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Tutorial 2 - Financial Statement, Taxes and Cash Flow

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31 views2 pages

Tutorial 2 - Financial Statement, Taxes and Cash Flow

Uploaded by

Tan Jian Hong
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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TUTORIAL (WEEK 3): TOPIC 2 - FINANCIAL STATEMENTS, TAXES

AND CASH FLOWS (CHAPTER 2)

CLASS ACTIVITIES:
• Revise Topic 2
• Tutorial exercises
• Reminder that students must provide (1) name of selected listed company for individual
assignment

LEARNING OUTCOME:
• The difference between accounting value (or “book” value) and market value.
• The difference between accounting income and cash flow.
• The difference between average and marginal tax rates.
• How to determine a firm's cash flow from its financial statements

Topic Overview:
This chapter will introduce you to some of the key concepts with regards to financial statements, taxes
and cash flows. In it, you will appreciate the following:
1. The difference between book value and market value. The book value is derived from the
Balance sheet which is a snapshot of the firm’s assets, liabilities and equity at a given point in
time. Market value is the price at which the assets, liabilities, or equity can actually be bought or
sold. Often the two values are different, and you would have to know why. The goal of financial
management is to maximize the market value of the stock, not its book value.
2. The difference between accounting income and cash flow. This requires familiarity with the
income statement, which presents accounting income, and realise that an income statement
contains non-cash items. Net income as it is computed on the income statement is not cash
flow. A primary reason is that depreciation, a noncash expense, is deducted when net income is
computed.
3. Marginal and average tax rates can be different, and it is the marginal tax rate that is relevant
for most financial decisions.
4. How to determine a firm’s cash flow from its financial statements. There is a cash flow identity
much like the balance sheet identity, and it says that cash flow from assets equals cash flow to
creditors and stockholders.

In appreciating the above, you would have to be familiar with the balance sheet, income statement and
cash flow statement of firms. You are encouraged to practice over and above the tutorial questions
presented below.

Tutorial Exercises:
You are required to come prepared for your tutorial with workout solutions. The questions below refer to
the end of Chapter 2 (Essentials of Corporate Finance; Ross, Westerfield & Jordan; 7 th Ed).

Questions & Problems


Q5. Market Values and Book Values. Cloc’em, Inc., purchased new cloaking machinery three
years ago for $4 million. The machinery can be sold to the Romulans today for $6.2 million.
Cloc’em 's current balance sheet shows net fixed assets of $2.8 million, current liabilities of
$710,000, and net working capital of $130,000. If all the current assets were liquidated today,
the company would receive $825,000 million cash. What is the book value of Cloc’em 's assets
today? What is the market value?
Q6. Calculating Taxes. The SGS Co. had Table 2.3 Corporate tax rate
$274,000 in taxable income. Using the
Taxable income ($) Tax rate
rates from Table
2.3 (refer beside), calculate the company's 0 - 50,000 15%
income taxes. 50,001 - 75,000 25%
75,001 - 100,000 34%
100,001 - 335,000 39%

335,001 - 10,000,000 34%


10,000,001 - 15,000,000 35%
15,000,001 - 18,333,333 38%
18,333,334+ 35%

Q14. Calculating Total Cash Flows. Sheffield Co. shows the following information on its 2010
income statement: sales = $153,000; costs = $81,900; other expenses = $5,200;
depreciation expense = $10,900; interest expense = $8,400; taxes = $16,330; dividends =
$7,200. In addition, you're told that the firm issued $2,600 in new equity during 2010, and
redeemed $3,900 in outstanding long-term debt.
a. What is the 2010 operating cash flow?
b. What is the 2010 cash flow to creditors?
c. What is the 2010 cash flow to stockholders?
d. If net fixed assets increased by $19,475 during the year, what was the addition to NWC?

Q15. Using Income Statements. Given the following information for Sookie’s Cookies Co.,
calculate the depreciation expense: sales = $51,000; costs = $39,800; addition to retained
earnings =$2,300; dividends paid = $925; interest expense = $1,230; tax rate = 40 percent.

Q16. Preparing a Balance Sheet. Prepare a balance sheet for Maskara Ltd. as of December
31, 2010, based on the following information: cash = $193,000; patents and copyrights =
$847,000; accounts payable = $296,000; accounts receivable = $253,000; tangible net
fixed assets =$5,100,000; inventory = $538,000; notes payable = $189,000; accumulated
retained earnings =$4,586,000; long-term debt = $1,250,000.

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