Practical Financial Management 7e By William R財(cái)務(wù)管理實(shí)務(wù)7E威廉R. Lasher

1、Chapter 2 - Financial background: A Review of Accounting, Financial Statements and Taxes Numerical representations of a firms activities for an accounting period A picture of activities within the firm and between the firm and the outside But can be counterintuitive 2 Most sales are on credit Seller

2、 receives a promise of later payment, rather than immediate cash The seller records an account receivable as an asset Net income may not = cash flow Proration of an assets cost over its service life Can be straight lined or accelerated Cost recorded on the income statement does not = cash spent Thre

3、e Financial Statements Income statement Balance sheet Statement of cash flows Generated from the income statement and balance sheet 5 A firms financial books are a collection of records in which money transactions are recorded Double entry system Accounting periods and closing the books Implications

4、 Stocks and flows 6 7 Sales Cost and Expenses Costs of Goods Sold Expense Depreciation Gross margin Earnings before interest and taxes (EBIT) 8 Earnings Before Tax, and Tax Net Income Terminology: Income = profit = earnings Profit before tax (PBT) Profit after tax (PAT) Earnings before tax (EBT) Ear

5、nings after tax (Net Income) 9 Earnings Also called net income Paid out as dividends or retained in business Retained Earnings (RE) Each year earnings not paid as dividends become an addition to equity Retained earnings account is cumulative earnings not paid out as dividends Lists everything a comp

6、any owns and owes at a moment in time All sources and uses of money must be equal A firms money sources include creditors and owners Borrowing creates a liability for repayment 11 Two equal sides Assets = liabilities + equity Assets and liabilities are arranged in order of decreasing liquidity Liqui

7、dity ease with which an asset becomes or a liability requires cash 12 13 Cash Checking balances plus currency Marketable securities are liquid investments held instead of cash Short-term, modest return, low risk Accounts Receivable Uncollected credit sales Bad Debt Reserve: some credit sales will ne

8、ver be paid Write Off: Remove bad debt from gross and reserve leaving net unchanged 14 15 Gross accounts receivable $5,650 Bad-debt reserve (290) Net accounts receivable $5,360 Need to Write Off $435,000 Reserve 290,000 Expense$145,000 Reestablish Reserve (5%) 260,750 Profit Reduction$405,750 Invent

9、ory - product held for sale in the normal course of business Work-In-Process Inventories (WIP) Value added as inventory moves through production The Inventory Reserve Some inventory is unusable - balances reported net of reserve Writing Off Bad Inventory Missing, damaged, or obsolete items removed f

10、rom gross and reserve leaving net unchanged 16 Overstatements If assets are overstated, firms value is less than total shown on balance sheet Current Assets Become cash within a year Include cash, accounts receivable and inventory Fixed Assets Long lived, depreciable, also called property, plant and

11、 equipment (PPE) Useful life of at least a year 17 Depreciation Spreads assets cost over its estimated useful life Financial Statement Representation Appears as an expense or cost Accumulated depreciation appears on balance sheet reflecting a wearing out of the asset 18 19 Disposing of a Used Asset

12、The Life Estimate Tax Depreciation and Tax Books Government allows different depreciation schedules for tax purposes and financial reporting purposes 20 Accounting Cash Flow Revenue $4,000 $4,000 Cost (NBV) 2,500 Profit contribution: EBT $1,500 Tax (30%) (450) (450) Contribution: net income $1,050 C

13、ash flow $3,550 21 What a company owes to outsiders Accounts Payable Arise when a firm buys from vendors on credit Terms of Sale Specify when payment is due on credit sales and the early payment discount Understated Payables 22 Accruals Recognize expenses and liabilities associated with incomplete t

14、ransactions Payroll Accrual Current Liabilities Require cash within one year Payable and accruals are classified as current 23 24 Total current assets = gross working capital Net Working Capital = Current Assets Current Liabilities 25 Long Term Debt The most significant non-current liability Leverag

15、e A business partially financed with debt is leveraged Fixed Financial Charges Interest must be paid regardless of profitability 26 A business is financed with equity of $100,000 Net Income = $15,000 Return on equity = 15% ($15,000/$100,000) Calculate return on equity if $50,000 borrowed at an after

16、 tax interest rate of 10% Borrowing levers return on equity up from 15% to 20%. Common Stock Preferred Stock Has mix of characteristics of both debt and equity Retained Earnings All previous earnings not paid out as dividends Capital The sum of long-term debt and equity Total Liabilities and Equity

