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# A B C D E F G

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3 Chapter 2. Tool Kit for Financial Statements, Cash Flows, and Taxes
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5 FINANCIAL STATEMENTS AND REPORTS (Section 2.1)
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8 The annual report contains a verbal section plus four key statements: the balance sheet, income statement, statement of retained
earnings, and statement of cash flows. These statements contain a wealth of information that is used by bankers, stock and bond
9 analysts, and managers. Hence, they are quite important. Spreadsheets are used both to create and to analyze these statements, as
10 we demonstrate in this model.
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13 Regarding statement creation, firms' accounting information is maintained in computer files, which are adjusted as sales occur,
14 materials are purchased, and so forth. The firm's accountants periodically--monthly, quarterly, and annually--extract information
from the general files and compile the aforementioned four statements. These statements-- in both printed and spreadsheet
15 format--are made available to security analysts, and if the firm wants to borrow money, the same information is provided to
16 potential lenders.
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18 The firm's financial staff also uses the data to analyze the firm's condition--its strengths and weaknesses--and this information is used
19 in the quest to improve operations and increase the firm's value.
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21 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
22 then we show how Excel (and other spreadsheet packages) can be used to analyze the data.
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32 In addition, note that in cells which summarize data in other cells, such as sums or differences, the spreadsheet uses formulas rather
33 than fixed numbers. For example, the cell for Total assets contains the Sum formula rather than just \$2,000. (The cell itself shows
34 \$2,000, but if you put the pointer on the cell, then the formula line will show that the cell actually contains a formula.) That way, if
the data for any input (cash, for instance) changes, the spreadsheet will automatically recalculate and provide the correct net value
35 for Total assets. As you will see as you go through our models, this automatic recalculation feature is one of the most useful and
36 powerful aspects of Excel and other spreadsheets.
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Finally, note that we show just below this introduction, before the financial statements, some information that is used to develop
40 aspects of the financial statements, including the tax rate, number of shares outstanding, and price per share. Generally, in financial
41 models, data that are used to construct statements are shown in an Input Data Section toward the top of the model.
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43 THE BALANCE SHEET (Section 2.2)
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A B C D E F G
45 INPUT DATA SECTION: Historical Data Used in the Analysis
46 2009 2008
47 Year-end common stock price \$23.00 \$26.00
48 Year-end shares outstanding (in millions) 50 50
49 Tax rate 40% 40%
50 Weighted average cost of captal (WACC) 11.0% 10.8%
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52 Table 2-1
53 MicroDrive Inc. December 31 Balance Sheets
54 (in millions of dollars)
55 2009 2008
56 Assets
57 Cash and equivalents \$10 \$15
58 Short-term investments \$0 \$65
59 Accounts receivable \$375 \$315
60 Inventories \$615 \$415
61 Total current assets \$1,000 \$810
62 Net plant and equipment \$1,000 \$870
63 Total assets \$2,000 \$1,680
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65 Liabilities and equity
66 Accounts payable \$60 \$30
67 Notes payable \$110 \$60
68 Accruals \$140 \$130
69 Total current liabilities \$310 \$220
70 Long-term bonds \$754 \$580
71 Total debt \$1,064 \$800
72 Preferred stock (400,000 shares) \$40 \$40
73 Common stock (50,000,000 shares) \$130 \$130
74 Retained earnings \$766 \$710
75 Total common equity \$896 \$840
76 Total liabilities and equity \$2,000 \$1,680
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78 THE INCOME STATEMENT (Section 2.3)
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80 Table 2-2
81 MicroDrive Income Statements for Years Ending December 31
82 (in millions of dollars)
83 2009 2008
84 INCOME STATEMENT
85 Net sales \$3,000.0 \$2,850.0
86 Operating costs except depreciation \$2,616.2 \$2,497.0
87 Earnings before interest, taxes, deprn., and amortization (EBITDA)* \$383.8 \$353.0
88 Depreciation \$100.0 \$90.0
89 Amortization \$0.0 \$0.0
90 Depreciation and amortization \$100.0 \$90.0
91 Earnings before interest and taxes (EBIT) \$283.8 \$263.0
92 Less interest \$88.0 \$60.0
93 Earnings before taxes (EBT) \$195.8 \$203.0
94 Taxes (40%) \$78.3 \$81.2
95 Net Income before preferred dividends \$117.5 \$121.8
A B C D E F G
96 Preferred dividends \$4.0 \$4.0
97 Net Income available to common stockholders \$113.5 \$117.8
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99 Common dividends \$57.5 \$53.0
100 Addition to retained earnings \$56.0 \$64.8
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102 *MicroDrive has no amortization charges.
