The Cash-Flow Statement Shows the cash that flowed into and out of a firm during a period of time Focuses attention on a firm's cash situation A firm may be profitable and short of cash Tradeoff between Profitability and liquidity Unlike the balance sheet and income statement,cash flow statements are independent of accounting methods The IRS uses accounting income to compute tax,so accounting rules have a second order effect on cash flows through taxes Cash basis (accrual basis for BS,IS) The cash-flow statement is a useful supplement to the income statement The cash-flow statement is a good description of a firm's operation. .THE COURSE OF FINANCE 2017 SPRING SJTU
The Cash-Flow Statement Shows the cash that flowed into and out of a firm during a period of time Focuses attention on a firm’s cash situation A firm may be profitable and short of cash Tradeoff between Profitability and liquidity Unlike the balance sheet and income statement, cash flow statements are independent of accounting methods The IRS uses accounting income to compute tax, so accounting rules have a second order effect on cash flows through taxes Cash basis (accrual basis for BS, IS) The cash-flow statement is a useful supplement to the income statement The cash-flow statement is a good description of a firm’s operation. •THE COURSE OF FINANCE 2017 SPRING SJTU •11
GPC Cash Flow Statement,for the Year ending Dec 31,2xx0 Net income 23.4 Depreciation 30.0 Increase in acc rec (10.0) Increase in invent (30.0) Increase in Acc pay 12.0 *Total cash from operations 25.4 Invest in new ppe (90.0) *Cash flow invest'activities (90.0) -Div paid (10.0) Inc short-term debt 94.6 *Cash flow from financing 84.6 **Chng cash mkt securities 20.0 .THE COURSE OF FINANCE 2017 SPRING SJTU 12
•THE COURSE OF FINANCE 2017 SPRING SJTU •12 GPC Cash Flow Statement, for the Year ending Dec 31, 2xx0 Net income 23.4 + Depreciation 30.0 - Increase in acc rec (10.0) - Increase in invent (30.0) + Increase in acc rec 12.0 *Total cash from operations 25.4 - Invest in new ppe (90.0) *Cash flow invest' activities (90.0) -Div paid (10.0) + Inc short-term debt 94.6 *Cash flow from financing 84.6 **Chng cash & mkt securities 20.0 Acc pay
GPC Income Statement for Year Ending 2xx1 Sales revenues 200.0 Cost of goods sold (110.0) GPC Balance Sheet at Dec 31,2xx1 Gross margin 90.0 2xx0 2xx1 Change Gen sell,admin exp (30.0) Assets Operating income 60.0 Cash mkt'ble secs 100.0 120.0 20.0 Receivables 50.0 60.0 108 Interest expense (21.0) Inventories 150.0 180.0 30.0 *Taxable income 39.0 *Current assets 300.0 360.0 60.0 Income tax (15.6) Pp&e 400.0 490.0 90.0 *Net income 23.4 Acc depreciation (100.0) (130.0) (30.0 *Net pp&e 300.0 360.0 60.0 Allocation to divs (1Q0) *Chg retained earn 13.4 **Total Assets 600.0 720.0 120.0 GPC Cash Flow Statement,for Liabilities Equity Accounts payable 60.0 72.0 12.0 the Year ending Dec 31,2xx0 Short-term debt 90.0 184.6 94.6 Current liabilities 150.0 256.6 106.6 Netincome 23.4 Depreciation 30.0 Long-term debt 150.0 150.0 Increase in ace rec 10.0) **Total liabilities 300.0 406.6 106.6 Increase in invent (30.0) Increase in acc pay 12.0 Paid-in capital 200.0 200.0 *Total cash from operations 25.4 Retained earnings 100.0 113.4 13.4 *Shareholders equ 300.0 313.4 13.4 Invest in new ppe (90.0) Cash flow invest'activities (90.0) Liab Shareholder 600.0 720.0 120.0 -Div paid (10.0) Inc short-term debt 94.6 THE COURSE OF FINANCE 2017 SPRING SJTU Cash flow from financing 84.6 *Chng cash mkt securities 20.0
