Financial statements Financial statements are general summaries of economic activity because user groups have diverse interests. 1

2 The Balance Sheet

Some important issues Net working capital (NWC) Liquidity Debt versus equity Market value versus book value 3

Cash flow from assets The difference between the number of dollars that come in and the number that goes out. Crucial for capital budgeting analysis. Note that there is a standard accounting statement called the statement of cash flows, but it is different from what is nte necessary ingredient for financial analysis. 4

5 Cash Flow Analysis

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8 Fantastic Copy Balance Sheet

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10 Fantastic Copy Income Statement

11 Fantastic Copy Cash Flow

12 Fantastic Copy Cash Flow

13 Taxes -tax -tax British Columbia (BC) 2005 Taxable Income2004 Taxable Income Marginal Tax Rate Other Income Capital Gains Canadian Dividends first $33,061first $ %11.03%4.52% over $33,061 up to $35,595over $32,476 up to $35, %12.58%8.40% over $35,595 up to $66,123over $35,000 up to $64, %15.58%15.90% over $66,123 up to $71,190over $64,954 up to $70, %16.85%19.08% over $71,190 up to $75,917over $70,000 up to $74, %18.85%24.08% over $75,917 up to $92,185over $74,575 up to $90, %19.85%26.58% over $92,185 up to $115,739over $90,555 up to $113, %20.35%27.83% over $115,739over $113, %21.85%31.58% BC Basic Personal Amount Tax Rate $8,676$8, %

14 Marginal versus Average

15 Corporate Tax (Ontario)

16 Capital Cost Allowance - Depreciation

Example 1: Firm “Fantastic copy” bought a photo-copier for $22,000 (asset class 8, 20%), calculate the CCA over the years. 17

18 Depreciation on $22,000 Photocopier (CCA Class 8) Year UCC t CCA UCC t+1 111,0002,200$8, ,8003,960 15, ,8403,168 12, ,6722,534 10, ,1382,028 8,110 68,1101,622 6,488

A proposed cost saving device has an installed cost of 59,400. It is class 43 (30%) for CCA purposes. It will actually function for five years at which time it will have no value. Calculate UCC at the end of five years. 19 Example 2:

Question 2.30 Mississauga Manufacturing Ltd. Just invested in some new processing machinery to take advantage of more favorable CCA rates in a new federal budget. The machinery qualifies for 25% CCA rate and has an installed cost of $500,000. Calculate CCA and UCC for the first five years. 20