A B C D E F G
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We can now use the above information to calculate three specific per-share data measures: earnings per share '(EPS), dividends per
106 share (DPS), and book value per share (BVPS). Simply divide the totals by the appropriate number of shares outstanding. Note that
107 BVPS is calculated by dividing total common equity (common stock plus retained earning) by shares outstanding.
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109 Per-share Data
110 Earnings per share (EPS) \$2.27 \$2.36
111 Dividends per share (DPS) \$1.15 \$1.06
112 Book value per share (BVPS) \$17.92 \$16.80
113 Cash flow per share (CFPS) \$4.27 \$4.16
114 The per share data gives managers and investors a quick look at some items that affect the price of the stock.
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116 STATEMENT OF RETAINED EARNINGS (Section 2.4)
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The statement of retained earnings takes the previous year's balance of retained earnings, adds the current year's net income, and
119 then subtracts dividends paid to common stockholders. The end result is the new balance of retained earnings. MicroDrive's
120 statement is shown below, in millions:
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122 Table 2-3
123 2009
124 Balance of Retained Earnings, Dec. 31, 2008 \$710.0
125 Add: Net Income, 2009 \$113.5
126 Less: Dividends to common stockholders (\$57.50)
127 Balance of Retained Earnings, Dec. 31, 2009 \$766.0
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130 NET CASH FLOW (Section 2.5)
131 2009 2008
132 Net income \$113.5 \$117.8
133 Depreciation \$100.0 \$90.0
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135 Net cash flow \$213.5 \$207.8
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137 STATEMENT OF CASH FLOWS (Section 2.6)
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139 Information from the balance sheet and income statement can be used to construct the Statement of
140 Cash Flows, which is shown below for MicroDrive, in millions of dollars.
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142 Table 2-4
143 MicroDrive Statement of Cash Flows for 2009
144 (in millions of dollars)
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146 Operating Activities
147 Net Income before preferred dividends \$117.5
149 Depreciation and amortization \$100.0
150 Due to changes in working capital
151 Increase in accounts receivable (\$60.0)
152 Increase in inventories (\$200.0)
153 Increase in accounts payable \$30.0
A B C D E F G
154 Increase in accruals \$10.0
155 Net cash provided by operating activities (\$2.5)
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157 Investing activities
158 Cash used to acquire fixed assets (\$230.0)
159 Sale of short-term investments \$65.0
160 Net cash provided by investing activities (\$165.0)
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162 Financing Activities
163 Increase in notes payable \$50.0
164 Increase in bonds \$174.0
165 Payment of common and preferred dividends (\$61.5)
166 Net cash provided by financing activities \$162.5
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168 Net change in cash and equivilents (\$5.0)
169 Cash and securities at beginning of the year \$15.0
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171 Cash and securities at end of the year \$10.0
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A B C D E F G
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175 MODIFYING ACCOUNTING DATA FOR MANAGERIAL DECISIONS (Section 2.7)
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Now that the statements have been developed, we can use the data contained in them to calculate some items that are of interest to
179 managers, investors, and lenders. All of these items are used more extensively in subsequent chapters, where we look in more
180 depth at how historical financial statements are analyzed and how future financial results are predicted.
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182 Net Operating Working Capital
183 Those current assets used in operations are called operating working capital, and operating working capital less operating current
184 liabilities is called Net Operating Working Capital.
