Financial Statements, Cash

Flow, and Taxes

Key Financial Statements
Balance sheet
Income statements
Statement of retained earnings
Statement of cash flows
Accounting income vs. cash flow
Federal tax system
1
The Annual Report
Balance sheet provides a snapshot of a
firms financial position at one point in time.
Income statement summarizes a firms
revenues and expenses over a given period of
time (month, quarter, year).
Statement of retained earnings shows
how much of the firms earnings were
retained, rather than paid out as dividends.
Statement of cash flows reports the
impact of a firms activities on cash flows over
a given period of time.
2
Balance Sheet DLeon Co.
Assets
Liabilities
Owners
Equity
Assets = Liabilities + Owners Equity
3
Balance sheet: Assets

Cash
A/R
Inventories
Total CA
Gross FA
Less: Dep.
Net FA
Total Assets
2013
7,282
632,160
1,287,360
1,926,802
1,202,950
263,160
939,790
2,866,592
2012
57,600
351,200
715,200
1,124,000
491,000
146,200
344,800
1,468,800
4
Balance sheet:
Liabilities and Equity

Accts payable
Notes payable
Accruals
Total CL
Long-term debt
Common stock
Retained earnings
Total Equity
Total L & E
2013
524,160
636,808
489,600
1,650,568
723,432
460,000
32,592
492,592
2,866,592
2012
145,600
200,000
136,000
481,600
323,432
460,000
203,768
663,768
1,468,800
5
Balance Sheet: Notes
Snapshot at a point in time
Inventory valuation issues
Book value (historical) vs Market Value
6
Income statement

Sales
COGS
Other expenses
EBITDA
Depr. & Amort.
EBIT
Interest Exp.
EBT
Taxes
Net income
2013
6,034,000
5,528,000
519,988
(13,988)
116,960
(130,948)
136,012
(266,960)
(106,784)
(160,176)
2012
3,432,000
2,864,000
358,672
209,328
18,900
190,428
43,828
146,600
58,640
87,960
7
Note: negative income tax
Other data

No. of shares
EPS
DPS
Stock price
Lease pmts
2013
100,000
-$1.602
$0.11
$2.25
$40,000
2012
100,000
$0.88
$0.22
$8.50
$40,000
8
Statement of Retained Earnings
(2013) (Stockholders Equity)
Balance of retained
earnings, 12/31, 2012
Add: Net income, 2013
Less: Dividends paid
Balance of retained
earnings, 12/31, 2013

$203,768
(160,176)
(11,000)

$32,592
9
Flow of Funds
10
Income
-expenses
-interest
-taxes
= net income
Income Statement
Assets

Short term

Long term
Liabilities

LT Debt

Equity

Retained Earnings
Balance Sheet
Used to produce
Net Income Dividends = Retained earnings
+ RE expands Assets & Liab + OE
- RE shrinks Assets & Liab + OE
What is a Source vs. Use?
Sources:
Decrease Asset
Increase Liability
Increase Owners
Equity
Uses:
Increase Asset
Decrease Liability
Decrease Owners
Equity

Sources have to equal Uses
from balance sheet accounts
11
Cash & Depreciation
Increase in cash is a use of funds
Increase in an asset consider it just like
any other asset that is used

Increase in depreciation is a source of
funds non cash expense
Due to artificial reduction in income on the
income statement so added back in
12
How to do it. CF Statement
2013 2012 Sources Uses
Assets Assets

Liabilities Liabilities

Owners Equity Owners Equity

Total Sources = Total Uses
13
Balance Sheet Classify Accounts Not Subtotals
Then Rearrange Sources and Uses into Operating, Investing,
Financing and Cash
Statement of Cash Flows
(2013)
OPERATING ACTIVITIES
Net income
Add (Sources of cash):
Depreciation
Increase in A/P
Increase in accruals
Subtract (Uses of cash):
Increase in A/R
Increase in inventories
Net cash provided by ops.

