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Financial Statements, Taxes, and Cash Flows ~ Chapter 2

Learn about the importance of financial statements, taxes, and cash flows in analyzing a company's performance. Explore balance sheets, income statements, market vs. book value, SEC documents, derivative instruments, corporate tax rates, and cash flow equations.

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Financial Statements, Taxes, and Cash Flows ~ Chapter 2

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  1. Financial Statements, Taxes, and Cash Flows ~ Chapter 2

  2. Balance Sheet - review

  3. The Balance Sheet - Figure 2.1

  4. 2017 and 2018 2017 2018 2017 2018

  5. Marketvs. Book Value

  6. Income Statement- Review

  7. Page 26 2018 Top Line Bottom Line

  8. Finding SEC Documents • Publicly traded companies must file regular reports with the Securities and Exchange Commission (SEC). • These reports are usually filed electronically and can be searched at the SEC public site called EDGAR. • http://www.sec.gov/edgar.shtml • http://www.sec.gov/edgar/searchedgar/companysearch.html • Look up Harley, for Harley-Davidson Corp. or HOGfor its ticker

  9. (From Quarterly Report, September 30, 2018 Notes to Financial Statements) Derivative Instruments and Hedging Activities The Company sells its products internationally, and in most markets those sales are made in the foreign country’s local currency. As a result, the Company’s earnings can be affected by fluctuations in the value of the U.S. dollar relative to foreign currency. The Company utilizes foreign currency exchange contracts to mitigate the effects of the Euro, the Australian dollar, the Japanese yen, the Brazilian real, the Canadian dollar and the Mexican peso. The foreign currency exchange contracts are entered into with banks and allow the Company to exchange a specified amount of foreign currency for U.S. dollars at a future date, based on a fixed exchange rate.

  10. Yahoo Finance Comparison of Competitors ttm = trailing twelve months, yoy is Year over Year, and PEG=PE/growth rate.

  11. Taxes

  12. Corporate Tax Rates in the USwere way too weird in 2017

  13. Corporate Tax Rates in 2018 & 19 • After the passage of the Tax Cuts and Jobs Act, on December 20th, 2017, the corporate tax rate has been changed to a flat 21% starting January 1st, 2018. • The global average corporate tax rate is about 25%, so this move is designed to make the U.S. more globally competitive, effective January 1st, 2018 and beyond. • The Marginal & the Average tax rate is 21%. • The effective tax rateis lower still due to immediate expensing of capital equipment. • The system now is territorial versus worldwide, which also eliminates double taxation.

  14. The Concept of Cash Flow

  15. Cash Flow From Assetsalternative methods

  16. Cash Flow From Assets (CFFA)equations

  17. Try This Problem as Example 1 • Current Accounts • 2018: CA = 4,400; CL = 1,500 • 2017: CA = 3,500; CL = 1,200 • Fixed Assets and Depreciation • 2018: NFA = 3,400; 2017: NFA = 3,100 • Depreciation Expense = 400 • Long-term Debt and Equity (R.E. not given) • 2018: LTD = 4,000; Common stock & APIC = 400 • 2017: LTD = 3,950; Common stock & APIC = 400 • 2018 Income Statement • EBIT = 2,000; Taxes = 300 • Interest Expense = 350; Dividends = 500 Compute CFFA !

  18. 2 ways to solve for CFFA METHOD 2 • OCF = $2,000 + $400 – $300 = $2,100 • NCS = $ 3,400 – $3,100 + $400 = $700 • Changes in NWC = ($4,400 – $1,500) – ($3,500 – $1,200) = $600 • CFFA = $2,100 – $700 - $600 = $800  METHOD 1Alternatively: • CF to Creditors = $350 – ($4,000 – $3,950) = $300 • CF to Stockholders = $500 • CFFA = $300 + $500 = $800

  19. Example 2:With Balance Sheet and Income Statement Information a bit harder. • Current Accounts • 2018: CA = 3625; CL = 1787 • 2017: CA = 3596; CL = 2140 • Fixed Assets and Depreciation • 2018: NFA = 2194; 2017: NFA = 2261 • Depreciation Expense = 500 • Long-term Debt and Equity • 2018: LTD = 538; Common stock & APIC = 462 • 2017: LTD = 581; Common stock & APIC = 372 • Income Statement • EBIT = 1014; Taxes = 368 • Interest Expense = 93; Dividends = 285 Additional Paid in Capital FIND CFFA !

  20. Cash Flow From Assets (2 ways) METHOD 2 OCF = 1,014 + 500 – 368 = 1,146 EBIT + Dep - Taxes NCS = 2,194 – 2,261 + 500 = 433 Ending FA – Beginning FA + Dep Changes in NWC = (3,625 – 1,787) – (3,596 – 2,140) = 382 Ending NWC – Beginning NWC CFFA = 1,146 – 433 – 382 = 331  METHOD 1 • CF to Creditors = 93 – (538 – 581) = 136 Interest paid – Net new borrowing • CF to Stockholders = 285 – (462 – 372) = 195 Dividends paid – Net new equity raised CFFA = 136 + 195 = 331  The CF identity holds.

  21. Repeated U.S. Corp. Financials for the Last Problem 2017 and 2018 2017 2018 2017 2018

  22. 2018 Top Line Bottom Line

  23. Example: US Corporation – Part I

  24. Example: US Corporation – Part II

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