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Financial Statements, Taxes, and Cash Flow > Other Statements
Other Statements
• The Statement of Equity
• Depreciation
• Free Cash Flow
• MVA and EVA
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Financial Statements, Taxes, and Cash Flow > Other Statements
The Statement of Equity
• The statement breaks down changes in the owners' interest in the organization.
Line items typically include profits or losses from operations, dividends paid, issue
or redemption of stock, and any other items charged or credited to retained
earnings.
• Owners' equity = assets − liabilities.
• The statement of equity uses information from the income statement and provides
information to the balance sheet.
• Ending retained earnings = beginning retained earnings − dividends paid + net
income.
The Statement of Retained Earnings and
Stockholders' Equity
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Financial Statements, Taxes, and Cash Flow > Other Statements
Depreciation
• Depreciation refers to the allocation of the cost of assets to periods in which the
assets are used (depreciation with the matching principle).
• Generally this involves four criteria: cost of the asset, expected salvage value
(residual value of the asset), estimated useful life of the asset, and a method of
apportioning the cost over such life.
• There are several methods for calculating depreciation, generally based on either
the passage of time or the level of activity of the asset: straight-line depreciation,
accelerated depreciation methods, activity depreciation methods, sum-of-years'
digits method, and units-of-production method.
Depreciation
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Financial Statements, Taxes, and Cash Flow > Other Statements
Free Cash Flow
• There are four different methods for calculating free cash flows.
• Free cash flow measures the ease with which businesses can grow and pay
dividends to shareholders.
• Net income and free cash flows are different. Some investors prefer using free
cash flow instead of net income to measure a company's financial performance
because free cash flow is more difficult to manipulate than net income.
Free Cash Flow
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Financial Statements, Taxes, and Cash Flow > Other Statements
MVA and EVA
• Market Value Added (MVA) is the difference between the current market value of
a firm and the capital contributed by investors.
• Economic Value Added or EVA, is an estimate of a firm's economic profit – being
the value created in excess of the required return of the company's investors
(being shareholders and debt holders).
• The firm's market value added, or MVA, is the discounted sum (present value) of
all future expected economic value added: MVA = Present Value of a series of
EVA values.
MVA
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Appendix
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Financial Statements, Taxes, and Cash Flow
Key terms
• amortization The distribution of the cost of an intangible asset, such as an intellectual property right, over the projected useful
life of the asset.
• capital expenditure Funds spent by a company to acquire or upgrade a long-term asset.
• net working capital current assets minus current liabilities
• NOPAT NOPAT (net operating profit after tax) is profits derived from a company's operations after cash taxes but before
financing costs and non-cash bookkeeping entries. It is the total pool of profits available to provide a cash return to those who
provide capital to the firm.
• retained earnings The portion of net income that is retained by the corporation rather than distributed to its owners as
dividends.
• salvage value The estimated value of an asset at the end of its useful life.
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Financial Statements, Taxes, and Cash Flow
MVA
Calculation of MVA
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Wikipedia. "Market value added." GNU FDL http://en.wikipedia.org/wiki/Market_value_added View on Boundless.com
Financial Statements, Taxes, and Cash Flow
Depreciation
This is the units-of-production method for calculating depreciation.
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Wikipedia. "Depreciation." GNU FDL http://en.wikipedia.org/wiki/Depreciation View on Boundless.com
Financial Statements, Taxes, and Cash Flow
MVA and EVA
MVA is the present value of a series of EVA values.
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Wikipedia. "Economic value added." GNU FDL http://en.wikipedia.org/wiki/Economic_value_added View on Boundless.com
Financial Statements, Taxes, and Cash Flow
Depreciation
This is the formula used to calculate straight-line depreciation.
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Wikipedia. "Depreciation." GNU FDL http://en.wikipedia.org/wiki/Depreciation View on Boundless.com
Financial Statements, Taxes, and Cash Flow
Free Cash Flow
An example of calculating free cash flow.
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Financial Statements, Taxes, and Cash Flow
The Statement of Retained Earnings and Stockholders' Equity
The statement of retained earnings uses information from the income statement and provides information to the balance sheet.
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Financial Statements, Taxes, and Cash Flow
Which of the following is not included in a company's statement of
equity?
A) Goodwill
B) Dividends paid
C) Profits/losses from opoerations
D) Redemption of Stock
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Financial Statements, Taxes, and Cash Flow
Which of the following is not included in a company's statement of
equity?
A) Goodwill
B) Dividends paid
C) Profits/losses from opoerations
D) Redemption of Stock
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Financial Statements, Taxes, and Cash Flow
A company's retained earnings at the beginning of the year is $1
million. It paid $100,000 in dividends, had $250,000 in net income,
and its goodwill increased by $10,000. What is its retained
earnings as of the end of the year?
