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Introduction
to Finance
Topic 2
Financial
Statements, Taxes
and Cash Flow
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Acknowledgement Ross et al, 2011, Essentials of Corporate Finance, 7th Ed, McGraw-Hill Companies, Inc..
1-1 2-1
Learning Outcomes
At the end of the lesson, students should be
able to:
differentiate between book value and market
value
differentiate between accounting income and
cash flow
differentiate between average and marginal
tax rates
calculate how to determine a firms cash flow
from its financial statements
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1-2 2-2
Chapter Outline
The Balance Sheet/Statement of
Financial Position
The Income Statement
Taxes
Cash Flow
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Figure 2.1
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Income Statement
The income statement is more like a
video of the firms operations for a
specified period of time
You generally report revenues first and
then deduct any expenses for the period
Matching principle To recognize
revenue when it is fully earned
(recognition principle) and match
expenses required to generate revenue
to the period of recognition
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1-8 2-8
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Taxes
The one thing about taxes we can rely
on is that they will always be changing!!
Marginal vs. average tax rates
Marginal the percentage paid on the next
dollar earned
Average the tax bill / taxable income
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2-10
Taxes
Tax rate
0 -
50,000
15%
50,001 -
75,000
25%
75,001 -
100,000
34%
100,001 -
335,000
39%
335,001 -
10,000,000
34%
10,000,001 -
15,000,000
35%
15,000,001 -
18,333,333
38%
18,333,334+
35%
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2-12
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2-13
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2-15
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Table 2.5
Refer to own C/Flow Excel s/sheet referring to
P&L (Table 2.2 on pg 28) & B/S (Table 2.1 on pg 25)
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