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1、McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.CHAPTER2AccountingStatementsandCashFlow0McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.Chapter Outline2.1 The Balance Sheet2.2 The Income Statement2.3 Ne
2、t Working Capital2.4 Financial Cash Flow2.5 The Statement of Cash Flows2.6 Summary and Conclusions1McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.Sources of InformationAnnual reportsWall Street JournalInternetNYSE ()Nasdaq ()Text ()SECEDGAR10K & 10Q
3、reports2McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.2.1 The Balance SheetAn accountants snapshot of the firms accounting value as of a particular date.The Balance Sheet Identity is:Assets Liabilities + Stockholders EquityWhen analyzing a balance s
4、heet, the financial manager should be aware of three concerns: accounting liquidity, debt versus equity, and value versus cost.3McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.The Balance Sheet of the U.S. Composite Corporation(in $ millions)20X2 and
5、20X1Balance SheetU.S. COMPOSITE CORPORATIONLiabilities (Debt)Assets20X220X1and Stockholders Equity20X220X1Current assets:Current Liabilities: Cash and equivalents$140$107 Accounts payable$213$197 Accounts receivable294270 Notes payable5053 Inventories269280 Accrued expenses223205 Other5850 Total cur
6、rent liabilities$486$455 Total current assets$761$707Long-term liabilities:Fixed assets: Deferred taxes$117$104 Property, plant, and equipment$1,423$1,274 Long-term debt471458 Less accumulated depreciation-550-460 Total long-term liabilities$588$562 Net property, plant, and equipment873814 Intangibl
7、e assets and other245221Stockholders equity: Total fixed assets$1,118$1,035 Preferred stock$39$39 Common stock ($1 per value)5532 Capital surplus347327 Accumulated retained earnings390347 Less treasury stock-26-20 Total equity$805$725Total assets$1,879$1,742Total liabilities and stockholders equity
8、$1,879$1,742The assets are listed in order by the length of time it normally would take a firm with ongoing operations to convert them into cash.Clearly, cash is much more liquid than property, plant and equipment.4McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Righ
9、ts Reserved.Balance Sheet AnalysisWhen analyzing a balance sheet, the financial manager should be aware of three concerns:1.Accounting liquidity2.Debt versus equity3.Value versus cost5McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.Accounting Liquidit
10、y Refers to the ease and quickness with which assets can be converted to cash.Current assets are the most liquid.Some fixed assets are intangible.The more liquid a firms assets, the less likely the firm is to experience problems meetingshort-term obligations.Liquid assets frequently have lower rates
11、 of return than fixed assets.6McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.Debt versus EquityGenerally, when a firm borrows it gives the bondholders first claim on the firms cash flow.Thus shareholders equity is the residual difference between asse
12、ts and liabilities.7McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.Value versus CostUnder GAAP audited financial statements of firms in the U.S. carry assets at cost.Market value is a completely different concept.8McGraw-Hill/IrwinCorporate Finance,
13、7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.2.2 The Income StatementThe income statement measures performance over a specific period of time.The accounting definition of income isRevenue Expenses Income9McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All
14、 Rights Reserved.U.S.C.C. Income Statement (in $ millions)20X2Income StatementU.S. COMPOSITE CORPORATIONTotal operating revenuesCost of goods soldSelling, general, and administrative expensesDepreciationOperating incomeOther incomeEarnings before interest and taxesInterest expensePretax incomeTaxes
15、Current: $71 Deferred: $13Net income Retained earnings: $43 Dividends: $43The operations section of the incomestatement reports the firms revenues and expenses from principal operations$2,262- 1,655- 327- 90$19029$219- 49$170- 84$8610McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Compa
16、nies, Inc. All Rights Reserved.(in $ millions)20X2Income StatementU.S. COMPOSITE CORPORATIONTotal operating revenues$2,262Cost of goods sold- 1,655Selling, general, and administrative expenses- 327Depreciation- 90Operating income$190Other income29Earnings before interest and taxes$219Interest expens
