FINANCIAL STATEMENTS, CASH FLOW, AND TAXES

taufikur@ugm.ac.id
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Financial Statements and Reports

The Need of Financial Statements and

Reports The Different between Financial Statements and Financial Reporting Financial Statements consist of:

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The Balance Sheet The Income Statement The Statement of Retained Earnings The Statement of Cash Flows
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The Balance Sheet

Assets = Liabilities + Equity Cash versus other assets Liabilities versus stockholders equity Preferred versus common stock Breakdown of the common equity accounts Inventory accounting Depreciation methods The time dimension
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Balance Sheet: Assets

Cash AR Inventories Total CA Gross FA Less: Deprec. Net FA Total Assets

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2010 7,282 632,160 1,287,360 1,926,802 1,202,950 263,160 939,790 2,866,592

2009 57,600 351,200 715,200 1,124,000 491,000 146,200 344,800 1,468,800

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Liabilities and Equity 2009 2010 Accts payable 524,160 145,600 Notes payable 720,000 200,000 Accruals 489,600 136,000 Total CL 481,600 1,733,760 Long-term debt 1,000,000 323,432 Common stock 460,000 460,000 Retained earnings (327,168) 203,768 Total equity 132,832 663,768 Total L&E 2,866,592 1,468,800
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The Income Statement

Revenue

Expense Vs Cost
Depreciation; Amortization; Depletion

EBITDA
EBIT Net Income

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Income Statement
2009 2010 5,834,400 3,432,000 5,728,000 2,864,000 680,000 340,000 (573,600) 228,000 116,960 18,900 (690,560) 209,100 176,000 62,500 (866,560) 146,600 (346,624) 58,640 (519,936) 87,960
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Sales COGS Other expenses EBITDA Depr. & Amort. EBIT Interest exp. EBT Taxes (40%) Net income
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Other Data 2010 No. of shares EPS 100,000 ($5.199) 2009 100,000 $0.88

DPS
Stock price

$0.110
$2.25

$0.22
$8.50

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Statement of Retained Earnings & Statement of Cash Flow

Statement of Retained Earning
Claim against assets Not represent cash available for payment dividend and other else

Net Cash Flow Vs. Accounting Profit

Net cash flow = NI Noncash revenue + Noncash charges Net cash flow = NI + Depreciation and Amortization

Statement of Cash Flow

Operating Activities Investing Activities Financing Activities

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Statement of Retained Earnings (2010) Balance of retained earnings, 12/31/2010 Add: Net income, 2010 Less: Dividends paid Balance of retained earnings, 12/31/2010

$203,768 (519,936) (11,000) ($327,168)

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Statement of Cash Flows (2010)

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.
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(519,936) 116,960 378,560 353,600 (280,960) (572,160) (523,936)

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L-T INVESTING ACTIVITIES Investment in fixed assets

(711,950) 520,000 676,568 (11,000) 1,185,568 (50,318)

FINANCING ACTIVITIES Increase in notes payable Increase in long-term debt Payment of cash dividends Net cash from financing
NET CHANGE IN CASH

Plus: Cash at beginning of year Cash at end of year

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57,600 7,282
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What can you conclude about DLeons financial condition from its statement of CFs?
Net cash from operations = -$523,936, mainly

because of negative NI.

The firm borrowed $1,185,568 to meet its cash

requirements.
Even after borrowing, the cash account fell by

$50,318.

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Accounting Data for Managerial Decisions

Operating Assets and Operating Capital
Operating Assets; Nonoperating Assets Operating Working Capital; Net Operating Working Capital

Net Operating Profit After Taxes (NOPAT) = EBIT (1 Tax rate) Net Operating Working Capital (NOWC) =

Current Asset Non-interest bearing Current liabilities

Free Cash Flow

= NOPAT - Net Investment in operating capital

Market Value Added (MWA)
= Market Value of stock Equity capital supplied by stockholders

Economic Value Added (EVA)

= NOPAT (Operating capital)(After-tax percentage cost of capital)
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Did the expansion create additional net operating profit after taxes (NOPAT)? NOPAT = EBIT(1 Tax rate)

NOPAT10 = -$690,560(1 0.4) = -$690,560(0.6) = -$414,336.

NOPAT09 = $125,460.
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What effect did the expansion have on net operating working capital (NOWC)? NOWC = Current assets Non-interest bearing CL

NOWC10 = ($7,282 + $632,160 + $1,287,360) ($524,160 + $489,600) = $913,042.

NOWC09 = $842,400.
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What effect did the expansion have on capital used in operations?

Operating capital = NOWC + Net fixed assets. Operating = $913,042 + $939,790 capital10 = $1,852,832.
Operating = $1,187,200. capital09
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What is your initial assessment of the expansions effect on operations?

2010 $5,834,400 ($414,336) $913,042 $1,852,832 ($519,936) 2009 $3,432,000 $125,460 $842,400 $1,187,200 $87,960

Sales NOPAT NOWC Operating capital Net Income

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What effect did the companys expansion have on its net cash flow and operating cash flow? NCF10 = NI + DEP = ($519,936) + $116,960 = ($402,976). NCF09 = $87,960 + $18,900 = $106,860. OCF10 = NOPAT + DEP = ($414,336) + $116,960 = ($297,376). OCF09 = $125,460 + $18,900 = $144,360.
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What was the free cash flow (FCF) for 2010

FCF = NOPAT Net capital investment = -$414,336 ($1,852,832 $1,187,200) = -$414,336 $665,632 = -$1,079,968.
Is negative free cash flow always a bad sign?

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Economic Value Added (EVA)

Operating Income After-Tax Cost EVA = After Tax of Capital Used Cost of = Funds Available Capital Used to Investors = NOPAT After-Tax Cost of Capital Used

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EVA Concepts
In order to generate positive EVA, a firm

has to more than just cover operating costs. It must also provide a return to those who have provided the firm with capital. EVA takes into account the total cost of capital, which includes the cost of equity.

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What is the companys EVA? Assume the firms after-tax cost of capital was 11% in 2009 and 13% in 2010.
EVA10 = NOPAT (A-T cost of capital)(Capital) = -$414,336 (0.13)($1,852,832) = -$414,336 $240,868 = -$655,204.

EVA09= $125,460 (0.11)($1,187,200) = $125,460 $130,592 = -$5,132.

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Would you conclude that the expansion increased or decreased MVA? Market value Equity capital MVA = of equity supplied During the last year stock price has decreased 73%, so market value of equity has declined. Consequently, MVA has declined.
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