chapter 13 business organization and financial data © 2000 john wiley & sons, inc
TRANSCRIPT
Chapter 13
Business Organization and Financial Data
© 2000 John Wiley & Sons, Inc.
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Chapter Outcomes
Describe the three major forms of business organization Identify the goal and functions of financial management Describe the agency relationships in a business organization and their implications for financial management
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Chapter Outcomes
Provide a brief description of the income statement.
Provide a brief description of the balance sheet.
Provide a brief description of the statement of cash flows.
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The Mission or Vision Statement
Indicates firm’s target market(s) Identifies goods/services the firm will
produce, distribute, or sell Will guide major decisions Supported by business and financial
plans to implement strategy Periodically reviewed and revised
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Forms of Business Organization in the U.S.
Proprietorships Partnerships
– Limited partnership Corporation
– Subchapter S corporation– Limited liability company
Financial implications of organizational form
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Annual Report
Information source for corporate shareholders
Contains– Discussions of operating and financial
information of past year– Future opportunities– Financial statements
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Accounting Principles
Public firm’s statements must conform to Generally Accepted Accounting Principles
Footnotes “Accrual” accounting versus cash
flows
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Income StatementYEAR ENDED DECEMBER 31, 1999
Net revenues or sales $700,000
Cost of goods sold 450,000
Gross profit 250,000
Operating expenses:
General and administrative 95,000
Selling and marketing 56,000
Depreciation 25,000
Operating income 74,000
Interest 14,000
Income before taxes 60,000
Income taxes (40%) 24,000
Net income $36,000
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Balance Sheet--AssetsDECEMBER 31, 1999
Cash and marketable securities $ 25,000
Accounts receivable 100,000
Inventories 125,000
Total current assets 250,000
Gross plant and equipment 300,000
Less: accumulated depreciation –100,000
Net plant and equipment 200,000
Land 50,000
Total fixed assets 250,000
Total assets $500,000
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Balance Sheet--Liabilities & Equity
Accounts payable $ 78,000
Notes payable 34,000
Accrued liabilities 30,000
Total current liabilities 142,000
Long-term debt 140,000
Total liabilities $282,000
Common stock ($1 par, 50,000 shares) $50,000
Paid-in capital 100,000
Retained earnings 68,000
Total stockholders’ equity 218,000
Total liabilities and equity $500,000
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Statement of Cash Flows
3 sections:– Cash flows from operations– Cash flows from investing activities– Cash flows from financing activities
Their sum equals the change in the firm’s cash balance over the year
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Goal of a Firm
GOAL:
MAXIMIZE SHAREHOLDER WEALTH
SHAREHOLDER WEALTH =
Common Stock Price X Number Of Common Shares Outstanding
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Why Shareholder Wealth? Market is efficient; common stock
price reflects available information and investor expectations
In a competitive global economy, market directs capital to most efficient use with best risk/return features
Need to treat customers, workers properly before shareholders benefit
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Other Shareholder Wealth Issues
Criterion for non-public firms
What about ethics?
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Corporate Governance
Owners Managers Shareholders Professional Mgt Principal Agents The Principal-Agent Problem Agency costs Ways to reduce the agency problem
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Learning Extension 13A Federal Income Taxation
Tax rates, married filing jointly
Marginal
Taxable income tax rate
$0 - 42,350 15.0%
42,351-102,300 28.0
102,301-155,950 31.0
155,951-278,450 36.0
over 278,450 39.6
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Tax rates, single Marginal
Taxable income tax rate
$0 - 25,350 15.0%
25,351-61,400 28.0
61,401-128,100 31.0
128,101-278,450 36.0
over 278,450 39.6
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Proprietor, single, $50,000 income
Compute the tax bill:
0.15 x $25,350 = $3,802.50
0.28 x $24,650 = 6,902.00
$10,704.50
Marginal tax rate: 28%
Average tax rate = $10,704.50/$50,000
= 21.4%
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Concepts
Ordinary taxable income Unrealized capital gains/losses Realized capital gains/losses
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Corporate tax ratesTaxable income Tax rate
$0-50,000 15%
50,001-75,000 25
75,001-100,000 34
100,001-335,000 39
335,001-10 million 34
10 million-15 million 35
15 million-18,333,333 38
over $18,333,333 35
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Depreciation Basics
Depreciation :
– a non-cash expense
– reduces taxable income
– reduces tax bill (“depreciation tax shield”)
– conserves cash as tax outflow is less
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Example: The benefits of depreciation
WITH WITHOUT
Income before depreciation
and income taxes $100,000 $100,000
Less: Depreciation 20,000 0
Income before taxes 80,000 100,000
Less: Income taxes
(@ 30%) 24,000 30,000
Net income $ 56,000 $ 70,000
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MACRS PercentagesPERCENTAGE DEPRECIATION ALLOWED BY
CLASS OF ASSET LIFE
RECOVERY
YEAR 3-YEAR 5-YEAR
1 33.00% 20.00%
2 45.00 32.00
3 15.00 19.20
4 7.00 11.52
5 11.52
6 5.76
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Example: $10,000 asset in 5-year class DEPREC DEPREC
YR PERCENTAGE AMOUNT
1 $10,000 x 0.2000 = $2,000
2 10,000 x 0.3200 = 3,200
3 10,000 x 0.1920 = 1,920
4 10,000 x 0.1152 = 1,152
5 10,000 x 0.1152 = 1,152
6 10,000 x 0.0576 = 576
Total $10,000