17、e- 49Pretax income$170Taxes- 84 Current: $71 Deferred: $13Net income$86 Retained earnings: $43 Dividends: $43The non-operating section of the income statement includes all financing costs, such as interest expense.U.S.C.C. Income Statement11McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hil
18、l Companies, Inc. All Rights Reserved.(in $ millions)20X2Income StatementU.S. COMPOSITE CORPORATIONTotal operating revenuesCost of goods soldSelling, general, and administrative expensesDepreciationOperating incomeOther incomeEarnings before interest and taxesInterest expensePretax incomeTaxes Curre
19、nt: $71 Deferred: $13Net income Retained earnings: $43 Dividends: $43Usually a separate section reports as a separate item the amount of taxes levied on income.$2,262- 1,655- 327- 90$19029$219- 49$170- 84$86U.S.C.C. Income Statement12McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Compa
20、nies, Inc. All Rights Reserved.(in $ millions)20x2Income StatementU.S. COMPOSITE CORPORATIONTotal operating revenuesCost of goods soldSelling, general, and administrative expensesDepreciationOperating incomeOther incomeEarnings before interest and taxesInterest expensePretax incomeTaxes Current: $71
21、 Deferred: $13Net income Retained earnings: $43 Dividends: $43Net income is the “bottom line”.$2,262- 1,655- 327- 90$19029$219- 49$170- 84$86U.S.C.C. Income Statement13McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.Income Statement AnalysisThere are
22、three things to keep in mind when analyzing an income statement:1.GAAP2.Non Cash Items3.Time and Costs14McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.Generally Accepted Accounting Principles1.GAAPThe matching principal of GAAP dictates that revenues
23、 be matched with expenses. Thus, income is reported when it is earned, even though no cash flow may have occurred15McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.Income Statement Analysis2.Non Cash ItemsDepreciation is the most apparent. No firm ever
24、 writes a check for “depreciation”.Another noncash item is deferred taxes, which does not represent a cash flow.16McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.Income Statement Analysis3.Time and CostsIn the short run, certain equipment, resources,
25、and commitments of the firm are fixed, but the firm can vary such inputs as labor and raw materials.In the long run, all inputs of production (and hence costs) are variable.Financial accountants do not distinguish between variable costs and fixed costs. Instead, accounting costs usually fit into a c
26、lassification that distinguishes product costs from period costs.17McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.2.3 Net Working CapitalNet Working Capital Current Assets Current LiabilitiesNWC is usually growing with the firm. 18McGraw-Hill/IrwinCo
27、rporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.The Balance Sheet of the U.S.C.C.(in $ millions)20X2 and 20X1Balance SheetU.S. COMPOSITE CORPORATIONLiabilities (Debt)Assets20X220X1and Stockholders Equity20X220X1Current assets:Current Liabilities: Cash and equivalents$14
28、0$107 Accounts payable$213$197 Accounts receivable294270 Notes payable5053 Inventories269280 Accrued expenses223205 Other5850 Total current liabilities$486$455 Total current assets$761$707Long-term liabilities:Fixed assets: Deferred taxes$117$104 Property, plant, and equipment$1,423$1,274 Long-term
29、debt471458 Less accumulated depreciation-550-460 Total long-term liabilities$588$562 Net property, plant, and equipment873814 Intangible assets and other245221Stockholders equity: Total fixed assets$1,118$1,035 Preferred stock$39$39 Common stock ($1 par value)5532 Capital surplus347327 Accumulated r
30、etained earnings390347 Less treasury stock-26-20 Total equity$805$725Total assets$1,879$1,742Total liabilities and stockholders equity $1,879$1,742Here we see NWC grow to $275 million in 20X2 from $252 million in 20X1. This increase of $23 million is an investment of the firm.$23 million$275m = $761
31、m- $486m$252m = $707- $45519McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.2.4 Financial Cash FlowIn finance, the most important item that can be extracted from financial statements is the actual cash flow of the firm.Since there is no magic in finan
32、ce, it must be the case that the cash from received from the firms assets must equal the cash flows to the firms creditors and stockholders.CF(A) CF(B) + CF(S) 20McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.Financial Cash Flow of the U.S.C.C.(in $
