UT FIN 357 - Chapter 2. Accounting value (28 pages)

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Chapter 2. Accounting value



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Chapter 2. Accounting value

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Pages:
28
School:
University of Texas at Austin
Course:
Fin 357 - Business Finance
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Accounting Value Chapter 2 Finance 357 J David Miller 2017 Balance Sheet Balance Sheet Snapshot of accounting value on a specific date Assets on left side Liabilities and Stockholder s equity on right side Assets Liabilities Stockholder s Equity 2 Balance Sheet Financial Concerns Accounting Liquidity quickness with which assets can be converted to cash Current Assets are the most liquid Cash shortterm notes Accounts Receivable is next with payments forthcoming and ability to factor them Inventory is more difficult to convert to cash as it must be sold first Fixed Assets are most difficult to convert to cash as they usually aren t meant to be resold 3 A Typical Balance Sheet Balance Sheet Financial Concerns Debt versus Equity Debt requires fixed payments of interest and principle over time First claim in bankruptcy Equity only has a residual claim on firm assets and does not require any ongoing payments Behind debt holders in bankruptcy Value versus Cost Generally GAAP requires that financial statements carry assets at cost Can be very misleading because market values of assets often vary from their original cost In Finance Value implies market value not cost 5 Income Statement Income Statement measures performance over specific time period Important Income Statement Values Operating Income Earnings before interest and taxes EBIT Earnings per share EPS 6 An Income Statement The operations section of the income statement reports the firm s revenues and expenses from principal operations Total operating revenues Cost of goods sold Selling general and administrative expenses Depreciation Operating income Other income Earnings before interest and taxes Interest expense Pretax income Taxes Current 71 Deferred 13 Net income Addition to retained earnings Dividends 2 262 1 655 327 90 190 29 219 49 170 84 86 43 43 An Income Statement The non operating section of the income statement includes all financing costs such as interest expense Total operating revenues Cost of goods sold Selling general and administrative expenses Depreciation Operating income Other income Earnings before interest and taxes Interest expense Pretax income Taxes Current 71 Deferred 13 Net income Addition to retained earnings Dividends 2 262 1 655 327 90 190 29 219 49 170 84 86 43 43 An Income Statement Net income is the bottom line Total operating revenues Cost of goods sold Selling general and administrative expenses Depreciation Operating income Other income Earnings before interest and taxes Interest expense Pretax income Taxes Current 71 Deferred 13 Net income Retained earnings Dividends 2 262 1 655 327 90 190 29 219 49 170 84 86 43 43 Income Statement Key Facts Important points to remember Income is reported when it is earned not when it is collected Non cash items are included in the income statement Depreciation Deferred Taxes Footnotes to income statement may provide important details not explicitly explained in the statement itself 10 Average Tax Rate Average Tax Rate The Average Tax rate is the tax bill divided by taxable income Taxable Income 10 000 000 Taxes Paid 3 500 000 Average Tax Rate 3 500 000 10 000 000 35 11 Tax Rates Marginal Tax Rate The Marginal Tax rate is the tax rate that would be paid on one more dollar of income In decision making Marginal Tax Rate is most important Taxable Income 250 000 50 000 X 15 7 500 75 000 50 000 X 25 6 250 100 000 75 000 X 34 8 500 250 000 100 000 X 39 58 500 Taxes Due 80 750 Average Tax Rate 80 750 250 000 32 3 Marginal Tax Rate 39 12 Net Working Capital Net Working Capital Current Assets Current Liabilities NWC usually grows with the firm 13 Balance Sheet and Change in NWC 252m 707 455 2014 Current assets Cash and equivalents Accounts receivable Inventories Total current assets 198 294 269 761 2013 157 270 280 Current Liabilities Accounts payable Total current liabilities 2013 486 455 486 455 707 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 275m 761m 486m 2014 Long term liabilities Deferred taxes Long term debt Total long term liabilities Here we see NWC grow 117to 104 471 458 275 million in 2014 from 588 562 252 million in 2013 Stockholder s equity Preferred stock 39 39 23 million Common stock 1 par value 55 32 This increase of 23 million is an investment of the firm Financial Cash Flow Calculation of Financial Cash Flow Statement of Cash Flow is helpful but Financial Cash Flows are the basis of firm value Financial Cash Flow not the same as Net Working Capital Cash Inventory both Current Assets Financial Cash Flow Formula CF from Assets CF to Bondholders CF to Stockholders 15 Cash generated by operations is used to pay debts and provide return to shareholders Calculating Financial Cash Flow Step 1 Cash Flows to Firm Operating Cash Flow Minus Capital Spending Minus Additions to Net Working Capital Step 2 Cash Flow to Investors Cash Flow to Debt Holders Cash Flow to Equity Investors 16 Financial Cash Flows Cash Flow of the Firm Operating cash flow Earnings before interest and taxes plus depreciation minus taxes Capital spending Acquisitions of fixed assets minus sales of fixed assets Additions to net working capital Total Cash Flow of Investors in the Firm Debt Interest plus retirement of debt minus long term debt financing Equity Dividends plus repurchase of equity minus new equity financing Total 238 Operating Cash Flow EBIT 173 23 42 36 6 42 219 Depreciation 90 Current Taxes 71 OCF 238 Financial Cash Flows Cash Flow of the Firm Operating cash flow Earnings before interest and taxes plus depreciation minus taxes Capital spending Acquisitions of fixed assets minus sales of fixed assets Additions to net working capital Total Cash Flow of Investors in the Firm Debt Interest plus retirement of debt minus long term debt financing Equity Dividends plus repurchase of equity minus new equity financing Total 238 Capital Spending 173 23 42 36 6 42 Purchase of fixed assets 198 Sales of fixed assets 25 Capital Spending 173 Financial Cash Flows Cash Flow of the Firm Operating cash flow Earnings before interest and taxes plus depreciation minus taxes Capital spending Acquisitions of fixed assets minus sales of fixed assets Additions to net working capital Total Cash Flow of Investors in the Firm Debt Interest plus retirement of debt minus long term debt financing Equity Dividends plus repurchase of equity minus new


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