Professional Documents
Culture Documents
Cash Flow
Chapter Outline
2.1 The Balance Sheet
2.2 The Income Statement
2.3 Taxes
2.4 Net Working Capital
2.5 Financial Cash Flow
2.6 The Accounting Statement of
Cash Flows
$140
294
269
58
$761
2006
$107
270
280
50
$707
Fixed assets:
Property, plant, and equipment
$1,423 $1,274
Less accumulated depreciation
(550)
(460)
Net property, plant, and equipment
873
814
Intangible assets and other
245
221
Total fixed assets
$1,118 $1,035
Total assets
$1,879
$1,742
$117
471
$588
$104
458
$562
Stockholder's equity:
Preferred stock
$39
$39
Common stock ($1 per value)
55
32
Capital surplus
347
327
Accumulated retained earnings
390
347
Less treasury stock
(26)
(20)
Total equity
$805
$725
Total liabilities and stockholder's equity $1,879 $1,742
Liquidity
Refers to the ease and quickness with
which assets can be converted to cash
without a significant loss in value
Current assets are the most liquid.
Some fixed assets are intangible.
The more liquid a firms assets, the less
likely the firm is to experience problems
meeting short-term obligations.
Liquid assets frequently have lower
rates of return than fixed assets.
XYZ Ltd purchased new machinery three years ago for Rs.
7mn. The machinery can be sold today for Rs.3.2mn. XYZ ltd
current balance sheet shows net fixed assets of Rs.4mn,
current liabilities of Rs. 2.2mn and net working capital of
0.9mn. If all the current assets were liquidated today, the
company would receive Rs. 2.8mn. What is the book value of
the companys assets today? What is the market value?
B.V.=7.1mn
M.V.=6mn
The following table presents the long-term liabilities and stockholders equity
of a company one year ago. During the past year the company issued 10mn
shares at a total price of 26mn and issued Rs.8 mn in long term debt. The
company generated Rs. 7mn in net income and paid Rs.4mn in dividends.
Construct the current balance sheet reflecting the changes that occurred at
the company during the year.
60
18
25
49
89
Long term debt
Shareholders equity
Preferred stock
Common Stock
Capital Surplus
Accumulated RE
Last
year
Current
year
60
68
18
25
49
89
18
35
65
92
241
278
Income Statement
The operations
section of the
income statement
reports the firms
revenues and
expenses from
principal
operations.
$2,262
1,655
327
90
$190
29
$219
49
$170
84
$86
$43
$43
Income Statement
The non-operating
section of the
income statement
includes all
financing costs,
such as interest
expense.
$2,262
1,655
327
90
$190
29
$219
49
$170
84
$86
$43
$43
Income Statement
Usually a separate
section reports the
amount of taxes
levied on income.
$2,262
1,655
327
90
$190
29
$219
49
$170
84
$86
$43
$43
Income Statement
$2,262
1,655
327
90
$190
29
$219
49
$170
84
$86
$43
$43
GAAP
The matching principal of GAAP
dictates that revenues be matched
with expenses.
Thus, income is reported when it is
earned, even though no cash flow
may have occurred.
Non-Cash Items
Depreciation is the most apparent.
No firm ever writes a check for
depreciation.
Another non-cash item is deferred
taxes, which does not represent a
cash flow.
Thus, net income is not cash.
During the year, a company had gross sales of Rs.1 mn. The
firms cost of goods sold and selling expense were 0.3mn and
0.2mn respectively. The company also had notes payable of
Rs.1mn. These notes carried an interest rate of 10%.
Depreciation was 0.1mn. The tax rate for the company is 35%.
1.What was the companys net income?
2.What was the companys operating cash flow?
N.I.: 195,000
OC.F.: 395,000
2.3 Taxes
The one thing we can rely on with
taxes is that they are always
changing
Marginal vs. average tax rates
Marginal the percentage paid on the
next dollar earned
Average the tax bill / taxable income
Other taxes
Balance Sheet
$252m = $707- $455
2007
Current assets:
Cash and equivalents
Accounts receivable
Inventories
Other
Total current assets
$140
294
269
58
$761
2006
$107
270
280
50
$707
Fixed assets:
Property, plant, and equipment
$1,423 $1,274
Less accumulated depreciation
(550)
(460
Net property, plant, and equipment
873
814
Intangible assets and other
245
221
Total fixed assets
$1,118 $1,035
2007
Current Liabilities:
Accounts payable
Notes payable
Accrued expenses
Total current liabilities
$1,879
$1,742
$197
53
205
$455
Long-term liabilities:
Deferred taxes
Long-term debt
Total long-term liabilities
Total assets
$213
50
223
$486
2006
$805
$725
$1,742
Operations
Net Income
Depreciation
Deferred Taxes
Changes in Assets and Liabilities
Accounts Receivable
Inventories
Accounts Payable
Accrued Expenses
Notes Payable
Other
Total Cash Flow from Operations
$86
90
13
-24
11
16
18
-3
-8
$199
-$198
25
-$173
-$73
86
-43
-6
43
$7
Operations
Net Income
Depreciation
Deferred Taxes
Changes in Assets and Liabilities
Accounts Receivable
Inventories
Accounts Payable
Accrued Expenses
Notes Payable
Other
Total Cash Flow from Operations
Investing Activities
Acquisition of fixed assets
Sales of fixed assets
Total Cash Flow from Investing Activities
Financing Activities
Retirement of debt (includes notes)
Proceeds from long-term debt sales
Dividends
Repurchase of stock
Proceeds from new stock issue
Total Cash Flow from Financing
Change in Cash (on the balance sheet)
$86
90
13
-24
11
16
18
-3
-8
$199
-$198
25
-$173
-$73
86
-43
-6
43
$7
$3
3
Given the Income statement and Balance sheet for XYZ Ltd. Do
the following:
1.Determine the Cash Flow From Operations, Investing and
Financing
2.Explain the changes in cash during the year.
Income
statement
Revenue
Expenses
Depreciatio
n
Net Income
Dividends
For 2014
500
300
75
125
65
Assets
2014
2013
Cash
45
10
Other CA
145
120
Net Fixed Assets
250
150
Total Assets
440
280
Current Liabilities
70
60
Long-term debt
90
0
Stockholder's equity
280
220
CFO
Cash from Investing
Change in FA
CFI
Cash from Financing
Debt
Dividends
CFF
Change in Cash
125
75
-25
10
185
-175
-175
90
-65
25
35
Quick Quiz
What is the difference between book
value and market value? Which should
we use for decision making purposes?
What is the difference between
accounting income and cash flow? Which
do we need to use when making
decisions?
What is the difference between average
and marginal tax rates? Which should we
use when making financial decisions?
How do we determine a firms cash flows?
What are the equations, and where do we
find the information?