33、millions)20X2Financial Cash FlowU.S. COMPOSITE CORPORATIONCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spending(173) (Acquisitions of fixed assets minus sales of fixed assets)Additions to net working capital(23) Total$42Cash F
34、low of Investors in the FirmDebt$36 (Interest plus retirement of debt minus long-term debt financing)Equity6 (Dividends plus repurchase of equity minus new equity financing) Total$42Operating Cash Flow:EBIT$219Depreciation $90Current Taxes($71)OCF$23821McGraw-Hill/IrwinCorporate Finance, 7/e 2005 Th
35、e McGraw-Hill Companies, Inc. All Rights Reserved.Financial Cash Flow of the U.S.C.C.(in $ millions)20X2Financial Cash FlowU.S. COMPOSITE CORPORATIONCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spending (Acquisitions of fixed
36、assets minus sales of fixed assets)Additions to net working capital TotalCash Flow of Investors in the FirmDebt (Interest plus retirement of debt minus long-term debt financing)Equity (Dividends plus repurchase of equity minus new equity financing) TotalCapital SpendingPurchase of fixed assets $198S
37、ales of fixed assets (25)Capital Spending $173(173)(23)$42$366$4222McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.Financial Cash Flow of the U.S.C.C.(in $ millions)20X2Financial Cash FlowU.S. COMPOSITE CORPORATIONCash Flow of the FirmOperating cash f
38、low$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spending (Acquisitions of fixed assets minus sales of fixed assets)Additions to net working capital TotalCash Flow of Investors in the FirmDebt (Interest plus retirement of debt minus long-term debt financing)Equity (D
39、ividends plus repurchase of equity minus new equity financing) TotalNWC grew from $275 million in 20X2 from $252 millionin 20X1.This increase of $23 million is the addition to NWC.(173)(23)$42$366$4223McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.Fi
40、nancial Cash Flow of the U.S.C.C.(in $ millions)20X2Financial Cash FlowU.S. COMPOSITE CORPORATIONCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spending (Acquisitions of fixed assets minus sales of fixed assets)Additions to net
41、working capital TotalCash Flow of Investors in the FirmDebt (Interest plus retirement of debt minus long-term debt financing)Equity (Dividends plus repurchase of equity minus new equity financing) Total(173)(23)$42$366$4224McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc.
42、All Rights Reserved.Financial Cash Flow of the U.S.C.C.(in $ millions)20X2Financial Cash FlowU.S. COMPOSITE CORPORATIONCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spending (Acquisitions of fixed assets minus sales of fixed as
43、sets)Additions to net working capital TotalCash Flow of Investors in the FirmDebt (Interest plus retirement of debt minus long-term debt financing)Equity (Dividends plus repurchase of equity minus new equity financing) TotalCash Flow to CreditorsInterest $49Retirementof debt 73Debt service 122Procee
44、ds from new debt sales (86)Total36(173)(23)$42$366$4225McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.Financial Cash Flow of the U.S.C.C.(in $ millions)20X2Financial Cash FlowU.S. COMPOSITE CORPORATIONCash Flow of the FirmOperating cash flow$238 (Ear
45、nings before interest and taxes plus depreciation minus taxes)Capital spending (Acquisitions of fixed assets minus sales of fixed assets)Additions to net working capital TotalCash Flow of Investors in the FirmDebt (Interest plus retirement of debt minus long-term debt financing)Equity (Dividends plu
46、s repurchase of equity minus new equity financing) TotalCash Flow to StockholdersDividends $43Repurchase of stock 6Cash to Stockholders 49Proceeds from newstock issue (43)Total $6(173)(23)$42$366$4226McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.Fin
47、ancial Cash Flow of the U.S.C.C.(in $ millions)20X2Financial Cash FlowU.S. COMPOSITE CORPORATIONCash Flow of the FirmOperating cash flow$238 (Earnings before interest and taxes plus depreciation minus taxes)Capital spending (Acquisitions of fixed assets minus sales of fixed assets)Additions to net w
48、orking capital TotalCash Flow of Investors in the FirmDebt (Interest plus retirement of debt minus long-term debt financing)Equity (Dividends plus repurchase of equity minus new equity financing) TotalThe cash from received from the firms assets must equal the cash flows to the firms creditors and s
49、tockholders:(173)(23)$42$366$4227McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.2.5 The Statement of Cash FlowsThere is an official accounting statement called the statement of cash flows.This helps explain the change in accounting cash, which for U.
