03 Chapter model

10/18/13

Chapter 3. Financial Statements, Cash Flows, and Taxes

This model is STRICTLY OPTIONAL. Neither students nor instructors need to go through it. However, if someone
wants to practice with Excel, then the model can be useful. Also, on the tabs we show solutions for the withinchapter self-test questions, if applicable.
THE ANNUAL REPORT
The annual report contains a verbal section plus four key statements: the balance sheet, income statement,
statement of stockholders' equity, and statement of cash flows. These statements contain a wealth of information
that is used by bankers, stock and bond analysts, and managers. Hence, they are quite important. Spreadsheets
are used both to create and to analyze these statements, as we demonstrate in this model.
In this model, we start with the same balance sheet and income statement that was used in the chapter, but in an
Excel format, and then we show how spreadsheets can be used to analyze the data. The analysis continues to cover
the statement of stockholders' equity, statement of cash flows, and shows how accounting data may be modified to
evaluate managerial performance.
INPUT DATA SECTION: Historical Data Used in the Analysis
Year-end stock price
Shares outstanding (in millions)
Tax rate

2014
$23.06
50
40%

2013
$26.00
50
40%

BALANCE SHEET (Section 3-2)

The balance sheet can be thought of as a snapshot in time of a firm's financial position. You can observe the firm's
level of assets and the manner in which they have used debt and equity to fund those assets.
BALANCE SHEETS - Allied Food Products - December 31
(in millions of dollars)
Assets
Cash and equivalents
Accounts receivable
Inventories
Total current assets

2014

Net plant and equipment

Other assets expected to last more than 1 year
Total assets
Liabilities and Equity
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term bonds
Total liabilities

2013

10 $
375
615
1,000 $

80
315
415
810

1,000

870

2,000 $

###
1,680

60 $
140
110
310 $

30
130
60
220

750
1,060 $

580
800

Common stock (50,000,000 shares)

130

###

Retained earnings
Total common equity

810
940 $

750
880

Total liabilities and equity

2,000 $

1,680

INCOME STATEMENT (Section 3-3)

The income statement summarizes a firm's revenues and expenses over an accounting period, usually a year. The
"bottom line" of an income statement is the firm's net income. Collectively, the income statement gives an
indication of a firm's operating ability.
INCOME STATEMENTS - Allied Food Products - Years Ending December 31
(in millions of dollars)
2014

2013

Net sales
Operating costs except depreciation and amortization
Depreciation and amortization
Earnings before interest and taxes (EBIT)
Less interest
Earnings before taxes (EBT)
Taxes

$ 3,000.0 $ 2,850.0
2,616.2
2,497.0
100.0
90.0
$ 283.8 $ 263.0
88.0
60.0
$ 195.8 $ 203.0
78.3
81.2

Net income

117.5 $

121.8

Common dividends
Addition to retained earnings

$
$

57.5 $
60.0 $

53.0
68.8

PER-SHARE DATA
We can now use the above information to calculate three specific per-share data measures: earnings per share
(EPS), dividends per share (DPS), and book value per share (BVPS). Simply divide the totals by the appropriate
number of shares outstanding. Note that BVPS is calculated by dividing total common equity (common stock plus
retained earnings) by shares outstanding.
Common stock price
Earnings per share (EPS)
Dividends per share (DPS)
Book value per share (BVPS)

$
$
$
$

2014
23.06
2.35
1.15
18.80

$
$
$
$

2013
26.00
2.44
1.06
17.60

The per-share data give managers and investors a quick look at some items that affect the stock price.

STATEMENT OF CASH FLOWS (Section 3-4)

Information from the balance sheet and income statement can be used to construct the statement of cash flows,
which is shown below for Allied, in millions of dollars.
STATEMENT OF CASH FLOWS - Allied Food Products (2014)
Parentheses indicate net cash outflows, no parentheses indicates net
cash inflows.
(in millions of dollars)
I. Operating Activities
Net income
Depreciation and amortization
Increase in inventories
Increase in accounts receivable
Increase in accounts payable
Increase in accrued wages and taxes
Net cash provided by (used in) operating activities

2014
117.5
100.0
(200.0)
(60.0)
30.0
10.0
(2.5)

II. Long-Term Investing Activities

Additions to property, plant, and equipment

$ (230.0)

