1. Financial Statements Income Statements Revenues Revenues Expenses (expired costs) Expenses (expired costs) Timing of recording Timing of recording at time of sale at time of use fixed and variable Non Cash Items Non Cash Items

2. Financial Statements Prepare an Income Statement Revenues RevenuesSales Costs CostsOperating Non Cash (Depreciation) Interest (Finance Charge) Taxes Net Income Net Income The bottom line…but we want cash flow!

3. Financial Statements The Balance Sheet Assets Assets Liabilities Liabilities Owner’s Equity Owner’s Equity Assets ≡ Liabilities + Owner’s Equity Assets ≡ Liabilities + Owner’s Equity This is an identity It always holds and is a check on the fundamental nature of who owns the business (assets)

4. Financial Statements Portions of the Balance Sheet Net Working Capital Current Assets Current Assets Current Liabilities Current Liabilities Liquidity Liquidity NWC = Current Assets - Current Liabilities NWC = Current Assets - Current Liabilities Debt versus Equity fixed claims fixed claims residual claims residual claims

5. Financial Statements Market Value versus Book Value

6. Financial Statements Build from Current Assets and Claims Current Assets (In order of conversion to cash) Current Assets (In order of conversion to cash) Long-term Assets Long-term Assets Current Liabilities (In order of anticipated payment of claim) Current Liabilities (In order of anticipated payment of claim) Long-term Liabilities Long-term Liabilities Owner’s Equity Owner’s Equity Identity Check Identity Check Assets = Liabilities + Owner’s Equity

7. Financial Statements Cash Flow the difference between accounting cash flow and financial cash flow the difference between accounting cash flow and financial cash flow segments of cash flow segments of cash flowoperations capital spending working capital shareholders/bondholders Importance of taxes and depreciation Importance of taxes and depreciation

8. Cash Flow From Operations Textbook uses Net Profit + Depreciation This is a special case when you have no interest expense This later is wrong if you want to do Cash Flow Statements Correct Approach EBIT + Depreciation – Taxes = Cash Flow from Operations Then to get Cash Flow Statement Correct you put Interest Expense with Cash Flow From Financing Activities

9. Statement of Cash Flows Cash Flow Statement in three parts Cash Flow from Operating Activities: Cash Flow from Operations (EBIT + Depreciation – Taxes) Changes in Net Working Capital Cash Flow from Investing Activities: Net Change in Gross Fixed Assets (Purchases and Sales) Cash Flow from Financing Activities : Net Change in Debt (Sales and Retirements) Net Change in Common Stock (Sales and Purchases) Net Change in Preferred Stock (Sales and Purchases) Dividends Paid Interest Expense

10. Depreciation and Salvage CF Depreciation using MACRS Life of Asset Life of Asset Depreciation Schedule (page 89) Depreciation Schedule (page 89) Assumption: No Salvage Value Assumption: No Salvage Value Disposal of Asset – Cash Flow Full Depreciated Asset Full Depreciated Asset Partially Depreciated Asset Partially Depreciated Asset Short-cut…book value or basis for gain/loss Short-cut…book value or basis for gain/loss

11. Financial Statements Taxes Corporate Taxes Corporate Taxes Personal Taxes Personal Taxes User Taxes User Taxes Sales Taxes Sales Taxes Property Taxes Property Taxes Average Tax versus Marginal Tax tax total divided by taxable income tax total divided by taxable income tax on the next dollar of earnings tax on the next dollar of earnings