•THE COURSE OF FINANCE 2017 SPRING SJTU •13 GPC Balance Sheet at Dec 31, 2xx1 2xx0 2xx1 Change Assets Cash & mkt'ble secs 100.0 120.0 20.0 Receivables 50.0 60.0 10.0 Inventories 150.0 180.0 30.0 *Current assets 300.0 360.0 60.0 Pp&e 400.0 490.0 90.0 Acc depreciation (100.0) (130.0) (30.0) *Net pp&e 300.0 360.0 60.0 **Total Assets 600.0 720.0 120.0 Liabilities & Equity Accounts payable 60.0 72.0 12.0 Short-term debt 90.0 184.6 94.6 *Current liabilities 150.0 256.6 106.6 Long-term debt 150.0 150.0 - **Total liabilities 300.0 406.6 106.6 Paid-in capital 200.0 200.0 - Retained earnings 100.0 113.4 13.4 *Shareholders equ 300.0 313.4 13.4 Liab + Shareholder 600.0 720.0 120.0 GPC Income Statement for Year Ending 2xx1 Sales revenues 200.0 Cost of goods sold (110.0) *Gross margin 90.0 Gen sell, & admin exp (30.0) *Operating income 60.0 Interest expense (21.0) *Taxable income 39.0 Income tax (15.6) *Net income 23.4 Allocation to divs (10.0) *Chg retained earn 13.4 GPC Cash Flow Statement, for the Year ending Dec 31, 2xx0 Net income 23.4 + Depreciation 30.0 - Increase in acc rec (10.0) - Increase in invent (30.0) + Increase in acc pay 12.0 *Total cash from operations 25.4 - Invest in new ppe (90.0) *Cash flow invest' activities (90.0) -Div paid (10.0) + Inc short-term debt 94.6 *Cash flow from financing 84.6 **Chng cash & mkt securities 20.0
Notes to Financial Statements Explains accounting methods used FIFO,LIFO Details of assets and liabilities Provide details regarding the conditions and expiration dates for debt,leases etc. Details of equity structure Vulnerability of the firm to takeovers Documentation of changes in operation Impact on performance from M&A and diverstitures Documents off-balance-sheet items Derivative contracts .THE COURSE OF FINANCE 2017 SPRING SJTU 14
Notes to Financial Statements Explains accounting methods used FIFO, LIFO Details of assets and liabilities Provide details regarding the conditions and expiration dates for debt, leases etc. Details of equity structure Vulnerability of the firm to takeovers Documentation of changes in operation Impact on performance from M&A and diverstitures Documents off-balance-sheet items Derivative contracts •THE COURSE OF FINANCE 2017 SPRING SJTU •14
3.3 Market Values y.Book Values-----For Balance sheet Not all assets and liabilities are included Intangible assets such as patents may have some value included,but brand loyalty,technological know-how,or a highly trained loyal workforce will not be valued. And others are understate and/or overstated Goodwill may be included,but soon loses its connection to market value because of accounting depreciation and market fluctuations Some contingent liabilities such as law-suits are not routinely disclosed,or only disclosed in the notes Accountants are beginning to mark-to-market the assets of pension funds .15 .THE COURSE OF FINANCE 2017 SPRING SJTU
3.3 Market Values v. Book Values-----For Balance sheet Not all assets and liabilities are included l Intangible assets such as patents may have some value included, but brand loyalty, technological know-how, or a highly trained loyal workforce will not be valued. And others are understate and/or overstated l Goodwill may be included, but soon loses its connection to market value because of accounting depreciation and market fluctuations Some contingent liabilities such as law-suits are not routinely disclosed, or only disclosed in the notes Accountants are beginning to mark-to-market the assets of pension funds •THE COURSE OF FINANCE 2017 SPRING SJTU •15