Tài chính doanh nghiệp - Chapter 2: Financial statements, taxes and cash flow

Financial Statements, Taxes and Cash FlowChapter 20Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerKey Concepts and SkillsKnow the difference between book value and market valueKnow the difference between accounting income and cash flowKnow the difference between average and marginal tax ratesKnow how to determine a firm’s cash flow from its financial statements1Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerChapter OutlineThe Balance SheetThe Income StatementTaxesCash Flow2Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerThe Balance SheetThe balance sheet is a snapshot of the firm’s assets and liabilities at a given point in timeAssets are listed in order of liquidityEase of conversion to cashWithout significant loss of valueBalance Sheet IdentityAssets = Liabilities + Shareholders’ Equity3Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerFigure 2.14Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerTable 2.1 OZ Company Balance Sheet 5Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerMarket vs Book ValueThe balance sheet provides the book value of the assets, liabilities and equityMarket value is the price at which the assets, liabilities or equity can actually be bought or soldMarket value and book value are often very different. Why?Which is more important to the decision-making process?6Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerBattler CompanyBattler CompanyBalance SheetsBook Value versus Market ValueBookMarketBookMarketAssetsLiabilities and Shareholders’ EquityNWC 400 600LTD 500 500NFA 700 1,000SE6001,100$1,100$1,600$1,100$1,6007Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerIncome StatementThe income statement is more like a video of the firm’s operations for a specified period of time.You generally report revenues first and then deduct any expenses for the periodMatching principle – AAS say to show revenue when it accrues and match the expenses required to generate the revenue8Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerTable 2.29Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerTaxesThe one thing we can rely on with taxes is that they are always changingCompany tax rates in Australia and New Zealand are a flat taxPersonal taxes are progressive leading to Marginal vs average tax ratesMarginal – the percentage paid on the next dollar earnedAverage – the tax bill/taxable incomeOther taxes10Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample: Marginal vs Average RatesSuppose you earn $60,000 in taxable incomeWhat is your tax liability?What is the average tax rate?What is the marginal tax rate?If you are considering a part time job that will increase your taxable income by $10,000, what tax rate should you use in your analysis?11Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerImputation taxMajor effect is that the double taxation of company profits is negated Company advises the shareholder of the amount of company tax already paid on the dividend Shareholder then adds this amount of tax to the cash dividend that they have received and pays personal tax on the grossed up amount Shareholder receives a tax (franking) credit equivalent to the amount of tax paid by the company 12Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerEffect of a $700 dividend fully franked at 30% tax rate13Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerThe Concept of Cash FlowCash flow is one of the most important pieces of information that a financial manager can derive from financial statementsThe statement of cash flows does not provide us with the same information that we are looking at hereWe will look at how cash is generated from utilising assets and how it is paid to those that finance the purchase of the assets14Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerCash Flow From AssetsCash Flow From Assets (CFFA) = Cash Flow to Creditors + Cash Flow to ShareholdersCash Flow From Assets = Operating Cash Flow – Net Capital Spending – Changes in NWC15Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample: OZ CompanyOCF (I/S) = EBIT + depreciation – taxes = $547NCS (B/S and I/S) = ending net fixed assets – beginning net fixed assets + depreciation = $130Changes in NWC (B/S) = ending NWC – beginning NWC = $330CFFA = 547 – 130 – 330 = $87CF to Creditors (B/S and I/S) = interest paid – net new borrowing = $24CF to Stockholders (B/S and I/S) = dividends paid – net new equity raised = $63CFFA = 24 + 63 = $8716Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerTable 2.517Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample: Balance Sheet and Income Statement InformationCurrent Accounts2001: CA = 4500; CL = 13002002: CA = 2000; CL = 1700Fixed Assets and Depreciation2001: NFA = 3000; 2002: NFA = 4000Depreciation expense = 300LT Liabilities and Equity2001: LTD = 2200; Common Equity = 500; RE = 5002002: LTD = 2800; Common Equity = 750; RE = 750Income Statement InformationEBIT = 2700; Interest Expense = 200; Taxes = 1000; Dividends = 125018Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample: Cash FlowsOCF = 2700 + 300 – 1000 = 2000NCS = 4000 – 3000 + 300 = 1300Changes in NWC = (2000 – 1700) – (1500 – 1300) = 100CFFA = 2000 – 1300 – 100 = 600CF to Creditors = 200 – (2800 – 2200) = -400CF to Stockholders = 1250 – (750 – 500) = 1000CFFA = -400 + 1000 = 600The CF identity holds.19Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerQuick QuizWhat 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 firm’s cash flows? What are the equations and where do we find the information?20Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan Trayler