Chapter 13 Business Organization and Financial Data © 2003 John Wiley and Sons.

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