Citibank: basic of corporate finance
Подождите немного. Документ загружается.
1-14 FINANCIAL STATEMENT ANALYSIS
v-1.1 v05/15/94
p01/14/00
• COSTS AND EXPENSES
LABOR AND MATERIALS – total amount spent on labor wages and
material costs to produce the items sold for the period. It is
common for these costs to be separated into two accounts:
material costs listed as COST OF GOODS SOLD and labor listed as
DIRECT LABOR COST.
DEPRECIATION – amount charged by the company for the use of
fixed assets to produce the items sold. This is not a cash
expenditure. It is an estimate of the decline in value of the plant and
equipment resulting from its use during the period.
SELLING EXPENSES – amount spent to sell the products or
services produced (includes advertising, sales commissions,
promotions, etc.)
GENERAL AND ADMINISTRATIVE – amount spent to manage the
production and sales of the company's products or services
(includes management salaries, office equipment, support staff,
etc.)
LEASE PAYMENTS – amount spent on leasing plants, equipment,
office space, etc.
• NET OPERATING INCOME – amount earned by the company's
operations during the reporting period. The calculation is NET SALES
minus COSTS AND EXPENSES. This value is also known as EARNINGS
BEFORE INTEREST AND TAXES (EBIT).
The Income Statement format varies between companies. The COST AND
EXPENSES section may have more or less detail than our example. Common
variations may include combining SELLING EXPENSES with GENERAL AND
ADMINISTRATIVE EXPENSES or combining DEPRECIATION EXPENSES with COST
OF LABOR AND MATERIALS.
www.LisAri.com
FINANCIAL STATEMENT ANALYSIS 1-15
v05/15/94 v-1.1
p01/14/00
The remaining Income Statement accounts are as follows.
• INTEREST EXPENSES – amount of interest paid on the company's
loans, notes, and bonds during the period
• EARNINGS BEFORE TAXES – NET OPERATING INCOME minus INTEREST
EXPENSES
• TAXES – amount of taxes paid by the company during the period.
Many companies provide the total tax assessment percentage on the
Income Statement.
• NET INCOME BEFORE PREFERRED DIVIDEND – amount of income
available for distribution to shareholders; calculated as EARNINGS
BEFORE TAXES minus TAXES
• PREFERRED DIVIDEND – amount distributed to preferred shareholders
during the period
• NET INCOME TO COMMON – amount available for distribution to
common shareholders or for internal use
• COMMON DIVIDEND – amount distributed to common shareholders
during the period
• EARNINGS RETAINED – amount held by the business to continue
operations
Shareholder Return on Investment
Appreciation in
value / dividends
There are two ways that a shareholder can receive a return on
investment. One is the appreciation in value of the shares of the
company (based on the future prospects of the company). The
other is a cash payment (dividend) paid by the company to the
shareholders. Many companies do not pay dividends to common
shareholders, especially growing companies with lots of investment
opportunities. We will discuss the methodology for determining the
value of stocks later in the course.
www.LisAri.com
1-16 FINANCIAL STATEMENT ANALYSIS
v-1.1 v05/15/94
p01/14/00
Depreciation
DEPRECIATION in the Income Statement is a charge against income based
on an estimate of the percentage of the original cost for fixed assets
that has been used up in the production process during the period
covered by the Income Statement.
For example, suppose that a piece of equipment is purchased for
$500,000. For tax purposes, most governments do not allow companies
to charge the entire $500,000 as a business expense
at the time of purchase. Instead, they require the purchase to be
"capitalized," which means it is carried on the books as an asset.
However, equipment has a finite useful life to the company, so
governments allow a portion of the equipment purchase price to
be deducted from operating expenses each year of its useful life.
Typically, governments will provide depreciation schedules that classify
each type of equipment and dictate its estimated useful life.
Straight-line
depreciation
In our example, the piece of equipment may have an estimated useful
life of five years and, therefore, will have no value at the end of the five
years. Using a straight-line depreciation method, the annual amount that
the company may deduct is ($500,000 - $0) /
5 yrs. = $100,000. There are several different depreciation methods
and any accounting text can provide a more detailed discussion of their
calculations and uses.
