Accounting for Financial Management
Accounting for Financial Management
Financial Statements
• Balance Sheet
• Income Statement
• Statement of Cash Flows
• Statement of Retained Earnings
www.sec.gov
Financial Statements
• Keep in mind:
– Backward vs. Forward Looking
– Book Values vs. Market Values
– Accounting Numbers vs. Cash Flows
– Tax Deductible vs. Taxable
– Notes to Financial Statements
FINC 3630 ‐ Yost
Accounting for Financial Management
Balance Sheet
DocYost, Inc.
December 31
Assets:
Cash
S-T invest.
AR
2015
2014
7,282
20,000
9,000
48,600
632,160
351,200
Inventories
1,287,360
715,200
Total CA
Gross FA
1,946,802
1,202,950
1,124,000
491,000
Less: Depr.
263,160
146,200
Net FA
939,790
344,800
2,886,592
1,468,800
Total assets
Balance Sheet
DocYost, Inc.
December 31
Liabilities and SE:
Accts. payable
Notes payable
Accruals
Total CL
Long-term debt
Common stock
2015
2014
324,000
720,000
145,600
200,000
284,960
136,000
1,328,960
481,600
1,000,000
460,000
323,432
460,000
Ret. earnings
97,632
203,768
Total equity
557,632
663,768
2,886,592
1,468,800
Total L&E
Income Statement
DocYost, Inc.
For Year Ended December 31
2015
2014
Sales
5,834,400
3,432,000
COGS
4,980,000
2,864,000
Other expenses
720,000
340,000
Deprec.
116,960
18,900
5,816,960
3,222,900
17,440
209,100
Tot. op. costs
EBIT
176,000
62,500
(158,560)
146,600
Taxes (40%)
(63,424)
58,640
Net income
(95,136)
87,960
Int. expense
EBT
FINC 3630 ‐ Yost
Accounting for Financial Management
Sources and Uses of Cash
Statement of Cash Flows
DocYost, Inc.
For Year Ended December 31, 2015
Operating Activities:
Net Income
Adjustments:
Depreciation and Amort.
Change in AR
Change in inventories
Change in AP
Change in accruals
Net cash provided by ops.
(95,136)
116,960
(280,960)
(572,160)
178,400
148,960
(503,936)
Statement of Cash Flows
DocYost, Inc.
For Year Ended December 31, 2015
Investing Activities :
Cash used to acquire FA
FINC 3630 ‐ Yost
(711,950)
Accounting for Financial Management
Statement of Cash Flows
DocYost, Inc.
For Year Ended December 31, 2015
Financing Activities:
Change in S-T invest.
Change in notes payable
Change in long-term debt
Payment of cash dividends
Net cash provided by fin. act.
Net change in cash
Cash at beginning of year
Cash at end of year
28,600
520,000
676,568
(11,000)
1,214,168
(1,718)
9,000
7,282
Statement of Retained Earnings
DocYost, Inc.
For Year Ended December 31, 2015
Balance of ret. earnings, 12/31/2014
203,768
Add: Net income, 2015
(95,136)
Less: Dividends paid, 2015
(11,000)
Balance of ret. earnings, 12/31/2015
Net Cash Flow
• Net Cash Flow = FINC 3630 ‐ Yost
97,632
Accounting for Financial Management
Operating Assets
• Operating Assets =
– Necessary to operate the firm
– Operating Current Assets
• Usually cash, accounts receivable, and inventories
– Operating Long‐Term Assets
• Operating Current Liabilities=
– NOT capital that investors provide
• Usually accounts payable and accruals
Nonoperating Assets
• Nonoperating Assets =
– NOT necessary to operate the firm
– Out of the control of management
– Examples:
•
•
•
Operating Capital
• Net Operating Working Capital =
Operating Current Assets – Operating Current Liabilities
• For example: (cash + accounts receivable + inventories) – (accounts payable + accruals)
• Total Net Operating Capital =
Net Operating Working Capital + Operating Long‐
Term Assets
FINC 3630 ‐ Yost
Accounting for Financial Management
Net Operating Profit After Taxes (NOPAT)
• NOPAT =
• Features/Uses:
– Ignores ____________________________
• Can compare companies with different capital structures
– Gives Profit from Operations
Free Cash Flow (FCF)
• FCF = – Cash flow available to investors after necessary investment in fixed assets and working capital
• Net Investment in Operating Capital =
–
• Gross Investment in Operating Capital =
–
Free Cash Flow (FCF)
• FCF = –
–
FINC 3630 ‐ Yost
Accounting for Financial Management
Uses of Free Cash Flow (FCF)
1.
2.
3.
4.
5.
Return on Invested Capital (ROIC)
• ROIC =
• Goal:
Taxes
• Average vs. Marginal Tax Rates
• Corporate Taxes:
– Capital Gains
• Taxed as ordinary income
– Dividends Received
• If own < 20%, can exclude 70%
• If own > 20% but < 80%, can exclude 80%
• If own > 80%, can exclude 100%
– Interest
FINC 3630 ‐ Yost
Accounting for Financial Management
2011 Corporate Tax Rates
Taxable Income
Tax on Base
0 -50,000
0
Rate on amount
above base
15%
50,000 - 75,000
7,500
25%
75,000 - 100,000
13,750
34%
100,000 - 335,000
335,000 - 10M
22,250
113,900
39%
34%
10M - 15M
3,400,000
35%
15M - 18.3M
5,150,000
38%
18.3M and up
6,416,667
35%
Taxes
• Corporate Taxes:
– Tax loss carry‐backs and carry‐forwards
• 2 years back
• 20 years forward
Taxes
• Personal Taxes:
– Capital Gains
• If own < 1 year, taxed as ordinary income
• If own > 1 year, taxed at lower rate
– Dividends
• Taxed at lower rate
– Interest
– Munis
– S‐Corporations vs. C‐Corporations
FINC 3630 ‐ Yost
Accounting for Financial Management
Market Value Added (MVA)
• MVA=
– Over life of a company
– Market value of stock – equity supplied by shareholders
–
–
– Total market value of firm – total capital
Economic Value Added (EVA)
• EVA =
– Over period of time
– Measures true economic profit
– Can be applied to divisions
– NOPAT – After‐tax cost of capital used to support operations
–
–
MVA and EVA for Home Depot
• What do we need?
• Where do we find it?
• What are MVA and EVA?
FINC 3630 ‐ Yost
Accounting for Financial Management
Chapter 7
Suggested Problems
• Questions:
– 7‐3, and 7‐5 through 7‐7
• Problems:
– 7‐1, 7‐2, 7‐3, 7‐10, and 7‐12
FINC 3630 ‐ Yost