Financial Management: Understanding Financial Statements, Cash Flow, and Taxes, Slides of Financial Economics

Download Financial Management: Understanding Financial Statements, Cash Flow, and Taxes and more Slides Financial Economics in PDF only on Docsity! 1 Chapter 2: Financial statements, cash flow, and taxes Financial management Learning Objectives ➢ List each of the key financial statements and identify the kinds of information they provide to corporate managers and investors. ➢ Estimate a firm’s free cash flow and explain why free cash flow has such an important effect on firm value. 2 Faculty of Finance & Banking 1 2 2 Contents 1. Financial Statements and Reports 2. Balance sheet 3. Income statement 4. Statement of cash flows 5. Statement of Stockholders’ Equity 6. Free cash flow 7. MVA and EVA 3 Faculty of Finance & Banking 1. Financial Statements and Reports 2. Balance sheet 3. Income statement 4. Statement of cash flows 5. Statement of Stockholders’ Equity 6. Free cash flow 7. MVA and EVA Financial management 3 4 5 2. Balance sheet A Typical Balance Sheet 9 Faculty of Finance & Banking 2. Balance sheet 10 Faculty of Finance & Banking 9 10 6 2. Balance sheet 11 Faculty of Finance & Banking 2. Balance sheet Several additional points about the balance sheet should be noted: 1. Cash versus other assets Only the cash and equivalents = actual spendable money Accounts receivable = credit sales that have not yet been collected Inventories = cost of raw materials + work in process + finished goods Net fixed assets = the cost of the buildings and equipment used in operations – the depreciation 12 Faculty of Finance & Banking 11 12 7 2. Balance sheet 2. Net Working Capital = Current assets – Current liabilities Net Operating Working Capital (NOWC) NOWC = Operating current assets – Operating current liabilities Operating current assets = Current assets – Excess cash Operating current liabilities = Current liabilities – Interest-bearing liabilities 13 Faculty of Finance & Banking 2. Balance sheet 3. Total debt versus total liabilities Total debt = Short-term + Long-term interest-bearing liabilities Total liabilities = Total debt + Non-interest-bearing liabilities 14 Faculty of Finance & Banking 13 14 10 3. Income statement Reports summarizing a firm’s revenues, expenses, and profits during a reporting period (a quarter or a year). 19 Faculty of Finance & Banking 3. Income statement 20 Faculty of Finance & Banking 19 20 11 3. Income statement 21 Faculty of Finance & Banking 3. Income statement Operating Income (EBIT) is derived from the firm’s regular core business. It is calculated before deducting non-operating costs (interest expenses and taxes). 22 Faculty of Finance & Banking 21 22 12 3. Income statement Depreciation The charge to reflect the cost of assets depleted in the production process. Depreciation is not a cash outlay. Amortization A noncash charge similar to depreciation except that it represents a decline in value of intangible assets (patents, copyrights, trademarks, and goodwill). 23 Faculty of Finance & Banking 3. Income statement Depreciation and amortization are not cash expenses. → Managers, security analysts, and bank loan officers who are concerned with the amount of cash a company is generating often calculate EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). EBITDA = EBIT + Depreciation and Amortization 24 Faculty of Finance & Banking 23 24 15 4. Statement of cash flows 29 Faculty of Finance & Banking Allied Food Products: Statement of Cash Flows for 2018 (Millions of Dollars) 4. Statement of cash flows 30 Faculty of Finance & Banking Allied Food Products: Statement of Cash Flows for 2018 (Millions of Dollars) 29 30 16 1. Financial Statements and Reports 2. Balance sheet 3. Income statement 4. Statement of cash flows 5. Statement of Stockholders’ Equity 6. Free cash flow 7. MVA and EVA Financial management 5. Statement of Stockholders’ Equity A statement that shows by how much a firm’s equity changed during the year and why this change occurred. 32 Faculty of Finance & Banking 31 32 17 5. Statement of Stockholders’ Equity 33 Faculty of Finance & Banking 1. Financial Statements and Reports 2. Balance sheet 3. Income statement 4. Statement of cash flows 5. Statement of Stockholders’ Equity 6. Free cash flow 7. MVA and EVA Financial management 33 34