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Sld02 Review of Acctg
Sld02 Review of Acctg
TWO
Review of Accounting
McGraw-Hill Ryerson
FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT 2-1
EDI TI ON
Table 2-1
KRAMER CORPORATION
Income Statement
For the Year Ended December 31, 1999
Block
Hirt
Short
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Sales . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . .
Gross Profits . . . . . . . . . . . . .
Selling and administrative expense . . . .
Amortization expense . . . . . . . . . .
Operating profit (EBIT)* . . . . . . . .
Interest expense . . . . . . . . . . . .
Earnings before taxes (EBT) . . . . . . .
Taxes . . . . . . . . . . . . . . . . .
Earnings after taxes (EAT) . . . . . . . .
Preferred stock dividends . . . . . . . .
Earnings available to common shareholders.
Shares outstanding . . . . . . . . . . .
Earnings per share . . . . . . . . . . .
$2,000,000
1,500,000
500,000
220,000
50,000
230,000
20,000
210,000
99,500
110,500
10,500
$ 100,000
100,000
$1.00
FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT 2-2
EDI TI ON
Table 2-3
Price-earnings ratios for selected Canadian companies
Corporation
Abitibi . . . .
BCE . . . . .
Bank of Montreal
Imasco . . . .
Loblaw . . .
Molson . . . .
Open Text . . .
Pan Canadian .
TSE 300 Index
Industry
.
.
.
.
.
.
.
.
Forest Products
Telecommunications
Banking
Tobacco Products
Grocery Chain
Brewery
Tech. Software
Petroleum
Dec.
1981
Sept.
1992
Nov.
1995
Mar.
1999
3.7
7.8
3.9
7.4
6.2
9.1
11.2
8.8
13.8
18.5
13.5
21.1
14.9
8.6
11.0
18.1
22.2
10.3
8.6
143.4
110.2
23.3
13.2
24.8
13.8
20.4
41.8
6.4
443.8
29.2
24.6
FIF T H
th
CANADIAN
Foundations of Financial
Management
PPT 2-3
EDI TI ON
Table 2-4a
KRAMER CORPORATION
Statement of Financial Position (Balance Sheet)
December 31, 1999
Assets
Current assets:
Cash . . . . . . . . .
Marketable securities . . . .
Accounts receivable . . . .
Less: Allowance for bad debts
Inventory . . . . . . .
Prepaid expenses . . . . .
Total current assets . . .
Block
Hirt
Short
.
.
.
.
.
.
.
Other assets:
Investments . . . . . . . .
Capital assets:
Plant and equipment, original cost. .
Less: Accumulated amortization
Net plant and equipment . . . .
Total assets
. . . . . . . . .
McGraw-Hill Ryerson
.
.
.
.
.
.
.
$
$ 220,000
20,000
.
.
.
.
.
40,000
10,000
200,000
180,000
20,000
450,000
50,000
1,100,000
600,000
500,000
$1,000,000
McGraw-Hill Ryerson Limited 2000
FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT 2-3
EDI TI ON
Table 2-4b
Liabilities and Shareholders Equity
Block
Hirt
Short
Current liabilities:
Accounts payable . . . . .
Notes payable (bank indebtedness)
Accrued expenses . . . . .
Total current liabilities . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Long-term liabilities:
Bonds payable, 2007 .
Total liabilities .
.
.
.
.
.
.
.
.
.
.
.
.
90,000
300,000
Shareholders equity:
Preferred stock, 500 shares . .
Common stock, 100,000 shares .
Retained earnings . . . . .
Total shareholders equity
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
50,000
350,000
300,000
700,000
. .
$1,000,000
.
.
.
.
$
.
80,000
100,000
30,000
210,000
FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT 2-4
EDI TI ON
Table 2-5
Comparison of market value to book value per share, March, 1999
Market Value
per Share
Corporation
Abitibi . . . .
Bank of Montreal
BCE . . . . .
Imasco . . . .
Loblaw . . . .
Molson . . . .
PanCanadian . .
Open Text . . .
Rogers Comm. .
Stelco . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
$12.15
64.50
62.05
33.25
39.75
21.60
17.20
32.40
27.20
8.50
Book Value
per Share
$15.66
32.32
18.70
8.56
6.94
16.60
10.79
4.62
(6.14)
13.47
Ratio of
Market Value
to Book Value
.78
2.00
3.32
3.88
5.73
1.30
1.59
7.01
0.63
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
PPT 2-5
EDI TI ON
Figure 2-1
Illustration of concepts behind the statement of cash flows
Cash inflows
(1)
Generation of
funds in normal
operations
Sale of plant
and equipment
Liquidation of
long-term
investment
Sale of bonds,
common stock,
preferred stock,
and other
securities
Cash outflows
Expenditure of funds
in normal operations
(2)
Purchase of plant
and equipment
Long-term investment
(3)
Cash flows from
financing activities
Retirement or
repurchase of
bonds, common stock,
preferred stock, and
other securities
Payment of cash
dividends
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT 2-6
EDI TI ON
FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT 2-7
EDI TI ON
Table 2-6a
KRAMER CORPORATION
Comparative Balance Sheets
Year-End
1998
Year-End
1999
Assets
Current assets:
Cash . . . . . .
Marketable securities .
Accounts receivable (net)
Inventory
. . . .
Prepaid expenses . . .
Total current assets .
Block
Hirt
Short
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
30,000
10,000
170,000
160,000
30,000
400,000
.
