Chapter 2
•Financial Statements, Taxes,
and Cash Flow
McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 02 – Index of Sample
Problems
• Slide # 03 - 10 Understanding a balance sheet
• Slide # 11 - 12 Market value versus book value
• Slide # 13 - 18 Understanding an income statement
• Slide # 19 - 20 Earnings per share
• Slide # 21 - 22 Dividends per share
• Slide # 23 - 24 Average tax rate
• Slide # 25 - 26 Marginal tax rate
• Slide # 27 - 28 Operating cash flow
• Slide # 29 - 34 Net capital spending
(index continued on next slide)
Chapter 02 – Index of Sample
Problems
• Slide # 35 - 36 Change in net working capital
• Slide # 37 - 38 Cash flow from assets
• Slide # 39 - 41 Cash flow to creditors
• Slide # 43 - 44 Cash flow to stockholders
3: Understanding a balance sheet
Answer these questions based on the balance sheet shown on
slide # 4. Use 2005 values.
1. What is the amount of the current assets?
2. What is the amount of the long-term assets?
3. What is the amount of the current liabilities?
4. What is the amount of the long-term debt?
5. What is the amount of the stockholders’ equity?
Answers on slide # 5.
4: Understanding a balance sheet
WISDOM, INC.
Balance Sheets
($ in millions)
2004 2005 2004 2005
Assets Liabilities and Owners’ Equity
Cash $ 199 $ 203 Accounts payable $ 219 $ 187
Accounts receivable 436 421 Notes payable 193 546
Inventory 504 497 Total 412 733
Total 1,139 1,121 Long-term debt 470 533
Net fixed assets 1,574 1,633 Total 882 1,266
Common stock and paid
690 650
in surplus
Retained earnings 1,141 838
Total 1,831 1,488
Total assets Total liabilities and
$2,713 $2,754 $2,713 $2,754
owners’ equity
5: Understanding a balance sheet
Answers to questions from slide # 3.
Current assets for 2005 $203m $421m $497m
$1,121m
Long term assets for 2005 $1,633m
Current liabilities for 2005 $187m $546m
$733m
Long - term debt for 2005 $533m
Stockholders' equity for 2005 $ 650m $838m
$1,488m
6: Understanding a balance sheet
The Dinmore Company has total assets of $6.4 million, current
assets of $2.3 million, current liabilities of $2.5 million and total
liabilities of $4.2 million.
1. What is the amount of the stockholders’ equity?
2. What is the amount of the net working capital?
3. What is the amount of the long-term assets?
4. What is the amount of the long-term debt?
Answers on slides # 7-8.
7: Understanding a balance sheet
Answers to slide # 6.
Stockholders' equity Total assets - Total liabilities
$6.4m - $4.2m
$2.2m
Net working capital Current assets - Current liabilities
$2.3m - $2.5m
- $0.2m
8: Understanding a balance sheet
Answers to slide # 6.
Long - term assets Total assets - Current assets
$6.4m - $2.3m
$4.1m
Long - term liabilities Total liabilities - Current liabilities
$4.2m - $2.5m
$1.7m
9: Understanding a balance sheet
Your company has current assets of $250 million, total assets of
$395 million and long-term debt of $116 million. The net working
capital is $19 million.
1. What is the amount of the current liabilities?
2. What is the amount of the total equity?
Answers on slide # 10.
10: Understanding a balance sheet
Net working capital Current assets - Current liabilities
Current liabilities Current assets - Net working capital
$250m - $19m
$231m
Total liabilities Current liabilities Long - term liabilities
$231m $116m
$347m
Total equity Total assets - Total liabilities
$395m - $347m
$48m
11: Market value vs book value
The balance sheet of your firm shows current assets of $214,500
which includes cash of $23,600, accounts receivable of $87,500
and inventory of $103,400. Long-term assets have a book value of
$487,300 which is comprised of a building and some equipment.
You believe you can sell the inventory for $163,900. You expect to
collect only $84,600 of the accounts receivables. You can sell the
equipment for $218,000 and the building for $365,000.
What is the total book value of your firm? The total market value?
