Ch. 3 - Understanding Financial Statements and Cash Flows

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Ch. 3 - Understanding Financial Statements
andCash Flows
? 2000, Prentice Hall, Inc.
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Income Statement

• SALES
• - EXPENSES
• PROFIT

3
Income Statement
Revenue

• SALES
• - EXPENSES
• PROFIT

4
Income Statement

• Cost of Goods Sold

• SALES
• - EXPENSES
• PROFIT

5
Income Statement

• Cost of Goods Sold
• Operating Expenses

• SALES
• - EXPENSES
• PROFIT

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Income Statement

• Cost of Goods Sold
• Operating Expenses
• (marketing, administrative)

• SALES
• - EXPENSES
• PROFIT

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Income Statement

• Cost of Goods Sold
• Operating Expenses
• (marketing, administrative)
• Financing Costs

• SALES
• - EXPENSES
• PROFIT

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Income Statement

• Cost of Goods Sold
• Operating Expenses
• (marketing, administrative)
• Financing Costs
• Taxes

• SALES
• - EXPENSES
• PROFIT

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Income Statement

• SALES
• - Cost of Goods Sold
• GROSS PROFIT
• - Operating Expenses
  
• OPERATING INCOME (EBIT)
• - Interest Expense
• EARNINGS BEFORE TAXES (EBT)
• - Income Taxes
• NET INCOME
• - Preferred Stock Dividends
• - NET INCOME AVAILABLE
• TO COMMON STOCKHOLDERS

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Income Statement

• SALES
• - Cost of Goods Sold
• GROSS PROFIT
• - Operating Expenses
  
• OPERATING INCOME (EBIT)
• - Interest Expense
• EARNINGS BEFORE TAXES (EBT)
• - Income Taxes
• NET INCOME
• - Preferred Stock Dividends
• - NET INCOME AVAILABLE
• TO COMMON STOCKHOLDERS

Operating Activities
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Income Statement

• SALES
• - Cost of Goods Sold
• GROSS PROFIT
• - Operating Expenses
  
• OPERATING INCOME (EBIT)
• - Interest Expense
• EARNINGS BEFORE TAXES (EBT)
• - Income Taxes
• NET INCOME
• - Preferred Stock Dividends
• - NET INCOME AVAILABLE
• TO COMMON STOCKHOLDERS

Financing Activities
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Balance Sheet
Outstanding Debt Shareholders Equity

• Total Assets

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Balance Sheet
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Balance Sheet
Assets
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Balance Sheet
Assets
Liabilities (Debt) Equity
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Balance Sheet
Assets
Liabilities (Debt) Equity

• Current Assets
• Cash
• Marketable Securities
• Accounts Receivable
• Inventories
• Prepaid Expenses
• Fixed Assets
• Machinery Equipment
• Buildings and Land
• Other Assets
• Investments patents

Current Liabilities Accounts Payable
Accrued Expenses Short-term notes Long-Term
Liabilities Long-term notes
Mortgages Equity Preferred Stock Common
Stock (Par value) Paid in Capital
Retained Earnings
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Free Cash Flows

• Free cash flow cash flow that is free and
  available to be distributed to the firms
  investors (both debt and equity investors)

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Free Cash Flows

• Firms Operating Free cash flows

Firms Financing Free cash flows
Cash flows generated through the firms
operations and investments in assets
Cash flows paid to - or received by - the firms
investors (creditors stockholders)

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Calculating Free Cash FlowsAn Operating
Perspective

• After-tax cash flow from operations
• less
• investment in net operating working capital
• less
• investments in fixed and other assets

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Calculating Free Cash FlowsAn Operating
Perspective
Operating income depreciation - cash
tax payments

• After-tax cash flow from operations
• less
• investment in net operating working capital
• less
• investments in fixed and other assets

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Calculating Free Cash FlowsAn Operating
Perspective

• After-tax cash flow from operations
• less
• investment in net operating working capital
• less
• investments in fixed and other assets

Change in current assets - change in
non-interest bearing current liabilities
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Calculating Free Cash FlowsAn Operating
Perspective

• After-tax cash flow from operations
• less
• investment in net operating working capital
• less
• investments in fixed and other assets

Change in gross fixed assets, and any other
assets that are on the balance sheet.
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Calculating Free Cash FlowsA Financing
Perspective

• Interest payments to creditors
• plus decrease in debt principal
• or
• minus increase in debt principal
• plus dividends paid to stockholders
• plus decrease in stock
• or
• minus increase in stock