Non-cash
bookkeeping
entry
Remember, DEPRECIATION is not a cash expense like LABOR AND
MATERIAL costs; it is simply a bookkeeping entry on the Balance Sheet
and on the Income Statement. The cash expense for fixed assets is
incurred at the time of purchase.
www.LisAri.com
FINANCIAL STATEMENT ANALYSIS 1-17
v05/15/94 v-1.1
p01/14/00
• On the Balance Sheet, GROSS FIXED ASSETS (capitalized
purchases of property, plants, and equipment) are listed at their
purchase price. Accumulated DEPRECIATION (sum of all
depreciation charges over the life of the assets currently on the
company's Balance Sheet) is deducted to arrive at NET FIXED
ASSETS. NET FIXED ASSETS can be considered as an estimate of the
value of those assets for the remainder of their useful lives.
These principles will also be important in the next section as we
analyze the Cash Flow Statement.
• On the Income Statement, the total DEPRECIATION for the
period for all CAPITALIZED ASSETS is deducted from earnings as
an OPERATING COST.
Summary
The Income Statement summarizes a company's operational expenses
and profitability over a given period of time. The total value of goods
and services sold by a company after deducting all operating costs is the
NET OPERATING INCOME. The deduction of interest, taxes, and
shareholder dividends results in the amount of earnings retained by the
company to support operations.
DEPRECIATION is a non-cash bookkeeping entry on the Balance Sheet and
on the Income Statement. On the Balance Sheet, it is the sum of all
depreciation charges over the life of the fixed assets. On the Income
Statement, it represents the portion of the value of a fixed asset that has
been used up for operations during the period.
You have completed the "Income Statement" section of Financial Statement Analysis. Please
complete the Progress Check and then continue with the section on "Cash Flow Statement." If
you answer any questions incorrectly, please review the appropriate text.
www.LisAri.com
1-18 FINANCIAL STATEMENT ANALYSIS
v-1.1 v05/15/94
p01/14/00
(This page is intentionally blank)
www.LisAri.com
FINANCIAL STATEMENT ANALYSIS 1-19
v05/15/94 v-1.1
p01/14/00
þ PROGRESS CHECK 1.2
Directions: Select the correct answer for each question. Check your solution with the
Answer Key on the next page.
6. Suppose that a company has NET SALES of $332 million, INTEREST EXPENSES of $16
million, DEPRECIATION of $6 million, $225 million expenses for LABOR AND
MATERIALS, and ADMINISTRATIVE EXPENSES of $42 million. What is the EBIT for that
company?
_____a) $43 million
_____b) $49 million
_____c) $59 million
_____d) $65 million
_____e) $91 million
7. Use the information in question 6, and apply a tax rate of 40%. What is the NET
INCOME available for distribution to the shareholders of this company?
_____a) $23.6 million
_____b) $25.8 million
_____c) $35.4 million
_____d) $43.0 million
_____e) $59.0 million
8. XYZ Corporation purchases a widget maker for $750,000. The piece of equipment has an
estimated useful life of ten years. Using a straight-line depreciation method, the annual
amount the company can deduct as an OPERATING COST is:
_____a) $7,500 per year
_____b) $150,000 per year
_____c) $1,500 per year
_____d) $75,000 per year
www.LisAri.com
1-20 FINANCIAL STATEMENT ANALYSIS
v-1.1 v05/15/94
p01/14/00
ANSWER KEY
6. Suppose that a company has NET SALES of $332 million, INTEREST EXPENSES of
$16 million, DEPRECIATION of $6 million, $225 million expenses for LABOR AND
MATERIALS, and ADMINISTRATIVE EXPENSES of $42 million. What is the EBIT for
that company?
c) $59 million
EBIT = NET SALES - OPERATING COSTS
(in millions)
Net Sales $332
Less:
LABOR AND MATERIALS $225
DEPRECIATION 6
ADMINISTRATIVE 42
EBIT $ 59
INTEREST EXPENSE is not an OPERATING COST
7. Use the information in question 6, and apply a tax rate of 40%. What is the NET INCOME
available for distribution to the shareholders of this company?
b) $25.8 million
Start with EBIT and deduct INTEREST and TAXES
(in millions)
EBIT $59.0
Less:
INTEREST $16.0
TAXES (@40%) 17.2 (59.0 - 16.0) x 0.40
NET INCOME $25.8
8. XYZ Corporation purchases a widget maker for $750,000. The piece of equipment
has an estimated useful life of ten years. Using a straight-line depreciation method, the
annual amount the company can deduct as an OPERATING COST is:
d) $75,000 per year
($750,000
÷
10 years)
www.LisAri.com
FINANCIAL STATEMENT ANALYSIS 1-21
v05/15/94 v-1.1
p01/14/00
CASH FLOW STATEMENT
Sources and uses
of funds
The financial statement that is used to show the sources and uses of a
company's funds is called a Cash Flow Statement. It also may be called
the "Statement of Changes in Financial Position" or the "Sources and
Uses Statement," depending on its structure. The analyst uses the Cash
Flow Statement to examine the flow of funds into a company and the
use of those funds. We will use the terms "funds" and "cash"
interchangeably throughout this section.
