CHAPTER 3 Financial Statements and
Cash Flows
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

Income statement
Balance sheet
Statement of cash flows
Free Cash Flow (FCF)
2-1
Income Statement

Measure of profitability over a period of time
Simplified Income Statement:
Sales(Total revenue)
-Cost of Goods Sold(Cost of revenue)
Gross Profit
-Expense
Earning Before Interest and Tax(EBIT,Operating income)
-Interest
Earning Before Tax (EBT)
-Tax
Net Income (NI)
2-2
Income Statement
Sales
COGS
Other expenses
Total oper.costs excl.
deprec. & amort.
Depreciation and amortization
EBIT
Interest expense
EBT
Taxes
Net income
2012
$6,034,000
5,528,000
519,988
2011
$3,432,000
2,864,000
358,672
$6,047,988
116,960
($ 130,948)
136,012
($ 266,960)
(106,784)
($ 160,176)
$3,222,672
18,900
$ 190,428
43,828
$ 146,600
58,640
$
87,960
2-3
3-3
Balance Sheet
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
Balance sheet provides a snap shot of
the firm’s financial condition at one
point in time
Assets=Liability+Equity
What you have = Where it comes from
2-4
Balance Sheet: Assets
Cash
A/R
Inventories
Total CA
Gross FA
Less: Dep.
Net FA
Total Assets
2012
7,282
632,160
1,287,360
1,926,802
1,202,950
263,160
939,790
2,866,592
2011
57,600
351,200
715,200
1,124,000
491,000
146,200
344,800
1,468,800
2-5
3-5
Balance Sheet: Liabilities and Equity
Accts payable
Notes payable
Accruals
Total CL
Long-term debt
Common stock
Retained earnings
Total Equity
Total L & E
2012
524,160
636,808
489,600
1,650,568
723,432
460,000
32,592
492,592
2,866,592
2011
145,600
200,000
136,000
481,600
323,432
460,000
203,768
663,768
1,468,800
2-6
3-6
Statement of Stockholders’
Equity (2012)
Balances, 12/31/01
2012 Net income
Cash dividends
Addition (subtraction)
to retained earnings
Balances, 12/31/12
Total
Common Stock
Retained Stockholders’
Shares
Amount Earnings
Equity
100,000 $460,000 $203,768
$663,768
(160,176)
(11,000)
100,000
$460,000 $ 32,592
(171,176)
$492,592
2-7
3-7
Statement of cash flows
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
A report that shows how cash is
obtained and used.
Why need it? Cash income and net
income can be very different



Depreciation
Revenue recognition
Cash are affected by three activities



Operating
Investing
Financing
2-8
Statement of Cash Flows (2012)
Operating Activities
Net income
Depreciation and amortization
Increase in accounts payable
Increase in accruals
Increase in accounts receivable
Increase in inventories
Net cash provided by operating activities
($160,176)
116,960
378,560
353,600
(280,960)
(572,160)
($164,176)
2-9
3-9
Statement of Cash Flows (2012)
Long-Term Investing Activities
Additions to property, plant, & equipment
Net cash used in investing activities
Financing Activities
Increase in notes payable
Increase in long-term debt
Payment of cash dividends
Net cash provided by financing activities
Summary
Net decrease in cash
Cash at beginning of year
Cash at end of year
($ 711,950)
($ 711,950)
$ 436,808
400,000
(11,000)
$ 825,808
($ 50,318)
57,600
$ 7,282
2-10
3-10
Free Cash flows

FCF:The amount of cash that could be
withdrawn from a firm without harming
its ability to operate and expand.
FCF=EBIT(1-t)+Dep.-[CapEx+increase in net
operating working capital]
 FCF=[EBIT(1-t)]-increase in Net Fixed
Assets-increase in net operating working
capital
 FCF=[EBIT(1-t)]-[CapEx-Dep.]-[increase in
net operating working capital]
2-11
Net Working Capital
Working Capital: Current assets
We are interested to know capital (funds, money)
supplied by investors (share holders and debt
holders)
NOWC = Current - Non-interest
assets
bearing CL
NOWC=(cash and marketable security+AR+Inventories)(AP+AC)
Change in NOWC =NOWC1-NOWC0
Change is NOWC is how much more money investors need
to put into the working capital of the company.
2-12
What effect did the expansion have on
net working capital?
NOWC
= Current assets – (Payables +
Accruals)
NOWC12 = ($7,282 + $632,160 +
$1,287,360) – ($524,160 + $489,600)
= $913,042
NOWC11 = $842,400
∆NOWC= NOWC12 –NOWC11 = $913,042$842,400=$70,642
2-13
3-13
Capital Expenditure
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Capital expenditure: Fund spent to
acquire fixed assets
Cap Exp =(NetFA1-NetFA0)+Dep1
(NetFA1=NetFA0+ Cap Exp -Dep1)
Cap Exp2012= ($939,790 –
$344,800)+116,960=$711,950
2-14
What was the free cash flow (FCF) for
2012?
Depr. and   Capital


FCF  EBIT(1  T) 

  NOWC

amortizati on  expenditur es


FCF12
= [-$130,948(1 – 0.4) + $116,960] –
[711,950+ $70,642]
= -$744,201
2-15
3-15