1. 2-1 CHAPTER 3 Financial Statements and Cash Flows Income statement Balance sheet Statement of cash flows Free Cash Flow (FCF)

2. 2-2 Income Statement Measure of profitability over a period of time

3. 2-3 Income Statement 3-3

4. 2-4 Balance Sheet Balance sheet provides a snap shot of the firm’s financial condition at one point in time Assets=Liability+Equity What you have = Where it comes from

5. 2-5 Balance Sheet: Assets Cash A/R Inventories Total CA Gross FA Less: Dep. Net FA Total Assets 3-5 2012 7,282 632,160 1,287,360 1,926,802 1,202,950 263,160 939,790 2,866,592 2011 57,600 351,200 715,200 1,124,000 491,000 146,200 344,800 1,468,800

6. 2-6 Balance Sheet: Liabilities and Equity Accts payable Notes payable Accruals Total CL Long-term debt Common stock Retained earnings Total Equity Total L & E 3-6 2012 524,160 636,808 489,600 1,650,568 723,432 460,000 32,592 492,592 2,866,592 2011 145,600 200,000 136,000 481,600 323,432 460,000 203,768 663,768 1,468,800

7. 2-7 Statement of Stockholders’ Equity (2012) 3-7

8. 2-8 Statement of cash flows A report that shows how cash is obtained and used. Why need it? Cash income and net income can be very different Depreciation Revenue recognition Cash are affected by three activities Operating Investing Financing

9. 2-9 Statement of Cash Flows (2012) 3-9

10. 2-10 Statement of Cash Flows (2012) 3-10

11. 2-11 Free Cash flows FCF:The amount of cash that could be withdrawn from a firm without harming its ability to operate and expand. FCF=EBIT(1-t)+Dep.-[CapEx+increase in net operating working capital] FCF=[EBIT(1-t)]-increase in Net Fixed Assets-increase in net operating working capital FCF=[EBIT(1-t)]-[CapEx-Dep.]-[increase in net operating working capital]

12. 2-12 Net Working Capital Working Capital: Current assets We are interested to know capital (funds, money) supplied by investors (share holders and debt holders) NOWC = Current - Non-interest assets bearing CL NOWC=(cash and marketable security+AR+Inventories)- (AP+AC) Change in NOWC =NOWC1-NOWC0 Change is NOWC is how much more money investors need to put into the working capital of the company.

13. 2-13 What effect did the expansion have on net working capital? NOWC= Current assets – (Payables + Accruals) NOWC 12 = ($7,282 + $632,160 + $1,287,360) – ($524,160 + $489,600) = $913,042 NOWC 11 = $842,400 ∆NOWC= NOWC 12 –NOWC 11 = $913,042- $842,400=$70,642 3-13

14. 2-14 Capital Expenditure Capital expenditure: Fund spent to acquire fixed assets Cap Exp =(NetFA 1 -NetFA 0 )+Dep 1 (NetFA 1 =NetFA 0 + Cap Exp -Dep 1 ) Cap Exp 2012 = ($939,790 – $344,800)+116,960=$711,950

15. 2-15 What was the free cash flow (FCF) for 2012? 3-15 FCF 12 = [-$130,948(1 – 0.4) + $116,960] – [711,950+ $70,642] = -$744,201