1. 2-0 Financial Statements, Taxes, and Cash Flow Chapter 2 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. Chapter 2: Outline Financial Statements: a) The Balance Sheet b) The Income Statement Taxes Financial Cash Flows 1

3. The Balance Sheet The balance sheet can be defined as a of the firm’s assets and liabilities at a given point in time Balance Sheet Identity: = + Assets are listed in order of Liabilities are listed in the order of. 2

4. The Balance Sheet 3

5. The Balance Sheet for the Miller Corporation (as of Dec 31) 20102011 cash400424 accounts receivable700705 inventory11051300 total current assets22052429 net fixed assets73447650 total assets954910079 current liabilities10031255 long-term debt31062085 total debt41093340 equity?? total debt & equity954910079 4

6. Income Statement The incomes statement can be thought of as a of the firm’s operations over a specified period of time. Be aware of three things: 1. GAAP matching principle 2. Non-cash items 3. Costs variable vs. fixed product & period 5

7. The Income Statement for the Miller Corporation (Jan 1 – Dec 31, 2011) sales4507 - COGS-2633 - depreciation-952 EBIT922 - interest-196 taxable income (EBT)726 - taxes (@ 35%)? net income (NI)? dividends250 addition to retained earnings? 6

8. Taxes Marginal vs. average tax rates –Marginal : the percentage paid on the next dollar earned –Average: the tax bill / taxable income Example: Taxable income is $150,000. What are the average and marginal tax rates (given the tax rates on the next slide)? 7

9. 8 Corporate Tax Rates

10. Financial Cash Flow Accounting vs. Financial Cash Flow Accounting CF: Statement of CF (shows uses and sources of cash in detail) Financial CF: how cash is generated from utilizing assets and how it is paid to those that finance the purchase of the assets CF from assets = CF to creditors + CF to shareholders 9

11. Cash Flow From Assets CF From Assets = Operating Cash Flow (EBIT + depr – taxes) – Net Capital Spending (end NFA – beg NFA + depr) – Changes in NWC (end NWC – beg NWC) CF to Creditors = Interest Paid - New Borrowing (end long-term debt – beg long-term debt) CF to Shareholders = Dividends Paid - New Equity Raised (end equity – beg equity – addition to retained earnings) = 10