(160,176)

116,960
378,560
353,600

(280,960)
(572,160)
(164,176)
14
Statement of Cash Flows
(2013)
L-T INVESTING ACTIVITIES
Investment in gross fixed
assets
FINANCING ACTIVITIES
Increase in notes payable
Increase in long-term debt
Payment of cash dividend
Net cash from financing
NET CHANGE IN CASH
Plus: Cash at beginning of year
Cash at end of year

(711,950)


436,808
400,000
(11,000)
825,808
(50,318)
57,600
7,282
15
What can you conclude about DLeons
financial condition from its statement
of CFs?
Net cash from operations = -$164,176,
mainly because of negative NI.
The firm borrowed $825,808 to meet
its cash requirements.
Even after borrowing, the cash
account fell by $50,318.
16
Did the expansion create additional net
operating profits after taxes (NOPAT)?
NOPAT = EBIT (1 Tax rate)
note: no financing costs: operating
NOPAT
13
= -$130,948 (1 0.4)
= -$130,948 (0.6)
= -$78,569*

NOPAT
12
= $114,257
*note: tax subsidy (recoup tax payments)
18
NOWC =
Operating
-
Non-interest

current assets bearing CL
NOWC
12
= ($7,282 + $632,160 + $1,287,360)
($524,160 + $489,600)
= $913,042
NOWC
11
= $842,400

Note: if CA includes marketable securities this amount
is not included. Not an operating asset.
What effect did the expansion have on net operating
working capital (operating no financing; no mkt.
sec.)?
20
What effect did the expansion have
on operating capital?
Operating capital = NOWC + Net Fixed Assets

Operating Capital
13
= $913,042 + $939,790
= $1,852,832

Operating Capital
12
= $1,187,200

Note: NOWC does not include financing
21
+
What is your assessment of the
expansions effect on operations?

Sales
NOPAT
NOWC
Operating capital
Net Income
2013
$6,034,000
-$78,569
$913,042
$1,852,832
-$160,176
2012
$3,432,000
$114,257
$842,400
$1,187,200
$87,960
22
What effect did the expansion have on
net cash flow and operating cash flow?
NCF
13
= NI + Dep = ($160,176) + $116,960
= -$43,216
NCF
12
= $87,960 + $18,900 = $106,860

OCF
13
= NOPAT + Depreciation and amortization
= ($78,569) + $116,960
= $38,391
OCF
12
= $114,257 + $18,900
= $133,157
23
NCF vs. OCF
NCF: includes financing
OCF: no financing
(1 - t) = after tax adjustment
NCF
13
OCF
13
= -43,216 38,391 =
-81,607 (after tax interest expense)
Interest
13
= -136,012
Note: -136,012 (1 - .4) = -81,607

24
What was the free cash flow
(FCF) for 2013?
(

A +
(

+ = NOWC
es expenditur
Capital
-
on amortizati
and Depr.
T) - (1 EBIT FCF
FCF
13
= [-$130,948(1 0.4) + $116,960]
[($1,202,950 - $491,000) + (913,042 - 842,400)]
= $-744,201 (using gross fixed assets)
NOTE: Capital Expenditures = Diff Net Plant & Equip + Dep
So: FCF = EBIT(1-T) + Dep [gross fixed assets + NOWC]
Or: FCF = EBIT(1-T) + Dep [Net fixed assets + Dep + NOWC]

Is negative free cash flow always a bad sign?
Change in NWC
Pos then
invested $s
NOPAT
25
How did DLeon finance its
expansion?
DLeon financed its expansion with
external capital.
DLeon issued long-term debt which
reduced its financial strength and
flexibility.
26
Market Value Added (MVA)
Economic Value Added (EVA)
MVA = Market Value Equity Book Value of
Assets (or total common equity)

EVA = NOPAT Annual $ Cost of Cap
EVA = EBIT(1-T) [investor supplied
Operating Cap. x A/T Cost of Capital]

Investor supplied op cap = net fixed assets +
NOWC = net operating capital
27
MVA Calculation for 2013
MVA = Market Value Equity Book Value of
Assets (or total common equity)
Mkt Value Equity = 100,000 shares @ 2.25 =
225,000
Book Value of Assets = total common equity
= 492,592 (CS + RE)
MVA = 225,000 492,592 = -267,592

Note: Share price dropped to 2.25 from 8.50




28
EVA Calculation at after tax
cost of capital = 12%; 2013
EVA = EBIT(1-T) [Operating Cap. x A/T
Cost of Capital]

EBIT(1-T) = -130,948 (1-.4) = -78,569
NOWC = 913,042; Net Fixed Assets =
939,790
EVA = -78,569 [(913,042+939,790)x.12] =
-300,909

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