An analyst may have difficulty gaining access to the applicable
information needed to determine a company's sources and uses of cash.
This is especially true when studying a competitor. One solution is to
construct a Cash Flow Statement based on publicly available
information (such as the Income Statement and Balance Sheet from a
company's annual report). The objective is to develop a framework that
provides an accurate estimate of the company's cash flows. It is
important for you to learn to construct a Cash Flow Statement as
preparation for Unit Three – Time Value of Money.
We will continue to use the XYZ Corporation as our example. The
company's Balance Sheet for the past two years is shown again in Figure
1.3 and the Income Statement is shown again in Figure 1.4. These two
financial statements provide the information for the Cash Flow
Statement, and you will want to refer to them as we move through the
process.
www.LisAri.com
1-22 FINANCIAL STATEMENT ANALYSIS
v-1.1 v05/15/94
p01/14/00
XYZ Corporation
December 31, 1993 (In Millions $)
ASSETS 1992 1993 LIABILITIES AND EQUITY 1992 1993
Cash 6.2 5.7 Accounts Payable 20.2 22.7
Marketable Securities 4.9 6.3 Notes Payable 29.6 31.5
Accounts Receivable 51.8 50.9 Accrued Wages and Taxes 2.1 2.3
Inventories 92.4 88.7 Other Current Liabilities 5.6 4.9
Prepaid Expenses 0.3 1.1 Total Current Liabilities 57.5 61.4
Other Current Assets 0.2 0.3
Total Current Assets 155.8 153.0 Long-term Debt 102.7 107.4
Preferred Stock 12.2 12.3
Gross Fixed Assets 136.2 158.8 Total Long-term Liabilities 172.4 181.1
Less Depreciation 16.0 24.9
Net Fixed Assets 120.2 133.9 Common Stock (8 Mil. Outst.) 10.4 10.4
Retained Earnings 93.2 95.4
Total Common Equity 103.6 105.8
Total Assets 276.0 286.9 Total Liabilities and Equity 276.0 286.9
Figure 1.3: XYZ Corporation – Balance Sheet for Two Years
XYZ Corporation
December 31, 1993 (In Millions $)
Net Sales 287.6
Cost and Expenses:
Labor and Materials
Depreciation
Selling Expenses
General and Administrative
Lease Payments
249.3
8.9
1.6
3.2
2.1
Total Operating Costs 265.1
Net Operating Income (EBIT)
Interest Expenses
22.5
6.0
Earnings Before Taxes
Taxes (at 40%)
16.5
6.6
Net Income Before Preferred Dividend
Preferred Dividend
9.9
3.7
Net Income to Common
Common Dividend
6.2
4.0
Earnings Retained 2.2
Figure 1.4: XYZ Corporation – Income Statement
www.LisAri.com
FINANCIAL STATEMENT ANALYSIS 1-23
v05/15/94 v-1.1
p01/14/00
Now, let's see how we build the Cash Flow Statement. It is grouped into
two main sections:
• Funds generated and used by operating activities
• Funds generated by financing activities
Operating Activities
We begin by identifying the operating activities that contribute to the
company's cash flow. Then we classify each activity as a source or a
use of cash.
Sources
Balance Sheet:
increased
liabilities;
decreased assets
First, let's see which accounts in the Balance Sheet represent sources
of cash from operating activities. There are two general rules to
determine if a change in a Balance Sheet account is a source of cash:
1. An increase in a liability or equity account is a source
of cash.
For example, an increase in ACCOUNTS PAYABLE (from $20.2
million in 1992 to $22.7 million in 1993) indicates that in 1993,
XYZ Company borrowed $2.5 million more from creditors than
it paid off. The company had access to that $2.5 million for use
in the business.
2. A decrease in an asset account is a source of cash.
For example, the decrease in the INVENTORY account (from $92.4
million in 1992 to $88.7 million in 1993) indicates that XYZ
Corporation reduced its investment in inventories by $3.7
million over the period. XYZ then had $3.7 million to use in
some other part of the company's operations.
www.LisAri.com