12: Market value vs book value
Book Value Market Value
Current assets $214,500 $272,100
Long-term $487,300 $583,000
assets
Total assets $701,800 $855,100
13: Understanding an income
statement
MALLORY, INC.
2005 Income Statement
($ in millions)
Net sales $2,179
Cost of goods sold
1,806
Depreciation 139
Earnings before interest and taxes ???
Interest paid 48
Earnings before taxes ???
Taxes 63
Net income $ ???
Dividends paid $ 50
Addition to retained earnings $???
Can you find the missing values?
14: Understanding an income
statement
MALLORY, INC.
2005 Income Statement
($ in millions)
Net sales $2,179
Cost of goods sold
1,806
Depreciation 139
Earnings before interest and taxes 234
Interest paid 48
Earnings before taxes 186
Taxes 63
Net income $ 123
Dividends paid $50
Addition to retained earnings $73
Calculations shown on next slide
15: Understanding an income
statement
Earnings before interest and taxes Net sales - Cost of goods sold - Depreciation
$2,179m - $1,806m - $139m
$234m
Earnings before taxes Earnings before interest and taxes - Interest paid
$234m - $48m
$186m
Net income Earnings before taxes - Taxes
$186m - $63m
$123m
Addition to retained earnings Net income - Dividends
$123m - $50m
$73m
16: Understanding an income
statement
FISCHER, INC.
2005 Income Statement
($ in millions)
Net sales $1,067
Cost of goods sold
731
Depreciation 64
Earnings before interest and taxes ???
Interest paid 32
Earnings before taxes ???
Taxes ???
Net income $ ???
Dividends paid $ 35
Addition to retained earnings $ 121
Can you find the missing values?
17: Understanding an income
statement
FISCHER, INC.
2005 Income Statement
($ in millions)
Net sales $1,067
Cost of goods sold 731
Depreciation 64
Earnings before interest and taxes 272
Interest paid 32
Earnings before taxes 240
Taxes – 35% 84
Net income $ 156
Dividends paid $ 35
Addition to retained earnings $121
18: Understanding an income
statement
Net income Dividends paid Addition to retained earnings
$35 $121
$156
Net income
Earnings before taxes
1 - Tax rate
$156
1 .35
$156
.65
$240
Earnings before interest and taxes Earnings before taxes Interest paid
$240 $32
$272
19: Earnings per share
Your firm has net income of $210,000. You own 140,000 shares of
stock and are the only stockholder.
What is the amount of your earnings per share?
20: Earnings per share
Net income
Earnings per share
Number of shares outstanding
$210,000
140,000
$1.50
21: Dividends per share
Your firm has net income of $210,000. The number of outstanding
shares of common stock is 140,000. The dividend payout ratio is
40%.
What is the amount of the dividends per share?
22: Dividends per share
Net income Dividend payout ratio
Dividends per share
Number of shares outstanding
$210,000 .40
140,000
$84,000
140,000
$0.60
23: Average tax rate
Given this tax table, what is the average tax rate for a firm
with taxable income of $160,000?
Taxable Income Tax Rate
0- 50,000 15%
50,001- 75,000 25%
75,001- 100,000 34%
100,001- 335,000 39%
24: Average tax rate
Taxable Income Tax Rate
$50,000 .15 $ 7,500 0- 50,000 15%
$25,000 .25 $ 6,250
50,001- 75,000 25%
$25,000 .34 $ 8,500
($160,000 $100,000) .39 $23,400 75,001- 100,000 34%
Total tax $45,650
100,001- 335,000 39%
Total tax
Average tax rate
Taxable income
$45,650
$160,000
.2853125
28.53%
25: Marginal tax rate
Given the information below, what is the marginal tax rate
if a firm has taxable income of $160,000?
Taxable Income Tax Rate
0- 50,000 15%
50,001- 75,000 25%
75,001- 100,000 34%
100,001- 335,000 39%
26: Marginal tax rate
The marginal tax rate for a firm with taxable income of
$160,000 is 39%. The marginal tax rate is the rate that
applies to the next dollar of taxable income earned.