Net cash used in investing activities

$ (230.0)

III. Financing Activities

Increase in notes payable
Increase in bonds outstanding
Payment of dividends to stockholders
Net cash provided by financing activities
IV. Summary
Net decrease in cash and equivalents: (Net sum of I, II, III)
Cash and equivalents at beginning of the year
Cash and equivalents at end of the year

50.0
170.0
(57.5)
162.5

(70.0)
80.0

10.0

STATEMENT OF STOCKHOLDERS' EQUITY (Section 3-5)

The statement of stockholders' equity takes the previous year's balance of retained earnings, adds the current
year's net income, and then subtracts dividends paid to common stockholders. The end result is the new balance of
retained earnings. Allied's statement is shown below, in millions:
STATEMENT OF STOCKHOLDERS' EQUITY - Allied Food Products (2014)
(in millions of dollars)
Total
Common Stock
Retained Stockholders'
Shares (000)
Amount Earnings
Equity
Balances, December 31, 2013
50,000
$130.0
$750.0
$880.0
2014 Net income
117.5
Cash dividends
(57.5)
Addition to retained earnings
$60.0
Balances, December 31, 2014
50,000
$130.0
$810.0
$940.0

FREE CASH FLOW (Section 3-7)

FCF = EBIT(1 T) + Depr'n (Capital expenditures + Net operating working capital)
FCF =

($230.0
$170.3
+
$100.0
+
$150.0
FCF =
-$109.7

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CORPORATE TAXES (Section 3-9)

10/18/13

Use the Excel function VLOOKUP to find the taxes due on a given amount of corporate income. The
corporate tax table is shown below, with an income statement that's missing the tax liability and net income
to the right. We use VLOOKUP to find the taxes due, after which we find net income.

If a corporation's
It pays this
taxable income
amount on
is between:
the base
(1)
(2)
(3)
$0
$50,000
$0
$50,000
$75,000
$7,500
$75,000
$100,000
$13,750
$100,000
$335,000
$22,250
$335,000 $10,000,000 $113,900
$10,000,000 $15,000,000 $3,400,000
$15,000,000 $18,333,333 $5,150,000
$18,333,333
and up
$6,416,667

Plus this % on
the excess
over the base

(4)
15.0%
25.0%
34.0%
39.0%
34.0%
35.0%
38.0%
35.0%

Sales
Costs
Taxable income
Taxes
Net income

$315,000
$250,000
$65,000

Tax on base
Income over base
Tax rate
Tax on income over base
Total taxes
Average tax rate

$315,000
1. You are to fill in the 8 yellow cells. They should end
Sales
up looking like the green cells.
$250,000
Costs
$65,000
2. Put pointer on H11. Then click Formulas > fx. Find and
Taxable income
select category Lookup & Reference, and then click
$11,250
Taxes
VLOOKUP and OK to get the dialog box shown to the right.
$53,750
Net income
Fill it in as indicated. H7 is the number you are looking
up, the taxable income. Highlight A9:D16 and select
Tax on base
$7,500
it to define the area of the lookup table. You want to look
Income over base
$15,000
up a number in the 3rd column.
Tax rate
25.0%
4. Excel looks down Column 1 until it finds the value that's
Tax: income over base
$3,750
just larger than the number in H7, then it backs up one,
Total taxes
$11,250
then it goes to the 3rd column, finds the right number, and
Average tax rate
17.3%
inserts it in H11. You now have the tax on the base income.
5. To find the income over the base, use VLOOKUP again. Put pointer on H12.
Get a new dialog box and fill it in just like the first one, except the third entry is 1 rather
than 3. You now subtract this amount from the firm's taxable income. Do this by editing and entering
H7 followed by a minus sign right after the equal sign in H12. The income over base is $15,000.
6. Now look up the marginal tax rate, i.e., the rate on the income over the base. Again, get a
dialog box and fill it out as before, but with a 4 for the index. See the third box to the right.
7. Now just complete the arithmetic and finish the income statement. Note that the marginal
tax rate is 25%, but the average tax rate is only 17.3%.
With the income statement completed, you can change sales and/or costs to see the new results.
For example, change sales (H5) from $315,000 to $400,000 to see the average rate rise from 17.3%
to 27.8%.