FINANCIAL STEMENTS,

CASH FLOWS, AND TAXES

 FINANCIAL STATEMENTS
History of Accounting and Financial
Statements
Journal and Ledger
Trial Balance
Balance Sheet
Profit and Loss Account
Statement of Retained Earnings
Notes to the Accounts
CEO Report
 BALANCE SHEET
Definition?
(YOU do not actually know it if you can not define it)
 Micro Drive Inc.
Balance Sheet
December 31, 1998
Assets 1998 1997 Liabilities and Equity 1998 1997
Cash & Equivalent $10 $15 Accounts Payable $60 $30
Short Term Notes Payable 110 60
Investments 0 65
Accounts Receivables 375 315 Accruals 140 130

Inventories 615 415 Total Current Liabilities 310 220

Total Current Long Term Bonds 754 580
Assets 1000 810
Net Plant & Equivalents Total debts 1064 800
1000 870
Preferred Stock 40 40
Common Stock 130 130
Retained earnings 766 710
Total Common Equity 896 840
Total Assets 2000 1680 Total Liabilities & Equity 2000 1680
THE BALANCE SHEET
(Order Of Liquidity)

Assets
o Receivables
o Inventories
o Plant and Equipment
Liabilities
o Accounts Payable
o Notes Payable
o Accruals
o Long term Financing
o Preferred Stock
o Common Stock
 Certain Important concepts

• Preferred Vs Common stock

• Liabilities Vs Stockholders Equity
• Stock Holder’s Equity Equation is:
Assets-Liabilities-Preferred Stock=C.E
• Break down of the CE Account
o Paid Up Capital
o Retained Earning
• Inventory Accounting
• Depreciation Methods
o Tangible assets
o Intangible assets
• The Time Dimension
The Income Statement
Definition?
 Micro Drive Inc
Income Statement
For the Period Ending on December 31, 1998
1998($M) 1997($M)
Net Sales 3000 2850
Expenses (Excluding Depreciation) 2616.2 2497
Depreciation 100 90
Total Operating Costs 2716.2 2587.0
Earning Before Interest and Taxes (EBIT) 283.8 263
Less Interest 88 60
Earning Before Taxes (EBT) 195.8 203
Taxes(40%) 78.3 81.0
Net Income Before Preferred Dividends 177.5 122
Preferred Dividends 4.00 4.00
Net Income Available to Common Stock Holders 113.5 118
Common Dividends 57.5 53.0
Addition to Retained Earnings 56.0 65.0
 PER- SHARE DATA
1998 1997

Common Stock Price $23 $26

Earning Per Share (EPS) $2.27 $2.36

Dividends Per Share (DPS) $1.15 $1.06

Book Value Per Share
(BVPS) $17.92 $16.80
 Calculation of Certain Concepts

• EPS = Net Income/(Common Stock Outstanding)

= $113,500,000/50,000,000 = $2.27 per share

• DPS = Dividends Paid to Common Stock Holders

Common Stock Outstanding

= $57,500,000/ 50,000,000
= $1.15 per share
• BVPS = Total Common Equity
Common Shares Out Standing

= $896’000’000/50,000,000
= $17.92 per share
Statement of Retained Earnings
Definition?
 Micro Drive Inc.
Statement of Retained Earning
For the Period ending on December 31, 1998
Balance of Retained Earning, December 31, $710.00
1997
Add: net Income, 1998 $113.50
Less: Dividends to Common stockholders ($57.50)
Balance of Retained earnings, December, $766.00
1998
 STATEMENT OF CASH FLOW
Definition?
Net Cash Flow = Net Income – Non cash revenues+ Non
Cash charges
However practically it is :
Net Cash Flow = Net Income + Depreciation and
Amortization
Remember
Effects of:
 Net Income
 Non Cash Adjustments to Net Income
 Changes to Working Capital
 Fixed Assets
 Security Transactions

Hence cash Flow is affected by three activities:

 Operating Activities
 Investing Activities
 Financing Activities
 Micro Drive Inc.
Statement of Cash Flow
For the Period ending on December 31, 1998
Cash Provided
Operating Activity
Net Income $ 117.50
Adjustments
Non Cash Adjustments:
Depreciation $ 100.00
Due to Changes in Working Capital
Increase in Accounts Receivables ($ 60.00)
Increase in Inventories ($ 200.00)
Increase in Accounts Payable $ 30.00
Increase in Accruals $ 10.00
Net Cash Provided by Operating Activities ($ 2.500)
Investing Activities (230)
(Cash used acquire fixed assets)
Financing Activities
Sale of Short Term Investments $ 65.00
Increase in Notes Payable $ 50.00

Increase in Bond Outstanding $ 174.00

Payments of Dividends ($ 61.50)

Net Cash Flow Provided by Financing Activities 227.50

SUMMARY

Net Change in Cash{ ($ 2.50) + ($ 230.00) + $ 227.50) } ($ 5.00)

Cash at the Beginning of Year $ 15.00

Cash at the end of Year $ 10.00

Cash provided by Operations
Net Income
Non Cash Expenses
Depreciation
Deferred Income Taxes
Deferred Income Taxes
Other, Including amortization
Changes in working capital
Decrease (Increase) in inventories
Decrease (Increase) in accounts receivables
Decrease (Increase) in other current assets
Decrease (Increase) in accounts payables
Decrease (Increase) in other current liabilities
Cash provided by Operations
Cash Provided (used) by Inventories
Additions to property, plant and equipment
Additions to other noncurrent assets
Cash provided (used) by investments
Cash provided (used) by financing
Additions (reductions) to debt
Dividend
Other
Cash provided (used) by financing
Net increase in cash and marketable securities
 MODIFYING ACCOUNTING DATA FOR
MANAGERIAL DECISIONS
• Operating Assets & Non Operating Assets
(Cash, A/R, Inv. necessary to operate business
and like marketable Securities, investment in
subsidiaries, land held for future)
• Working Capital & Plant and Equipment
• Operating Working Capital & Net Operating
Working Capital
Net Operating Working Capital =
(All Current assets that do not pay Interest) –
(All Current Liabilities that do not Charge
Interest)
In 1998 in the case of Micro Drive Inc. the
NOWC is:
= ( Cash + A/ R + Inventories) – (A/P +
Accruals)
= (10+375+615) – (60 + 140) = $ 800.00
Total Operating Capital =NOWC+FA
= $ 800 + $ 1000
= $ 1800.00
• Net Operating Profit After Taxes ( NOPAT)
The amount of profit a company would generate if it had
no debt and held no financial assets(?).
NOPAT = EBIT (1- Tax Rate)
= 283.81(1-0.40) = $ 170.30
• Free Cash Flow (FCF)
The cash flow actually available for distribution to investors after the
company has made all the investment in fixed assets and working
capital necessary to sustain ongoing operations
Operating Cash Flow = NOPAT + Depreciation
= 170.3 + 100 = 270.30
Also:
Gross Investment( GI) = Net Investment +Depreciation=
345 +100=445
FCF = Operating Cash Flow - GI = 270.3 – 445
= - 174.7
FCF = NOPAT – Net Investment in
Operating Capital
= 170.5 – 345 = - 174.7
 Taxation System
• Indirect Taxation
o Customs Duties
o Sales Tax
o Central Excise

• Direct Taxation (Income Tax)

o Progressive
o Taxable Income
o Marginal Tax rate
o Average Tax Rate
o Bracket Creep
o Tax on Dividend (Double Taxation?)
o Difference in Taxation of Persons