50、S. Composite is $33 million in 20X2.The three components of the statement of cash flows areCash flow from operating activitiesCash flow from investing activitiesCash flow from financing activities28McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.U.S.C
51、.C. Cash Flowfrom Operating Activities(in $ millions)20X2Cash Flow from Operating ActivitiesU.S. COMPOSITE CORPORATIONTo calculate cash flow from operations, start with net income, add back noncash items like depreciation and adjust for changes in current assets and liabilities (other than cash).Ope
52、rationsNet IncomeDepreciationDeferred TaxesChanges in Assets and LiabilitiesAccounts ReceivableInventoriesAccounts PayableAccrued ExpensesNotes PayableOtherTotal Cash Flow from Operations$869013(24)111618(3)$199(8)29McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rig
53、hts Reserved.U.S.C.C. Cash Flowfrom Investing Activities(in $ millions)20X2Cash Flow from Investing ActivitiesU.S. COMPOSITE CORPORATIONCash flow from investing activities involves changesin capital assets: acquisition of fixed assets and sales of fixed assets(i.e. net capital expenditures).Acquisit
54、ion of fixed assetsSales of fixed assetsTotal Cash Flow from Investing Activities$(198)25$(173)30McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.U.S.C.C. Cash Flowfrom Financing Activities(in $ millions)20X2Cash Flow from Financing ActivitiesU.S. COMP
55、OSITE CORPORATIONCash flows to and from creditors and owners include changes inequity and debt.Retirement of debt (includes notes)Proceeds from long-term debt salesDividendsRepurchase of stockProceeds from new stock issueTotal Cash Flow from Financing $(73)86(43)43$7(6)31McGraw-Hill/IrwinCorporate F
56、inance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.U.S.C.C. Statement of Cash FlowsThe statement of cash flows is the addition of cash flows from operations,cash flowsfrom investing activities, and cash flows from financing activities.OperationsNet IncomeDepreciationDeferred TaxesC
57、hanges in Assets and LiabilitiesAccounts ReceivableInventoriesAccounts PayableAccrued ExpensesNotes PayableOtherTotal Cash Flow from Operations$869013(24)111618(3)$199(8)Acquisition of fixed assetsSales of fixed assetsTotal Cash Flow from Investing Activities$(198)25$(173)Investing ActivitiesFinanci
58、ng ActivitiesRetirement of debt (includes notes)Proceeds from long-term debt salesDividendsRepurchase of stockProceeds from new stock issueTotal Cash Flow from Financing $(73)86(43)43$7(6)Change in Cash (on the balance sheet)$3332McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies
59、, Inc. All Rights Reserved.Statement of Cash Flows versus Cash Flow from the FirmSince interest paid is deducted as an expense when net income is calculated (and not deducted under financing activities) there is a difference between cash flow from operations and total cash flow to the firmthe differ
60、ence is interest expense.33McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.2.5 Summary and ConclusionsFinancial statements provide important information regarding the value of the firm.You should keep in mind:Measures of profitability do not take risk or timing of cash flows into account.Financial ratios are linked to one another.34