17、Sum of the right-hand side of the balance sheet Must equal total assets 29 Three Separate Accounts Direct Investment by owners paying for stock Par value and paid in excess accounts Retained Earnings Illustration: 20,000 shares of $2 par sold for $8 Firm Earns $70,000 Pays dividends of $15,000 Commo

18、n Stock ($2 x 20,000) $ 40,000 Paid in Excess ($6 x 20,000) 120,000 Retained Earnings ($70,000 - $15,000) 55,000 Total Equity $215,000 30 Beginning Equity + Net Income Dividends + New Stock Sold = Ending Equity 31 Taxing Authorities and Tax Bases Income tax Wealth tax Consumption tax Sales tax 32 To

19、tal effective tax rate (TETR) is the combined state and federal rate State tax is deductible from income when calculating federal tax TETR = Tf + Ts (1 Tf) where Tf = federal tax rate Ts = state tax rate 33 Progressive tax system Brackets Marginal and average tax rates 34 Two major types of income O

20、rdinary income Capital gains or loss and dividends 35 Capital gains historically taxed at lower rates Holding period must be 1 year for favorable tax treatment 36 Income taxes are paid by households and corporations according to the same basic principles Tax is levied on a base of taxable income But

21、 rate schedules for corporations and households are very different as are the rules for calculating taxable income 37 38 Taxable Income Wages, profits, interest and dividends are basic taxable income Deductions are personal expenditures that can be subtracted from income before calculating taxes Exe

22、mptions are fixed amounts per person that can be subtracted from income to arrive at taxable income 39 The Harris family had the following income in 2012: Salaries: Joe $55,000 Sue 52,000 Interest on savings acct 2,000 Interest on IBM bonds 800 Interest on Boston Bonds 1,200 Dividends - Gen Motors 6

23、00 40 In 2012 the Harris family: Sold property for $50,000, paid $53,000 years earlier Sold stock for $14,000, paid $12,000 years earlier. Paid $12,000 interest on home mortgage Paid $1,800 in real estate taxes. Had $3,500 withheld from pay for state income tax Contributed $1,200 to charity. Have tw

24、o children Exemption rate is $3,800 per person. Calculate taxable income and tax liability. What are marginal and average tax rates? 41 42 Ordinary income: Deductions: Salaries $107,000 Mortgage interest $12,000 Interest 2,800 Taxes 5,300 $109,800 Charity 1,200 $18,500 Net capital gain or loss: Loss

25、 on property ($3,000)Exemptions: Gain on stock 2,000$3,800 x 4 = $15,200 Net capital loss ($1,000) Total Income $108,800 Taxable Income $75,100 (excludes dividends) 43 Use the married filing jointly schedule as follows: 10% of the entire first bracket $17,400 x .10 = $1,740 15% of the amount in the

26、second bracket ($70,700- $17,400) x .15 = 7,995 25% of the amount in the third bracket ($75,100 - $70,700) x .25 = 1,000 Tax Liability $10,835 Tax on dividends $600 x .15 = 90 Total tax liability $10,925 Average tax rate: $10,925/$75,700 = 14.4% Marginal tax rate = bracket rate = 25% (15% if dividen

27、ds or capital gains) Tax Rates and Investment Decisions Comparing municipal (muni) and corporate bonds Interest on munis not subject to federal taxes At same rate munis return is higher after taxes If the rates differ, restate corporate to an after tax yield Multiply by one minus investors marginal

28、tax rate (1 marginal tax rate) 44 The Harris family (25% bracket) has a choice between an IBM bond paying 11% and a Boston bond paying 9%. Solution: IBM after tax = 11% x (1 - .25) = 8.25% Boston = 9% Therefore prefer the Boston bond if risks are similar. If marginal tax rate is 15% 11% x (1 - .15)

29、= 9.35% then prefer IBM High bracket taxpayers tend to be more interested in tax exempt bonds than those with lower incomes. 45 Similar in principle to personal taxes: total income is revenue Earnings Before Tax (EBT) is taxable income Corporate tax rates do not consistently rise as taxable income r

30、ises 46 47 The rate increases from 34% to 39% and 35% to 38% recover the benefit of lower rates on earlier income. So a corporation earning more than $18,333,333 pays 35% on all of its income from the first dollar. 48 Calculate the tax liability for corporations with the following EBTs: a. $280,000 b. $500,000 c. $16,000,000 d. $23,000,000 SOLUTION: a. Applyi