 $ , 400 NOWC 14 10
FIN303 Vicentiu Covrig What was the free cash flow (FCF) for 2015? + = on amortizati Depr. and Capital + FCF EBIT(1 T) NOWC expenditur es FCF15 $116,960] [($1,202,950 $491,000) + $70,642] = -$744,201 Is negative free cash flow always a bad sign? = [-$130,948(1 0.4) + 11
FIN303 Vicentiu Covrig Performance Measures for Evaluating Managers Accounting statements insufficient for evaluating managers performance because they do not reflect market values. Performance Measures MVA = Difference between market value and book value of a firm s common equity. P0 x Number of shares Book value. EVA = Estimate of a business true economic profit for a given year. Investor-supplied capital Cost of capital EBIT(1 T) x 12
FIN303 Vicentiu Covrig What was D Leon s MVA in 2014 and 2015? MVA14 = ($8.50 x 100,000) $663,768 = $186,232. MVA15 = ($2.25 x 100,000) $492,592 = -$267,592. Shareholder wealth has been destroyed! 13
FIN303 Vicentiu Covrig Federal Income Tax System 14
FIN303 Vicentiu Covrig Corporate and Personal Taxes Both have a progressive structure (the higher the income, the higher the marginal tax rate). Corporations - Rates begin at 15% and rise to 35% for corporations with income over $10 million, although corporations with income between $15 million and $18.33 million pay a marginal tax rate of 38%. - Also subject to state tax (around 5%). 15
FIN303 Vicentiu Covrig Tax treatment of various uses and sources of funds Interest paid tax deductible for corporations (paid out of pre-tax income), but usually not for individuals (interest on home loans being the exception). Interest earned usually fully taxable (an exception being interest from a (muni ). Dividends paid paid out of after-tax income. Dividends received taxed as ordinary income for individuals ( double taxation ). A portion of dividends received by corporations is tax excludable, in order to avoid triple taxation . 16
FIN303 Vicentiu Covrig Tax Treatment of Various Uses and Sources of Funds Dividends received: most investors pay 15% taxes. - Investors in the 10% or 15% tax bracket pay 0% on qualified dividends. - Single individuals with incomes over $400,000 and married couples filing jointly with incomes over $450,000 pay 20% taxes on dividends. - Dividends are paid out of net income which has already been taxed at the corporate level, this is a form of double taxation . - A portion of dividends received by corporations is tax excludable, in order to avoid triple taxation. 17
FIN303 Vicentiu Covrig More Tax Issues Tax Loss Carry-Back and Carry-Forward since corporate incomes can fluctuate widely, the Tax Code allows firms to carry losses back to offset profits in previous years or forward to offset profits in the future. Capital gains defined as the profits from the sale of assets not normally transacted in the normal course of business, capital gains for individuals are generally taxed as ordinary income if held for a year or less, and at the capital gains rate if held for more than a year. Corporations face somewhat different rules. Most taxpayers pay 15% taxes on long-term capital gains. Single individuals with incomes over $400,000 and married couples filing jointly with incomes over $450,000 pay 20% taxes on long-germ capital gains. 18
FIN303 Vicentiu Covrig After tax calculation AT Income =BT Income x(1-T) AT Interest rate= BT Interest rate x(1-T) Example: BT mortgage rate is 4%; T=25% AT mortgage= 3% 19
FIN303 Vicentiu Covrig Learning objectives Annual report; Balance sheet; Income Statement items you see on the slides You DO NOT need to know the Statement of Cash Flows (3.4) Free Cash Flow MVA and EVA (no numerical problems) Taxes All the numerical problems on the slides and recommended below from end of chapter You need to know to do After Tax Income problems and remember the formula from page 83 Questions: ST-1, ST-2 a,b,c,d; 3-1 to 3-5; 3-7,3-9,3-10 Problems: 3-1, 3-2, 3-3, 3-5, 3-8, 20