Taxable Income Tax Rate
0- 50,000 15%
50,001- 75,000 25%
75,001- 100,000 34%
100,001- 335,000 39%
27: Operating cash flow
Your firm has sales of $231,800, costs of goods sold of
$187,000, interest expense of $3,600, depreciation expense of
$11,300 and a tax rate of 34%.
What is your operating cash flow?
28: Operating cash flow
Sales $231,800
COGS 187,000
Depreciation 11,300
EBIT 33,500
Interest 3,600
EBT 29,900
Tax 34% 10,166 Tax $29,900 .34 $10,166
Net Income $ 19,734
OCF EBIT Depreciation – Taxes
$33,500 11,300 – 10,166
$34,634
29: Net capital spending
Your firm has ending net fixed assets of $467,803 and beginning
net fixed assets of $503,498. The depreciation expense for the year
is $59,200.
What is the amount of your net capital spending for the year?
30: Net capital spending
Net capital spending Ending net fixed assets - Beginning net fixed assets Depreciation
$467,803- $503,498 $59,200
$23,505
31: Net capital spending
Net fixed assets, beginning $503,498
Less: Depreciation 59,200
Total 444,298
Plus: Net capital spending 23,505
Net fixed assets, ending $467,803
32: Net capital spending
Your firm has beginning net fixed assets of $678,407 and ending
net fixed assets of $402,398. The depreciation expense for the year
is $75,380.
What is the amount of the net capital spending for the year?
33: Net capital spending
Net capital spending Ending net fixed assets - Beginning net fixed assets Depreciation
$402,398- $678,407 $75,380
- $200,629
34: Net capital spending
Net fixed assets, beginning $678,407
Less: Depreciation 75,380
Total 603,027
Plus: Net capital spending -200,629
Net fixed assets, ending $402,398
In this case, you had net sales of fixed assets.
35: Change in net working capital
Given the following information what is the change in net working
capital (NWC)?
Beginning Ending
Cash $ 903 $ 789
Accounts receivable 3,298 3,672
Inventory 6,129 5,032
Net fixed assets 11,973 12,530
Accounts payable 1,542 1, 303
Long-term debt 10,200 9,300
36: Change in net working capital
Ending NWC Ending current assets - Ending current liabilities
$789 $3,672 $5,032 - $1,303
$8,190
Beginning NWC Beginning current assets - Beginnng current liabilities
$903 $3,298 $6,129 - $1,542
$8,788
Change in NWC Ending NWC - Beginning NWC
$8,190 - $8,788
-$598
37: Cash flow from assets
A firm has operating cash flow of $18,500, change in net working
capital of $300 and additions to net capital spending of -$1,200.
What is the amount of the cash flow from assets?
38: Cash flow from assets
Cash flow from assets Operating cash flow - Net capital spending - Change in net working capital
$18,500 - (-$1,200) - $300
$19,400
39: Cash flow to creditors
40: Cash flow to creditors
Your firm has long-term debt of $42,900 as of year end. Your
beginning long-term debt was $38,900. During the year, the
company paid a total of $3,500 in interest.
What is the amount your cash flow to creditors?
41: Cash flow to creditors
Cash flow to creditors Interest paid - Net new borrowing
Interest paid - (Ending long - term debt - Beginning long - term debt)
$3,500 - ($42,900 - $38,900)
-$500
42: Cash flow to stockholders
43: Cash flow to stockholders
Your firm has a net income of $136,800 for the year. The dividend
payout ratio is 50%. The balance sheet shows an ending common
stock balance of $800,000 and an ending paid in surplus balance
of $400,000. The beginning common stock balance is $750,000 and
the beginning paid in surplus balance is $350,000.
What is the amount of your cash flow to stockholders?
44: Cash flow to stockholders
Dividends paid $136,800 .50 $68,400
CFS Dividends - Net new equity
Dividends - (Common stock paid in surplus)End - (Common stock paid in surplus)Begin
$68,400 - ($800,000 $400,000- $750,000- $350,000)
-$31,600
Chapter 2
• End of Chapter 2
McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
