8/13/2019 3. Accounting & Finance
1/21
Chapter 3Fundamentals of
Corporate Finance
Fourth Edition
Accounting andFinance
Slides by
Matthew Will
Irwin/McGraw Hill Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
8/13/2019 3. Accounting & Finance
2/21
Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 2
Irwin/McGraw Hill
Topics Covered
The Balance Sheet
The Income Statement
The Statement of Cash FlowsAccounting Practice & Malpractice
Taxes
8/13/2019 3. Accounting & Finance
3/21
Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 3
Irwin/McGraw Hill
The Balance Sheet
Definition
Financial statements that show
the value of the firms assets andliabilities at a particular point in
time (from an accounting
perspective).
8/13/2019 3. Accounting & Finance
4/21
Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 4
Irwin/McGraw Hill
The Balance Sheet
The Main Balance Sheet Items
Current Assets
Cash & Securities
ReceivablesInventories
+
Fixed Assets
Tangible Assets
Intangible Assets
Current Liabilities
Payables
Short-term Debt
+
Long-term Liabilities
+
Shareholders Equity
=
8/13/2019 3. Accounting & Finance
5/21
Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 5
Irwin/McGraw Hill
Market Value vs. Book Value
Book Values are determined by GAAP
Market Values are determined by current
values
Equity and Asset Market Values are usually
higher than their Book Values
8/13/2019 3. Accounting & Finance
6/21
Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 6
Irwin/McGraw Hill
Market Value vs. Book Value
Example
According to GAAP, your firm has equity worth $6
billion, debt worth $4 billion, assets worth $10
billion. The market values your firms 100 millionshares at $75 per share and the debt at $4 billion.
Q: What is the market value of your assets?
A: Since (Assets=L iabi l i ties + Equi ty), your assets
must have a market value of $11.5 bil l ion.
8/13/2019 3. Accounting & Finance
7/21
8/13/2019 3. Accounting & Finance
8/21Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 8
Irwin/McGraw Hill
The Income Statement
Definition
Financial statement that shows
the revenues, expenses, and netincome of a firm over a period of
time (from an accounting
perspective).
8/13/2019 3. Accounting & Finance
9/21Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 9
Irwin/McGraw Hill
The Income Statement
Earnings Before Income & Taxes (EBIT)
EBIT = - total Revenues
- costs
- deprecation
8/13/2019 3. Accounting & Finance
10/21Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 10
Irwin/McGraw Hill
The Income Statement
Pepsico Income Statement (year end 2001)
Net Sales 26,935
COGS 10,754
Other Expenses 392
Selling, G&A expenses 10,526
Depreciation expense 1,082
EBIT 4,181
Net interest expense 152
Taxable Income 4,029
Income Taxes 1,367
Net Income 2,662
8/13/2019 3. Accounting & Finance
11/21Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 11
Irwin/McGraw Hill
Profits vs. Cash Flows
Differences
Profits subtract depreciation (a non-cash expense)
Profits ignore cash expenditures on new capital
(the expense is capitalized)
Profits record income and expenses at the time of
sales, not when the cash exchanges actually occur
Profits do not consider changes in working capital
8/13/2019 3. Accounting & Finance
12/21Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 12
Irwin/McGraw Hill
The Statement of Cash Flows
Definition
Financial statement that shows
the firms cash receipts and cashpayments over a period of time.
8/13/2019 3. Accounting & Finance
13/21Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 13
Irwin/McGraw Hill
The Statement of Cash Flows
Pepsico Statement of Cash Flows (excerpt - year end 2001)
Net Income 2,662
Non-cash expenses
Depreciation 1,082
Other 373Changes in working capital
A/R=7 A/P=(236) Inv=(75) other=388 1,539
Cash Flow from operations 4,201
Cash Flow from investments (2,637)Cash provided by financing (1,919)
Net Change in Cash Position (355)
8/13/2019 3. Accounting & Finance
14/21Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 14
Irwin/McGraw Hill
Accounting Practice
Stock options
Allowance for bad debts
Revenue recognition
8/13/2019 3. Accounting & Finance
15/21Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 15
Irwin/McGraw Hill
Taxes
Taxes have a major impact on financialdecisions
Marginal Tax Rate is the tax that theindividual pays on each extra dollar ofincome.
Average Tax Rate is the total tax bill dividedby total income.
8/13/2019 3. Accounting & Finance
16/21Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 16
Irwin/McGraw Hill
Taxes
Example - Taxes and Cash Flows can be changed bythe use of debt. Firm A pays part of its profits asdebt interest. Firm B does not.
Firm A Firm BEBIT 100 100
Interest 40 0
Pretax Income 60 100
Taxes (35%) 21 35
Net Income 39 65
Example - Taxes and Cash Flows can be changed bythe use of debt. Firm A pays part of its profits asdebt interest. Firm B does not.
Firm AEBIT 100
Interest 40
Pretax Income 60
Taxes (35%) 21
Net Income 39
8/13/2019 3. Accounting & Finance
17/21Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 17
Irwin/McGraw Hill
Taxes
FOOD FOR THOUGHT - If you were both the debtand equity holders of the firm, which would generatemore cash flow to you? (assume Net Income = Cash
Flow)
Firm A Firm BEBIT 100 100
Interest 40 0
Pretax Income 60 100
Taxes (35%) 21 35
Net Income 39 65
?
8/13/2019 3. Accounting & Finance
18/21Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 18
Irwin/McGraw Hill
Taxes
FOOD FOR THOUGHT - If you were both the debtand equity holders of the firm, which would generate
more cash flow to you? (assume Net Income = Cash
Flow)
Firm A Firm B
Net Income 39 65
+ Interest 40 0
Net Cash Flow 79 65
?
3 19
8/13/2019 3. Accounting & Finance
19/21Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 19
Irwin/McGraw Hill
Corporate Tax Rates (2002)
Taxable Income ($) Tax Rate (%)
0-50,000 15
50,001-75,000 2575,001-100,000 34
100,001-18,333,333 34-39
over 18,333,333 35
3 20
8/13/2019 3. Accounting & Finance
20/21Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
3- 20
Irwin/McGraw Hill
Personal Tax Rates (2002)
Single Taxable
Income ($)
Married Taxable
Income ($) Tax Rate (%)
0-6,000 0-12,000 10
6,000-27,950 12,000-46,700 15
27,950-67,700 46,700-112,850 27
67,700-141,250 112,850-171,950 30
141,250-307,050 171,950-307,050 35
over 307,050 over 307,050 38.6
3 21
8/13/2019 3. Accounting & Finance
21/21C i ht 2003 b Th M G Hill C i I All i ht d
3- 21
Irwin/McGraw Hill
Web Resources
www.ibm.com/investor/financialguide
www.reportgallery.com
www.sec.gov/edgar.shtml
http://moneycentral.msn.com/tax/workshop/welcome.asp
www.aicpa.org/index.htm
www.businessweek.com/2001/01_04/b3716160.htm
www.irs.gov
Click to access web sitesInternet connection required
http://www.ibm.com/investor/financialguidehttp://www.reportgallery.com/http://www.sec.gov/edgar.shtmlhttp://moneycentral.msn.com/tax/workshop/welcome.asphttp://www.aicpa.org/index.htmhttp://www.businessweek.com/2001/01_04/b3716160.htmhttp://www.irs.gov/http://www.irs.gov/http://www.businessweek.com/2001/01_04/b3716160.htmhttp://www.aicpa.org/index.htmhttp://moneycentral.msn.com/tax/workshop/welcome.asphttp://www.sec.gov/edgar.shtmlhttp://www.reportgallery.com/http://www.ibm.com/investor/financialguide