Slide 1Slide 2Slide 3Balance SheetNet Working CapitalUS Corporation Balance Sheet – Table 2.1Balance Sheet AnalysisMarket Value vs. Book ValueThe Income StatementUS Corporation Income Statement – Table 2.2Income Statement AnalysisTime and CostsFinancial Cash FlowFinancial Cash FlowFinancial Cash FlowCash Flow From AssetsThe Concept of Cash FlowCash Flow Summary Table 2.6Cash Flow From AssetsExample of CCFA: Part ICash Flow From AssetsExample of CCFA: Part IISlide 23Slide 24Cash Flow Problem Answers:Comprehensive Problem2-1Financial Statements and Cash FlowChapter 2Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin2-2Chapter Outline•The Balance Sheet•The Income Statement•Cash Flow2-2Current AssetsCashInventoriesFixed assetsProperty, plant, and equipmentIntangible assetsOther assetsCurrent liabilitiesPayablesexpensesLong-term debtStockholders’ equity StockRetained earningsAssets Liabilities and EquityBalance Sheet of a Corporation: Classification2-4Balance SheetThe most important relationship you can bring to this class (from your accounting), is the formula of the “Balance Sheet Identity”:Total Assets = Total Liabilities + Stockholders Equity2-5Net Working Capital NWC = Current Assets – Current LiabilitiesPositive when the cash that will be received over the next 12 months exceeds the cash that will be paid outUsually positive in a financially healthy firm2-52-6US Corporation Balance Sheet – Table 2.1Place Table 2.1 (US Corp Balance Sheet) here2-6Balance Sheet AnalysisWhen analyzing a balance sheet, the Finance Manager should be aware of three concerns:–Liquidity•Refers to the ease and quickness with which assets can be converted to cash—without a significant loss in value–Debt versus equity•Creditors generally receive the first claim on the firm’s cash flow.•Shareholder’s equity = assets - liabilities.–Value versus cost•Market value is the price at which the assets, liabilities, and equity could actually be bought or sold, which is a completely different concept from historical cost.2-8Market Value vs. Book ValueThe balance sheet provides the book value of the assets, liabilities, and equity.Market value is the price at which the assets, liabilities, or equity can actually be bought or sold.The Income StatementMeasures financial performance over a specific period of timeThe accounting definition of income is:Revenue – Expenses ≡ Income2-10US Corporation Income Statement – Table 2.2Income Statement AnalysisWhen analyzing an income statement keep in mind :1. Generally Accepted Accounting Principles (GAAP)•revenues be matched with expenses. •Thus, income is reported when it is earned, even though no cash flow may have occurred.2. Non-Cash Items•No firm ever writes a check for “depreciation.”•deferred taxes, which does not represent a cash flow.•Thus, net income is not cash.3. Time and CostsTime and CostsShort vs. long runIn the short-run certain equipment, resources, and commitments of the firm are fixed, but the firm can vary such inputs as labor and raw materials.In the long-run, all inputs of production (and hence costs) are variable.Financial accountants do not distinguish between variable costs and fixed costs. Instead, accounting costs usually fit into a classification that distinguishes product costs from period costs.Financial Cash FlowThe cash flow statement is concerned with the flow of cash in and cash out of the business. shows how changes in “balance-sheet accounts” and “income” affect cash. The actual cash flow of the firm is the most important item in a financial statements.The cash flow received from the firm’s assets (A) must equal the cash flows to the firm’s creditors (B) and stockholders (S).CF(A)≡ CF(B) + CF(S)Financial Cash FlowCash flow from assets consists of:Operating cash flows = EBIT - taxes + Depreciation •Where taxes = EBT * tax rateCapital spending = ending net fixed assets - beginning net fixed assets + Dep’n.Additions to NWC = ending NWC – beg. NWC.Financial Cash FlowCash flows to Bondholders = Net Interest - ∆ in DebtCash flows to stockholders = dividends - net new equityCash Flow From AssetsOperating Cash Flows: Cash Flows to B/H: EBIT - Taxes Net Interest + Depreciation - Net new Debt = - Capital Spending Cash Flows to S/H: - Additions to NWC Dividends - Net new equity2-17The Concept of Cash FlowCash flow is one of the most important pieces of information that a financial manager can derive from financial statementsWe will look at how cash is generated from utilizing assets andhow it is paid to those that finance the purchase of the assets.2-18Cash Flow Summary Table 2.62-19Cash Flow From AssetsCash Flow From Assets (CFFA) = Cash Flow to Creditors + Cash Flow to Stockholders CFFA = CF to creditors + CF to Stockholders2-20Example of CCFA: Part ICF to Creditors = interest paid – net new borrowing = $24CF to Stockholders = dividends paid – net new equity raised = $63CFFA = CF to creditors + CF to StockholdersCFFA = 24 + 63 = $872-21Cash Flow From AssetsCash Flow From Assets = Operating Cash Flow – Net Capital Spending – Changes in NWC CFFA = OCF – NCS - ∆NWC2-22Example of CCFA: Part IIOCF = EBIT + depreciation – taxes = $547NCS = ending net fixed assets – beginning net fixed assets + depreciation = $130Changes in NWC = ending NWC – beginning NWC = $330CFFA = OCF – NCS - ∆NWCCFFA = 547 – 130 – 330 = $872-23The Big Picture Problem: Balance Sheet and Income Statement InformationCurrent Accounts2009: CA = 3625; CL = 17872008: CA = 3596; CL = 2140Fixed Assets and Depreciation2009: NFA = 2194; 2008: NFA = 2261Depreciation Expense = 500Long-term Debt and Equity2009: LTD = 538; Common stock & APIC = 4622008: LTD = 581; Common stock & APIC = 372Income StatementEBIT = 1014; Taxes = 368Interest Expense = 93; Dividends = 2852-24Task: use the information on the previous slide to compute the following:1. OCF2. NCS3. Changes in NWC4. CFFA5. CF to Creditors6. CF to Stockholders7. CFFA8. Does the CF identity hold?2-25Cash Flow Problem Answers:OCF = 1,014 + 500 – 368 = 1,146NCS = 2,194 – 2,261 + 500 = 433Changes in NWC = (3,625 – 1,787) – (3,596 – 2,140) =