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Chapter 3 Accounting and Finance
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Learning Objectives Interpret information contained in the balance sheet, income statement, and statement of cash flows. Distinguish between market and book value. Explain why income differs from cash flow. Understand the essential features of the taxation of corporate and personal income.
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Topics Covered The Balance Sheet The Income Statement The Statement of Cash Flows Taxes
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The Balance Sheet Definition Financial statements that show the value of the firm’s assets and liabilities at a particular point in time (from an accounting perspective). Refer to Intel’s balance sheet
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The Balance Sheet The Main Balance Sheet Items Current Assets Cash & Securities Receivables Inventories + Fixed Assets Tangible Assets Intangible Assets Current Liabilities Payables Short-term Debt + Long-term Liabilities + Shareholders’ Equity =
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Important Balance Sheet Relationships Net Working Capital = Current Assets minus Current Liabilities Shareholders’ Equity = Total Assets minus Total Liabilities Book Value = Historical accounting value of assets and equity found on balance sheet. Market Value = current value of assets and equity Recent market value of Intel stock = $184.49 billion vs. latest quarterly balance sheet equity of $35.49. Market Value of Intel’s Assets = Market Value of Liabilities ($8.75 billion) + Market Value of Equity ($184.49 billion) = $193.24 billion vs. latest quarterly balance sheet assets of $44.47 billion
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The Income Statement Definition Financial statement that shows the revenues, expenses, and net income of a firm over a period of time (from an accounting perspective). Refer to Intel’s Income Statement
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The Income Statement Earnings Before Income & Taxes (EBIT) EBIT = - total Revenues - costs - deprecation
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Accounting Income vs. Cash Flow An Income Statement Sales Cost of Goods Sold Selling & Gen. Adm. Exp Depreciation Interest Exp Taxable Income Taxes Net Income Do all items reflect all cash collected and paid? NO!!! Income statement is on an accrued basis. What is and who is depreciation?
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Statement of Cash Flows Shows how the firm used and raised cash during the year. Reconciles the Income Statement by the changes in the Balance Sheet from the beginning of the year to the end of the year
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Statement of Cash Flows: General Concepts Overall: Inflows(or sources) of cash are net income, depreciation, decreases in assets, and increases in liabilities Outflows(or uses) of cash are increases in assets, decreases in liabilities, and dividends
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Parts of Statement of Cash Flows Operating Cash Flow = net cash income from income statement: net income, Depreciation,change in A/R, Inv, Other CA, A/P, Accruals (Wages & Taxes), Other CL Investing Cash Flow = Purchases and Sales of long-term real assets and investments (Marketable Securities) Financing Cash Flow = issuances and payments of debt and stock: L-T Debt, Common and Preferred Stock, Notes Payable & Dividends Paid
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Intel’s Cash Flows 1998-2002 (millions of $)
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INCOME TAXES
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Corporate Income Taxes Corporate deductions from income: operating expenses, depreciation, interest expense. Dividends paid are NOT deductible. Interest and capital gain income is fully taxable. 30% (in general) of Dividend income is taxable. Losses can be carried back (for refund of past taxes paid) and carried forward (to reduce future taxable income & taxes).
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Corporate Tax Rates (2002)
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Corporate Tax Example Kramerica has taxable income of $80,000. What is their tax liability, marginal and average tax rates? Marginal tax rate = the tax rate on the next dollar of income. Average Tax Rate = taxes paid divided by taxable income. In 34% bracket = marginal tax rate. Tax Liability =.15($50,000) +.25($25,000) +.34($80,000 - $75,000) = $15,450 Average Tax Rate = $15,450/$80,000 =19.3%
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Personal Income Taxes Marginal tax rate = the tax rate on the next dollar of income. Average Tax Rate = taxes paid divided by taxable income. Wages, tips, and interest income are considered ordinary taxable income. Deductions: charitable donations, mortgage interest, personal exemptions, medical expenses to an extent(> 7.5% of gross income), and a portion of student loan interest is tax deductible.
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New 2003 Personal Tax Rates Marginal RateSingleMarried File Jointly 10%0-$7,0000-$14,000 15%$7,001-$28,400$14,001-$56,800 25%$28,401-$68,800$56,801-$114,650 28%$68,801-$143,500$114,651-$174,700 33%$143,501-$311,950$174,701-$311,950 35%Over $311,950
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Recent Changes in Personal Investment Income Taxes Financial and Real assets held for less than 12 MONTHS and then sold are considered short-term capital gains and taxed as ordinary income at the taxpayer’s marginal tax rate. Long-term (held more than 12 months) capital gains and dividend income are now taxed at a maximum rate of 15% (25% tax bracket and above) or 5%(10% & 15% tax bracket).
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