chapter 13 business organization and financial data © 2003 john wiley and sons
TRANSCRIPT
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Chapter 13
Business Organization and Financial Data
© 2003 John Wiley and Sons
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Chapter Outcomes
Describe the three major forms of business organization
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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Chapter Outcomes
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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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 (Table 13.1)
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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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Table 13.2 Comparison of Accounting and Financial Perspectives
Accounting Focus Finance Focus
Matching Revenue Identifying cash inflows
and Expenses (accrual concept) and outflows
Use of different accounting Track the cash flows to
can lead to manipulation of financial assess the “quality” of
statements and earnings
Seek to Measure Firm Profitability Measure cash usage
Emphasis is historical Looks forward
Attempts to track assets and Market value of assets
depreciate them
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Income Statement($ millions)
Net revenues or sales $24,623.0
Cost of goods sold 17,779.7
Gross profit 6,843.3
Operating expenses:
Selling, general and admin. 5,175.8
Depreciation 269.2
Operating income 1,398.3
Interest 3.1
Other expenses (income) (27.5)
Income before taxes 1,422.7
Income taxes 537.1
Net income $ 885.6
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Balance Sheet--Assets($ millions)
Cash and marketable securities $ 16.9
Accounts receivable 798.3
Inventories 3,482.4
Other current assets 96.3
Total current assets 4,393.9
Net plant and equipment 4,345.3
Other Long-term Assets 94.6
Total assets $ 8,833.8
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Balance Sheet--Liabilities & Equity
Accounts payable $ 1,546.8
Notes payable 440.7
Other current liabilities 1,024.1
Total current liabilities 3,011.6
Long-term debt 0.0
Other Liabilities 615.0
Total liabilities $ 3,626.6
Common equity $ 676.3
Retained earnings 4,530.9
Total stockholders’ equity $5,207.2
Total liabilities and equity $ 8,833.8
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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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Financial Statements of Different Companies
Learn differences in how companies operate
Compare composition of assets and liabilities, current versus long-term
How they generate earnings, characteristics of their industries
Common-size financials allow comparison of different-sized firms
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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/expected return features
Need to treat customers, workers properly before shareholders benefit
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Other Shareholder Wealth Issues
Market Value Added: wealth created by firm’s managers, net of capital invested
Peer review: compare firm’s wealth performance with competitors to determine strategy’s financial success or failure
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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Finance in the Organizational Chart
Chief Financial Officer (CFO)– Treasury function– Controller function
Compensation: Figure 13.2 Finance and the Balance Sheet
Structure– Capital budgeting question– Capital structure question– Operations or net working capital
question
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Learning Extension 13A Federal Income Taxation
Tax rates, married filing jointly 2001Marginal
Taxable income tax rate$0 – 45,200 15.0%45,201-109,250 27.5109,251-166,500 30.5166,501-297,350 35.5over 297,350 39.1
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Tax rates, single 2001 Marginal
Taxable income tax rate
$0 - 27,050 15.0%
27,051-65,550 27.5
65,551-136,750 30.5
136,751-297,350 35.5
over 297,350 39.1
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Proprietor, single, $50,000 income
Compute the tax bill:
0.15 x $27,050 = $4,057.50
0.275 x $22,950 = 6,311.25
$10,368.75
Marginal tax rate: 27.5%
Average tax rate = $10,368.75/$50,000
= 20.7%
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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