1. Chapter 3 Understanding Financial Statements, Taxes, and Cash Flows

2. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-2 Slide Contents Learning Objectives 1.An Overview of the Firm’s Financial Statements 2.The Income Statement 3.Corporate Taxes 4.The Balance Sheet 5.The Cash Flow Statement Principles Applied in This Chapter Key Terms

3. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-3 Learning Objectives 1.Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the financial manager. 2.Evaluate firm profitability using the income statement. 3.Estimate a firm’s tax liability using the corporate tax schedule and distinguish between the average and marginal tax rate.

4. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-4 Learning Objectives (cont.) 4.Use the balance sheet to describe a firm’s investments in assets and the way it has financed them. 5.Identify the sources and uses of cash for a firm using the firm’s cash flow statement.

5. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-5 Principles Used in This Chapter Principle 1: Money Has a Time Value. Principle 3: Cash Flows Are the Source of Value. Principle 4: Market Prices Reflect Information. Principle 5: Individuals Respond to Incentives.

6. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-6 3.1 AN OVERVIEW OF THE FIRM’S FINANCIAL STATEMENTS

7. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-7 Basic Financial Statements The accounting and financial regulatory authorities mandate the following four types of financial statements: 1.Income statement 2.Balance sheet 3.Cash flow statement 4.Statement of shareholder’s equity

8. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-8 Basic Financial Statements (cont.) 1.Income Statement: An income statement provides the following information for a specific period of time (for example, a full year or quarterly): Revenue earned, Expenses incurred, and Profit earned.

9. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-9 Basic Financial Statements (cont.) 2.Balance sheet: Balance sheet contains information on a specific date (for example, as of December 31, 2013) of the following: Assets (everything of value the company owns), Liabilities (the firm’s debts), and Shareholders’ equity (the money invested by the company owners).

10. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-10 Basic Financial Statements (cont.) 3.Cash flow statement: It reports cash received and cash spent by the firm over a period of time. 4.Statement of shareholder’s equity: It provides a detailed account of the firm’s activities in the following accounts: Common stock & Preferred stock account, Retained earnings account, and Changes to owners’ equity.

11. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-11 Why Study Financial Statements? Analyzing a firm’s financial statement can help managers carry out three important tasks: 1.Assess current performance, 2.Monitor and control operations, and 3.Plan and forecast future performance.

12. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-12 Why Study Financial Statements? (cont.) This chapter discusses the distinction between the earnings numbers that the firm’s accountants calculate and the amount of cash that a firm generates. It is possible for a firm to report positive accounting earnings while generating negative cash flows (and vice versa).

13. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-13 What are the Accounting Principles Used to Prepare Financial Statements? Accountants use the following three fundamental principles when preparing financial statements: 1.The revenue recognition principle, 2.The matching principle, and 3.The historical cost principle.

14. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-14 3.2 THE INCOME STATEMENT

15. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-15 An Income Statement An income statement (also called a profit and loss statement) measures the amount of profits generated by a firm over a given time period (usually a year or a quarter). It can be expressed as follows: Revenues (or Sales) – Expenses = Profits

16. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-16 An Income Statement (cont.) An income statement will contain the following: 1.Revenues 2.Expenses –Cost of goods sold, Selling expenses, General and administrative expense, depreciation & amortization expense, Interest expense, and Income tax expense 3.Net Income –Difference between Revenue and all expenses

17. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-17 Table 3.1 H. J. Boswell, Inc.

18. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-18 Evaluating a Firm’s per Share Earnings (EPS) and Dividends Per Share earnings = company’s net income divided by the number of common shares outstanding. Dividends per share = total dividends paid divided by the number of common shares outstanding.

19. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-19 Evaluating a Firm’s EPS and Dividends (for Boswell, Table 3.1) Earnings per share = $204.75m ÷ 90m = $2.28 per share Dividends per share = $45m ÷ 90m = $0.50 per share

20. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-20 Connecting the Income Statement and the Balance Sheet What can the firm do with the net income?: Pay dividends to shareholders, and/or Reinvest in the firm –Boswell, Inc. earned net income of $204.75 million, of which $45 million was distributed in dividends and $159.75 million was retained and reinvested in the firm.

21. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-21 Interpreting Firm Profitability using the Income Statement From H.J. Boswell Inc.’s income statement (Table 3-1) we observe that firm has been profitable. We can identify three different measures of profit or income: 1.The gross Profit margin is 25% ($675 million) 2.The operating profit margin is only 14.2% ($382.5 million) 3.The net profit margin is only 7.6% ($204.75 million)

22. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-22 Interpreting Firm Profitability using the Income Statement (cont.) 1.The gross profit margin (GPM) = gross profits ÷ sales = $675 million ÷ $2,700 million = 25% –GPM indicates the firm’s “mark-up” on its cost of goods sold per dollar of sales. The markup percentage equals gross profit divided by cost of goods sold (=$675m ÷ $2.025m = 33.3%)

23. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-23 Interpreting Firm Profitability using the Income Statement (cont.) 2.The operating profit margin = net operating income ÷ sales = $382.5 million ÷ $2,700 million = 14.17% –The operating profit margin is equal to the ratio of net operating income or EBIT divided by firm’s sales.

24. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-24 Interpreting Firm Profitability using the Income Statement (cont.) 3.The net profit margin = net profits ÷ sales = $204.75 million ÷ $2,700 million = 7.6% –Net profit margin indicates the percentage of revenues left over after all expenses (including interest and taxes) have been considered.

25. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-25 Interpreting Firm Profitability using the Income Statement (cont.) By monitoring any changes in these margins and comparing these margins to those of similar businesses, we can dissect and identify a firm’s performance and identify expenses that are out of line.

26. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-26 GAAP and Earnings Management While the firms must adhere to GAAP, there is considerable room for managers to actively influence the firm’s reported earnings. Managers have an incentive to tamper with earnings as their pay depends upon it and because investors pay close attention to earnings announcements.

27. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-27 GAAP and Earnings Management An audit by an independent accounting firm serves as a check and balance to control management’s incentive to disguise the firm’s financial condition.

28. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-28 CHECKPOINT 3.1: CHECK YOURSELF Constructing an Income Statement Reconstruct the firm’s income statement assuming the firm is able to cut its cost of goods sold by 10% and that the firm pays taxes at a 40% rate. What is the firm’s net income and earnings per share?

29. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-29 Step 1: Picture the Problem The income statement can be expressed as follows: Revenues – Expenses = Net Income We are given information on revenues and expenses (cost of goods sold, operating expenses, interest expense and income taxes) to fill the template given on next slide.

30. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-30 Step 1: Picture the Problem (cont.) Revenues Less: Cost of goods sold Equals Gross profit Less: Operating expenses Equals: net Operating income Less: Interest expense Equals: earnings Before taxes Less: Income taxes Equals: NET INCOME

31. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-31 Step 2: Decide on a Solution Strategy Given the account balances, constructing the income statement will entail substituting the appropriate balances into the template of step 1.

32. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-32 Step 3: Solve Revenues = $14,549,000,000 Less: Cost of goods sold = $8,347,500,000 Equals: profit =$6,201,500,000 Less: Operating/other expenses =$3,841,000,000 Equals: net Operating income =$2,370,500,000 Less: Interest expense =$74,000,000 Equals: earnings Before taxes =$2,291,500,000 Less: Income taxes (40%) =$916,600,000 Equals: NET INCOME =$1,374,900,000

33. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-33 Step 3: Solve (cont.) Earnings per share: = net income ÷ number of shares = $1,374,900,000 ÷ 716,296,296 = $1.92

34. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-34 Step 4: Analyze The firm is profitable since it earned net income of $1,374,900,000. The shareholders were able be earn $1.96 per share.

35. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-35 3.3 CORPORATE TAXES

36. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-36 Corporate Taxes A firm’s income tax liability is based on its taxable income and the tax rates on corporate income.

37. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-37 Computing Taxable Income The table reveals the following: –Tax rates range from 15% to 39% –Tax rates are progressive i.e. corporations with higher profits tend to pay more taxes.

38. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-38 Marginal and Average Tax Rates Marginal tax rate is the tax rate that the company will pay on its next dollar of taxable income. Average tax rate is total taxes paid divided by the taxable income.

39. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-39 Marginal and Average Tax Rates Example: What is the average and marginal tax liability for a firm reporting $100,000 as taxable income.

40. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-40 Marginal and Average Tax Rates Average tax rate –= Total tax liability ÷ Total taxable income –= $22,250 ÷ $100,000 –= 22.25% Marginal tax rate –= 39% as the firm will have to pay 39% on its next dollar of taxable income i.e. if its taxable income increases from $100,000 to $100,001.

41. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-41 Dividend Exclusion for Corporate Shareholders The dividend received by corporate stockholders are partially exempt from taxation. The rationale is to avoid double taxation at the corporate level. The percentage of exempt taxes is based on the degree of ownership of the firm.

42. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-42 Dividend Exclusion for Corporate Shareholders Example What will be the taxable income if firm A receives $100,000 in dividends from firm B.

43. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-43 3.4 THE BALANCE SHEET

44. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-44 The Balance Sheet The balance sheet provides a snapshot of the firm’s financial position on a specific date. It is defined by the following equation: Total Assets = Total Liabilities + Total Shareholders Equity

45. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-45 The Balance Sheet (cont.) Total liabilities represent the total amount of money the firm owes its creditors Total shareholders’ equity refers to the difference in the value of the firm’s total assets and the firm’s total liabilities. Total assets, sum of total shareholders’ equity and total liabilities, represents the resources owned by the firm.

46. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-46 The Balance Sheet (cont.) In general, GAAP requires that the firm report assets using the historical costs. Cash and assets held for sale (such as marketable securities) are an exception to the rule. These assets are reported using the lower of their cost or current market value.

47. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-47 The Balance Sheet (cont.) Assets whose value is expected to decline over time (such as equipment) is reported as “net equipment”(equal to historical cost less the accumulated depreciation). Net value (also known as accounting or book value) could be significantly different from the market value of the asset.

48. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-48 Table 3.2 H. J. Boswell, Inc.

49. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-49 Table 3.2 H. J. Boswell, Inc. (cont.)

50. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-50 Figure 3.1 The Balance Sheet

51. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-51 The Balance Sheet (cont.) The balance sheet includes the following main components: 1.Assets – It includes current assets and fixed assets. 2.Liabilities and Stockholders’ Equity – It indicates how the firm finances its assets. It includes current liabilities, long-term liabilities, and owner’s equity.

52. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-52 The Balance Sheet (cont.) Current assets consists of firm’s cash plus other assets the firm expects to convert to cash within 12 months or less, such as receivables and inventory. Fixed assets are assets that the firm does not expect to sell within one year. For example, plant and equipment, land.

53. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-53 The Balance Sheet (cont.) Current liabilities represent the amount that the firm owes to creditors that must be repaid within a period of 12 months or less such as accounts payable, notes payable. Long-term liabilities refer to debt with maturities longer than a year such as bank loans, bonds.

54. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-54 The Balance Sheet (cont.) The stockholder’s equity includes the following: Par value of common stock + Paid in Capital + Retained Earnings. We can also express stockholders’ equity as follows: Shareholders' equity = Total Assets – Total Liabilities

55. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-55 Firm Liquidity and Net Working Capital Liquidity generally refers to the firm’s ability to covert its current assets into cash so that it can pay its current liabilities on time. We can thus measure a firm’s liquidity by computing its net working capital (equal to current assets less current liabilities).

56. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-56 Firm Liquidity and Net Working Capital (cont.) If a firm’s net working capital is significantly positive, it is in a good position to pay its debts on time and is consequently very liquid. Lenders consider the net working capital as an important indicator of firm’s ability to repay its loans.

57. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-57 CHECKPOINT 3.2: CHECK YOURSELF Constructing a Balance Sheet Reconstruct the Gap’s balance sheet to reflect the repayment of $1 billion in short- term debt using a like amount of the firm’s cash. What is the balance for total assets and current liabilities?

58. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-58 Step 1: Picture the Problem The firm’s balance sheet can be expressed as follows: Total Shareholders’ Equity + Total Liabilities = Total Assets

59. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-59 Step 1: Picture the Problem (cont.) Current Assets Cash Accounts Receivable Inventories Other current assets Total current assets Current Liabilities Accounts payable Short-term debt Other current liabilities Total current liabilities Long-term Liabilities Long-term debt Long-term (fixed) assets Gross PPE Less: Accumulated depreciation Net property, plant and equip. Other long-term assets Total long-term assets Owner’s Equity Par value of common stock Paid-in-capital Retained earnings Total equity Total AssetsTotal Liabilities and Owners’ equity

60. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-60 Step 2: Decide on a Solution Strategy We are given the account balances so in order to construct the balance sheet we need to substitute the appropriate balances into the template developed in step 1.

61. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-61 Step 3: Solve Cash Inventories Other current assets 885,000,000 1,615,000,000 809,000,000 Current liabilities 1,128,000,000 Total current assets 3,309,000,000Total current liabilities 1,128,000,000 Net Property, Plant and equipment 2,523,000,000Long-term liabilities 2,539,000,000 Other long-term assets 590,000,000Common Equity2,755,000,000 Total Assets$6,422,000,00 0 Total Liabilities and Equity $6,422,000,00 0

62. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-62 Step 4: Analyze We can make the following observations from Gap’s Balance sheet: –The total assets of $6,422,000,000 is financed by a combination of current liabilities, long-term liabilities and owner’s equity. Owner’s equity accounts for $2,755,000,000 of the total. –The firm has a healthy net working capital of $2,181,000,000.

63. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-63 Debt and Equity Financing The right-hand side of the balance sheet reveals the following two sources of money used to finance the purchase of the firm’s assets listed on the left-hand side of the balance sheet. –Borrowings (debt financing) – firms owners (equity financing)

64. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-64 Debt versus Equity Payment: Payment for debt holders is generally fixed (in the form of interest); Payment for equity holders (dividends) is not fixed nor guaranteed. Seniority: Debt holders are paid before equity holders in the event of bankruptcy. Maturity: Debt matures after a fixed period while equity securities do not mature.

65. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-65 Book Values, Historical Costs, and Market Values Book values (based on historical cost) reported in the balance sheet can differ from market values. The gap is likely to be higher for fixed assets relative to current assets for two reasons:

66. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-66 3.5 THE CASH FLOW STATEMENT

67. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-67 The Cash Flow Statement The Cash Flow Statement is used by firms to explain changes in their cash balances over a period of time by identifying all of the sources and uses of cash for the period spanned by the statement.

68. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-68 Sources and Uses of Cash A source of cash is any activity that brings cash into the firm. For example, sale of equipment. A use of cash is any activity that causes cash to leave the firm. For example, payment of taxes.

69. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-69 Table 3-3 H. J. Boswell, Inc., Balance Sheets and Balance Sheet Changes

70. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-70 Cash Flow Analysis (cont.) Why did the cash balance decline by $4.50m?. See table 3.1 and table below: Sources of CashUses of Cash Increase in Accounts Payable = $4.50 Increase in Accounts Receivable $22.50 Increase in long-term debt =$51.75 Increase in inventory = $148.50 Increase in retained earnings = $159.75 Increase in net plant and equipment = $40.50 Decrease in short-term notes = $9 Total Sources of cash = $216.00 Total Uses of cash = $220.50

71. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-71 Cash Flow Analysis (cont.) An analysis of H.J. Boswell’s operations reveals the following: –The firm used more cash than it generated, resulting in a deficit of $4.5 million –The main source of cash flow was retained earnings ($159.75m) and long-term debt ($51.75m) –The largest use of cash was for acquiring inventory at $148.5 million.

72. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-72 Cash Flow Analysis Summary Sources of CashUses of Cash Decrease in an asset account Increase in an asset account Increase in a liability account Decrease in a liability account Increase in an owner’s equity account Decrease in an owners’ equity account

73. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-73 Cash Flow Statement The basic format for a cash flow statement is as follows: Beginning Cash Balance Plus: Cash Flow from Operating Activities Plus: Cash Flow from Investing Activities Plus: Cash Flow from Financing Activities Equals: Ending Cash Balance

74. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-74 Cash Flow Statement (cont.) Operating activities represent the company’s core business, including sales and expenses. Investing activities include the cash flows that arise out of the purchase and sale of long-term assets such as plant and equipment.

75. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-75 Cash Flow Statement (cont.) Financing activities represent changes in the firm’s use of debt and equity such as issue of new shares, the repurchase of outstanding shares, and the payment of dividends.

76. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-76 Table 3-4 H. J. Boswell, Inc.

77. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-77 Evaluating the Cash Flow Statement The statement can be used to answer a number of important questions such as: –How much cash did the firm generate from its operations? –How much did the firm invest in plant and equipment? –Did the firm raise additional funds, and if so, how much and from what sources? –Is the firm able to generate positive cash flows?

78. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-78 Quality of Earnings: Evaluating Cash Flow from Operations Since reported earnings can sometimes be misleading, we can combine information from the firm’s income statement and the statement of cash flows to evaluate the quality of firm’s reported earnings.

79. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-79 Quality of Earnings: Evaluating Cash Flow from Operations (cont.) A ratio of 1.00 indicates very high quality of earnings and that the firm’s operating cash flows and net income are in sync with each other. A low ratio indicates firm’s reliance on non- operating sources of cash to generate net income that may not be sustainable.

80. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-80 Quality of Earnings: Evaluating Cash Flow from Operations (cont.) The quality of earnings ratio for Boswell for 2013 = $173.25m ÷ $ 204.75m = 84.6% Boswell’s ratio was only 84.6% due to more credit sales than it collected, increase in inventories, non-cash depreciation expense, and increased reliance on accounts payable.

81. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-81 Sustainable Capital Expenditures: Evaluating Investment Activities This ratio calculates the extent to which the firm’s operating cash flows can pay for capital expenditures. Higher ratio will mean less dependence on capital markets for financing.

82. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-82 Sustainable Capital Expenditures: Evaluating Investment Activities (cont.) For Boswell, the capital acquisition ratio is: = $157.75m ÷ $159.5m = 98.9% Boswell was, on average, able to finance 98.9% of its new expenditures out of the firm’s current-year operations.

83. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-83 CHECKPOINT 3.3: CHECK YOURSELF Interpreting the Statement of Cash Flows Go to http:finance.google.com/finance and get the cash flow statements for the most recent four-year period for Exco Resources (XCO). How does their cash from investing activities compare to their cash flow from operating activities in 2012.

84. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-84 Step 1: Picture the Problem The cash flow statement identifies the net sources and uses of cash for a specific period of time into 3 groups: operating activities, investing activities, and financing activities. Here we have to compare the cash flow from operating activities and investment activities in 2012 for Exco Resources (XCO).

85. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-85 Step 2: Decide on a Solution Strategy We can compare the cash flow from operating activities and cash flow from investing activities by retrieving the cash flow statement from http://finance.google.com/finance http://finance.google.com/finance

86. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-86 Step 3: Solve Cash flow from operating activities EXCO had a positive cash flow from operating activities of $514.78 million in 2012. In 2011, the cash flow from operating activities was much lower at $428.54 million. The primary contributors to the operating cash flows were adjustments to net income.

87. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-87 Step 3: Solve (cont.) Cash flow from investing activities: Cash flow from investing activities were ($426.09) million in 2012. EXCO had invested heavily in capital expenditures with a total expense of $536.92 million.

88. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-88 Step 4: Analyze The cash flow statement for 2012 depicts a profitable firm with positive cash flow from operations that have been steadily increasing since 2010. In 2010, cash flow from operations were only $339.92 million. The firm has been aggressively investing in fixed assets. However, it has dropped significantly compared to 2011 ($1,041 million).

89. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-89 Key Terms Accounts receivable Accounts payable Accumulated depreciation Average tax rate Balance sheet Cash flow from operations Cash flow statement

90. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-90 Key Terms (cont.) Cost of goods sold Current assets Current liabilities Depreciation expense Dividends per share Earnings before interest and taxes (EBIT) Earnings per share

91. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-91 Key Terms (cont.) Fixed assets Gross plant and equipment Gross profit margin Income statement Inventories Liquidity Long-term debt

92. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-92 Key Terms (cont.) Marginal tax rate Market value Net operating income Net income Net plant and equipment Net profit margin Net working capital Notes payable

93. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-93 Key Terms (cont.) Operating profit margin Paid-in capital Par value Profits Quality of earnings ratio Retained earnings Revenues

94. Copyright ©2014 Pearson Education, Inc. All rights reserved.3-94 Key Terms (cont.) Source of cash Stockholders’ equity Taxable income Total assets Total liabilities Total shareholders’ equity Treasury stock Uses of cash