Ch. 3 - Understanding Financial Statements and Cash Flows , Prentice Hall, Inc.

SALES SALES - EXPENSES - EXPENSES = PROFIT = PROFIT Income Statement

SALES SALES - EXPENSES - EXPENSES = PROFIT = PROFIT Income Statement Revenue

Income Statement SALES SALES - EXPENSES - EXPENSES = PROFIT = PROFIT Cost of Goods SoldCost of Goods Sold

Income Statement SALES SALES - EXPENSES - EXPENSES = PROFIT = PROFIT Cost of Goods SoldCost of Goods Sold Operating ExpensesOperating Expenses

Income Statement SALES SALES - EXPENSES - EXPENSES = PROFIT = PROFIT Cost of Goods SoldCost of Goods Sold Operating ExpensesOperating Expenses (marketing, administrative) (marketing, administrative)

Income Statement SALES SALES - EXPENSES - EXPENSES = PROFIT = PROFIT Cost of Goods SoldCost of Goods Sold Operating ExpensesOperating Expenses (marketing, administrative) (marketing, administrative) Financing CostsFinancing Costs

Income Statement SALES SALES - EXPENSES - EXPENSES = PROFIT = PROFIT Cost of Goods SoldCost of Goods Sold Operating ExpensesOperating Expenses (marketing, administrative) (marketing, administrative) Financing CostsFinancing Costs TaxesTaxes

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

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

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

Balance Sheet Total Assets = Total Assets = OutstandingDebt+Shareholders’Equity

Balance Sheet

Assets

Assets Liabilities (Debt) & Equity

Balance Sheet Assets Liabilities (Debt) & Equity Current Assets Current Assets Cash Cash Marketable Securities Marketable Securities Accounts Receivable Accounts Receivable Inventories Inventories Prepaid Expenses Fixed Assets Machinery & Equipment Machinery & Equipment Buildings and Land Buildings and Land Other Assets Investments & patents Current Liabilities Accounts Payable Accounts Payable Accrued Expenses Accrued Expenses Short-term notes Long-Term Liabilities Long-term notes MortgagesEquity Preferred Stock Common Stock (Par value) Paid in Capital Paid in Capital Retained Earnings Retained Earnings

Free Cash Flows Free cash flow: cash flow that is free and available to be distributed to the firm’s investors (both debt and equity investors)

Free Cash Flows Firm’s Operating Free cash flows = Firm’s Financing Free cash flows Cash flows generated through the firm’s operations and investments in assets = Cash flows paid to - or received by - the firm’s investors (creditors & stockholders)

Calculating Free Cash Flows: An Operating Perspective After-tax cash flow from operations less investment in net operating working capital less investments in fixed and other assets

Calculating Free Cash Flows: An Operating Perspective After-tax cash flow from operations less investment in net operating working capital less investments in fixed and other assets Operating income Operating income + depreciation + depreciation - cash tax payments - cash tax payments

Calculating Free Cash Flows: An 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 current assets]- [change in non- interest bearing current liabilities]

Calculating Free Cash Flows: An 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. Change in gross fixed assets, and any other assets that are on the balance sheet.

Calculating Free Cash Flows: A 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