3 subdivisions of the cash flow statement
Operations
Investing
and Financing
Accrual accounting makes reading the financial statements more complex. true or false
true
Accrual accounting provides a superior view of the operations of a company. true or false
true
Accrual accounting recognizes revenue only when cash is received. true or false
false
Accrual accounting requires matching expenses incurred with revenue recognized. true or false
true
addition to RE =
addition to RE = NI x (1 - payout ratio)
Assets have to be financed by either by other people's money or the owner's money. true or false
true
Assets on the balance sheet with a life span greater than one year.
fixed assets
At the end of 20x4, PH Computer had retained earnings of $3,870. At the end of 20x5, retained earnings was reported as $4,560. Net income in 20x4 and 20x5 is $490 and $1080, respectively. How much did PH Computer pay in dividends to its stockholders in 20
$390 = New RE = Old RE + Net Income - Dividends.
CFF
Cash Flow from Financing
CFI
Cash Flow from Investing
CFO
Cash Flow from Operations
Cash flow from Operations =
NI
add: Depr. Exp
CFF = Cash flows from financing
Dividends = (old RE + Net Income) - New RE
CFI (formula)
Long term assets increase from--to
CFO =
CFO = NI + depreciation expense + decreases in operating assets - increases in operating
change in RE =
Change is RE = Net Income - dividends
combined to come up with net change in cash
CFO, CFI, & CFF
components of the Statements of Cash Flow
CFI, CFF, and CFO
Considered a noncash expense
depreciation & amortization
Current assets are normally listed on the balance sheet in the order of:
most liquid to the least liquid.
Dividends =
Dividends = (Old RE + Net Income) - New RE
Figuring out the future value of money you will invest.
compounding
Figuring out the present value of money you will receive in the future.
discounting
Future value =
Future value = present value � (1 + i)n where: i = discount rate and n= n = number of
Holding all else equal, higher levels of depreciation on an income statement will lead to:
Lower tax expenses
Holding all else equal, the present value of a lump sum that will be received in the future will be ______________ if the number of time periods is larger
Smaller
how items that appear on the financial statements are stated
historical cost
how much paid in dividends (formula)
Dividends = (old RE + Net Income) - New RE
How much spending power money has today.
present value
If we were to receive some lump sum in the future and we wanted to determine the value of the lump sum in today's dollars, we must _______________ this future cash flow.
Discount
If you deposit $1000 in an account earning 10% per year, how much would you have in the account after one year?
One year: $1,100
If you deposit $1000 in an account earning 10% per year, how much would you have in the account after two years?
Two years: $1,210.
In order to determine the value of some lump sum in the future, we must use the process of _________________.
Compounding
In the basic framework, a firm can allocate net income to one of two items. These two items are:
Dividends and Retained Earnings
includes any cash flows resulting from increased borrowing, debt repayment, stock issuance, stock repurchase or dividend payment.
Cash flow from financing
includes direct materials and direct labor associated with the production process.
Cost of goods sold
involves any cash in or out of the company due to investment in or disposal of fixed assets.
Cash flow from investing
Kirtland Inc. reported current assets of $139 million, the owners' equity of $176 million, and the total liabilities of $165 millions. If accumulated depreciation is $35 million, what is Kirkland's gross fixed assets?
Solution: Recall, Assets = Liabilities + Owners' Equity. Further, Assets = Total Current Assets + Net Fixed Assets. Hence, we know the following:
� Liabilities + Owners' Equity = $165 mil + $176 mil = $341 mil = Total Assets
� Net Fixed Assets = Total Ass
KitchenMate reported an increase in retained earnings of $234,500. KitchenMate also reported net income of $400,000 and paid a cash dividend. If KitchenMate had NOT paid any dividends, retained earnings would have increased by:
change in RE = Net Income - Dividends. This year, KitchenMate paid total dividends of $400,000 - $234,500 = $165,500. If the firm did not pay any dividends, then Change in RE = $400,000 - $0 = $400,000.
LeftAid reported revenues of $26,121, cost of goods sold of $19,327, operating expenses of $6,531, depreciation expense of $100 and interest expense of $529. If the tax rate is 40%, what is LeftAid's earnings before interest and taxes (EBIT)?
Revenues
28,121
-COGS
19,327
-Op Exp
6,531
-Depr Exp
100
EBIT
2,163
Major Principles in Accounting-ese
Accrual-based accounting & Historical cost
measures how quickly it can be turned into cash without taking a large discount in value
liquidity
Net Income (directly from the income statement)
+ Non-cash expenses (depr. exp)
+ Increase in Operating Asset accounts (other than cash).
+ Increase in Operating Liability Accounts (other than notes payable).
- Decrease in Operating Liability Accounts (other than notes payable)
= CFO
Net Income =
Net Income = Dividends + change in RE
New RE =
New RE = Old RE + Change in RE
Only two things we can do with net income:
1. pay out as dividends
2. retain within company
POY Inc. has just reported sales of $557 million, costs of goods sold of $150 million, depreciation of $190 million and interest expense of $40.2 million. If the tax rate is 35%, what is POY's net income?
Sales
557.00
COGS
150.00
Depr Exp
190.00
Intrest Exp
40.20
EBT
176.80
Tax Exp
61.88
=EBT x Tax Rate
NI
114.92
Rate =
Rate = Risk free rate + risk premium = Rf + risk premium
Represents money a firm owes to suppliers for purchases made on credit.
Account payable
Revenues minus Cost of Goods Sold minus Operating Expenses equals:
operating profit, EBIT, and Operating income
Subdivisions of the Cash Flow Statement
Operational decisions, Investing activities, Financing decisions
The present value of a lump sum that will be received in the future will be ______________ if the interest rate is larger.
Smaller
When calculating CFO with the indirect method, depreciation expense is added to Net Income. Why do you add depreciation expense when calculating CFO?
Depreciation expense is a non-cash expense.
When evaluating cash flows, an increase in an asset account on the balance sheet such as inventory or fixed assets most directly indicates:
An outflow of cash
while an accrual system is complex and can be cumbersome, it is consistent for all firms
at purchase price
While you are looking at XYZ Corp's two most recent balance sheets, you notice that inventory decreased by $100,000. XYZ's tax rate is 40%. As a result of the inventory decrease, when calculating Cash Flow from Operations (CFO) you will:
Add $100,000