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Operating Operating
186 2009 NOWC =
current assets
- current
liabilities
187 = \$1,000 - \$200
188 2009 NOWC = \$800
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Operating
Operating
190 2008 NOWC = current assets - current
liabilities
191 = \$745 - \$160
192 2008 NOWC = \$585
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194 Total Net Operating Capital (also just called Operating Capital)
195 The Total Net Operating Capital is Net Operating Working Capital plus any fixed assets.
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197 2009 TOC = NOWC + Fixed assets
198 = \$800 + \$1,000
199 2009 TOC = \$1,800
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201 2008 TOC = NOWC + Fixed assets
202 = \$585 + \$870
203 2008 TOC = \$1,455
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205 Net Operating Profit After Taxes
206 NOPAT is the amount of profit MicroDrive would generate if it had no debt and held no financial assets.
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209 2009 NOPAT = EBIT x (1-T)
210 = \$284 x 60%
211 2009 NOPAT = \$170.3
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213 2008 NOPAT = EBIT x (1-T)
214 = \$263 x 60%
215 2008 NOPAT = \$157.8
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217 Free Cash Flow
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219 MicroDrive's Free Cash Flow caluclation is the cash flow actually available for distribution to investors after the company has made
all necessary investments in fixed assets and working capital to sustain ongoing operations.
A
MicroDrive's Free CashBFlow caluclation C D
is the cash flow actually E for distribution
available F to investorsGafter the company has made
220 all necessary investments in fixed assets and working capital to sustain ongoing operations.
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222 2009 FCF = NOPAT + Depr. - Gross investment in operating capital
223 = \$270.3 - \$445
224 2009 FCF = (\$174.70)
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227 2009 FCF = NOPAT - Net investment in operating capital
228 = \$170.3 - \$345
229 2009 FCF = (\$174.70)
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231 MVA AND EVA (Section 2.8)
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233 Market Value Added is the difference between the market value of MicroDrive's stock and the
234 amount of equity capital supplied by shareholders.
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236 2009 MVA = Stock price x # of shares - Book value of common equity
237 = \$23.00 x 50 - \$896
238 = \$1,150 - \$896
239 2009 MVA = \$254
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241 2008 MVA = Stock price x # of shares - Book value of common equity
242 = \$26.00 x 50 - \$840
243 = \$1,300 - \$840
244 2008 MVA = \$460
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247 Economic Value Added represents MicroDrive's residual income that remains after the cost of all
248 capital, including equity capital, has been deducted.
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250 2009 EVA = NOPAT - Operating Capital x Weighted average cost of capital
251 = \$170.3 - \$1,800 x 11%
252 = \$170.3 - \$198.0
253 2009 EVA = (\$27.72)
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255 2008 EVA = NOPAT - Operating Capital x Weighted average cost of capital
256 = \$157.8 - \$1,455 x 10.8%
257 = \$157.8 - \$157.1
258 2008 EVA = \$0.7
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260 Return on Invested Capital
261 The Return on Invested Capital tells us the amount of NOPAT per dollar of operating capital.
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263 2009 ROIC = NOPAT ÷ Operating Capital
264 \$170.30 ÷ \$1,800
265 2009 ROIC = 9.46%
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267 2008 ROIC = NOPAT ÷ Operating Capital
268 \$157.80 ÷ \$1,455
269 2008 ROIC = 10.85%
A B C D E F G
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272 Table 2-5
273 MVA and EVA for MicroDrive (Millions of Dollars)
274 2009 2008
275 MVA Calculation
276 Price per share \$23.0 \$26.0
277 Number of shares (millions) 50.0 50.0
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me statement, 8 statement of retained
t is used by bankers, stock and bond
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ate and to analyze these statements, as
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which are adjusted as sales occur,
y, and annually--extract
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ame information
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weaknesses--and
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he chapter, 21
but in an Excel format, and
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, the spreadsheet uses formulas rather
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an just \$2,000.
ually contains
34a formula.) That way, if
late and provide the correct net value
ature is one35of the most useful and
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e information that is used to develop
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price per share.
d the top of41the model.
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arnings per share '(EPS), dividends per
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shares outstanding.
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ice of the stock.
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ds the current year's net income, and
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retained earnings. MicroDrive's
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culate some items that are of interest to
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orking capital
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nvestors after
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Book value
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Book value
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