A) $1,160,00
B) $1,150,000
C) $1,250,000
D) $1,260,000
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Financial Statements, Taxes, and Cash Flow
A company's retained earnings at the beginning of the year is $1
million. It paid $100,000 in dividends, had $250,000 in net income,
and its goodwill increased by $10,000. What is its retained
earnings as of the end of the year?
A) $1,160,00
B) $1,150,000
C) $1,250,000
D) $1,260,000
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Financial Statements, Taxes, and Cash Flow
Which of the following is a correct way to calculate depreciation
expense?
A) Straight-line = (acquisition cost - salvage value) / number of years of
the asset's useful life
B) Activity depreciation = (acquisition cost - salvage value) / unit of
activity (e.g. miles driven)
C) All of these answers
D) Accelerated Depreciation = Depreciation Rate * Book Value at
Beginning of Year
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Financial Statements, Taxes, and Cash Flow
Which of the following is a correct way to calculate depreciation
expense?
A) Straight-line = (acquisition cost - salvage value) / number of years of
the asset's useful life
B) Activity depreciation = (acquisition cost - salvage value) / unit of
activity (e.g. miles driven)
C) All of these answers
D) Accelerated Depreciation = Depreciation Rate * Book Value at
Beginning of Year
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Financial Statements, Taxes, and Cash Flow
A company had an after tax profit of $1,500,000. Its debt to equity
ratio was 0.5. It had $200,000 in capital expenditures for the year
and a $100,000 increase in working capital. It had $250,000 in
depreciation expenses. What is its free cash flow?
A) $1,400,000
B) $1,225,000
C) $1,275,000
D) $1,150,000
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Financial Statements, Taxes, and Cash Flow
A company had an after tax profit of $1,500,000. Its debt to equity
ratio was 0.5. It had $200,000 in capital expenditures for the year
and a $100,000 increase in working capital. It had $250,000 in
depreciation expenses. What is its free cash flow?
A) $1,400,000
B) $1,225,000
C) $1,275,000
D) $1,150,000
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Financial Statements, Taxes, and Cash Flow
A company has earnings before income tax of $2 million and a
15% tax rate. It had $250,000 in depreciation expenses with a
$50,000 increase in working capital. It had another $100,00 in
capital expenditures. What is its free cash flow.
A) $1,700,000
B) $1,800,000
C) $1,950,000
D) $1,850,000
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Financial Statements, Taxes, and Cash Flow
A company has earnings before income tax of $2 million and a
15% tax rate. It had $250,000 in depreciation expenses with a
$50,000 increase in working capital. It had another $100,00 in
capital expenditures. What is its free cash flow.
A) $1,700,000
B) $1,800,000
C) $1,950,000
D) $1,850,000
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Financial Statements, Taxes, and Cash Flow
When is a business a good investment based on the Market Value
Added (MVA) metric?
A) MVA is positive.
B) MVA exceeds the investors' initial investment.
C) MVA is greater than the business's net operating profit after taxes.
D) The MVA is greater than what the investors could have received by
investing in the market portfolio.
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Financial Statements, Taxes, and Cash Flow
When is a business a good investment based on the Market Value
Added (MVA) metric?
A) MVA is positive.
B) MVA exceeds the investors' initial investment.
C) MVA is greater than the business's net operating profit after taxes.
D) The MVA is greater than what the investors could have received by
investing in the market portfolio.
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Financial Statements, Taxes, and Cash Flow
Assume a businesses's return on investment capital is 8%,its
weighted average cost of capital is 4%, and its economic capital
employed is $1,000,000. What is its EVA?
A) $400,000
B) $120,000
C) $40,000
D) $60,000
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Financial Statements, Taxes, and Cash Flow
Assume a businesses's return on investment capital is 8%,its
weighted average cost of capital is 4%, and its economic capital
employed is $1,000,000. What is its EVA?
A) $400,000
B) $120,000
C) $40,000
D) $60,000
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Financial Statements, Taxes, and Cash Flow
Attribution
• Wikipedia. "Economic value added." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Economic_value_added
• Wikipedia. "Market value added." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Market_value_added
• Wikipedia. "NOPAT." CC BY-SA 3.0 http://en.wikipedia.org/wiki/NOPAT
• Wikipedia. "Statement of retained earnings." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Statement_of_retained_earnings
• Wiktionary. "retained earnings." CC BY-SA 3.0 http://en.wiktionary.org/wiki/retained+earnings
• Wikipedia. "Depreciation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Depreciation
• Wikipedia. "salvage value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/salvage%20value
• Wikipedia. "Free cash flow." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Free_cash_flow
• Wikipedia. "Net working capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_working_capital
• Wiktionary. "amortization." CC BY-SA 3.0 http://en.wiktionary.org/wiki/amortization
• Wiktionary. "capital expenditure." CC BY-SA 3.0 http://en.wiktionary.org/wiki/capital+expenditure
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