.
.
.
.
.
.
.
.
.
20,000
1,000,000
550,000
450,000
$ 870,000
40,000
10,000
200,000
180,000
20,000
450,000
50,000
1,100,000
600,000
500,000
$ 1 ,000,000
McGraw-Hill Ryerson Limited 2000
FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT 2-7
EDI TI ON
Table 2-6b
KRAMER CORPORATION
Comparative Balance Sheets
Liabilities and Shareholders Equity
Block
Hirt
Short
Current liabilities:
Accounts payable . . . . . .
Notes payable
. . . . . .
Accrued expenses . . . . . .
Total current liabilities .
Long-term liabilities:
Bonds payable, 2007 . . . . . .
Total liabilities . . .
Shareholders equity:
Preferred stock,
. . . . . .
Common stock, . . . . . . .
Retained earnings . . . . . .
Total shareholders equity
Year-End
1998
.
.
.
.
. $ 45,000
.
100,000
.
35,000
.
180,000
.
.
.
.
40,000
220,000
90,000
300,000
.
.
.
.
.
.
.
.
50,000
350,000
250,000
650,000
50,000
50,000
300,000
700,000
. $ 870,000
$ 1,000,000
Year-End
1999
80,000
100,000
30,000
210,000
FIF T H
Block
Hirt
Short
th
CANADIAN
Foundations of Financial
Management
PPT 2-8
EDI TI ON
Table 2-7
Cash flows from operating activities
Operating Activities
Net income (earnings aftertaxes) (Table 2-1) . .
Add items not requiring an outlay of cash:
Amortization (Table 2-1) . . . . . . . . .
Cash flow from operations . . . . . . . . . .
Changes in non-cash working capital:
Increase in accounts receivable (Table 2-6) .
Increase in inventory (Table 2-6) . . . . .
Decrease in prepaid expenses (Table 2-6) . .
Increase in accounts payable (Table 2-6) . .
Decrease in accrued expenses (Table 2-6). .
Net change in non-cash working capital . . . .
Cash provided by (used in) operating activities.
McGraw-Hill Ryerson
. . .
$110,500
. . . . $50,000
. . . .
$160,500
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
. . .
(30,000)
(20,000)
10,000
35,000
(5,000)
10,000
$150,500
FIF T H
th
CANADIAN
Foundations of Financial
Management
PPT 2-9
EDI TI ON
Table 2-10a
KRAMER CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 1999
Block
Hirt
Short
Operating Activities
Net income (earnings aftertaxes) . . . . . .
Add items not requiring an outlay of cash:
Amortization
. . . . . . . .
Cash flow from operations
Changes in non-cash working capital
Increase in accounts receivable . . . . . .
Increase in inventory .
. . . . . . . .
Decrease in prepaid expenses . . . . . .
Increase in accounts payable . . . . . . .
Decrease in accrued expenses . . . . . .
Net change in non-cash working capital . . .
Cash provided by (used in) operating activities .
McGraw-Hill Ryerson
. . .
$ 110,500
. . . $ 50,000
160,500
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
(30,000)
(20,000
10,000
35,000
(5,000)
10,000
$ 150,500
FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT 2-9
EDI TI ON
Table 2-10b
Investing Activities:
Increase in investments (long-term securities) . . . ($ 30,000)
Increase in plant and equipment . . . . . . . . . (100,000)
Cash used in investing activities . . . . . . . . . .
($130,000)
Financing Activities:
Increase in bonds payable . . .
Preferred stock dividends paid .
Common stock dividends paid .
Cash used in financing activities
Block
Hirt
Short
.
.
.
.
.
.
.
.
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.
.
.
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.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
50,000
(10,500)
(50,000)
(10,500)
Net increase (decrease) in cash and cash equivalents during the year
10,000
Cash and cash equivalents, beginning of year . . . .
30,000
Cash and cash equivalents, end of year . . . . . . .
$ 40,000
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
EDI TI ON
Table 2-11a
Comparison of accounting and cash flows
Year 1
(A)
(B)
Accounting Flows Cash Flows
Earnings before amortization and taxes (EBAT) .
Amortization . . . . . . . . . . .
.
.
$1,000
100
$1,000
100
.
.
.
.
.
.
.
.
.
.
.
.
.
.
900
400
900
400
.
.
.
.
.
.
.
.
.
.
.
.
$ 500
500
-500
+100
$ 100
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
EDI TI ON
Table 2-11b
Comparison of accounting and cash flows
Year 2
(A)
(B)
Accounting Flows Cash Flows
$1,000
100
$1,000
100
900
400
$ 500
900
400
500
+100
$ 600
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
Chapter 2 - Outline
LT 2-1
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
Income Statement
LT 2-2
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
P/E Ratio
LT 2-3
FIF T H
Foundations of Financial
Management
th
CANADIAN
EDI TI ON
Balance Sheet
LT 2-4
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 2-5
FIF T H
Block
Hirt
Short
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 2-6
FIF T H
Foundations of Financial
Management
th
CANADIAN
EDI TI ON
LT 2-7
Interest
Dividend
Capital Gain
$1,000.00
$1,000.00
$1,000.00
Gross -up
(dividends by 25%) . . .
Taxable capital gain
(75% of capital gain) . . .
250.00
$1,000.00
$1,250.00
750.00
$750.00
290.00
362.50
217.50
290.00
195.80
217.50
145.00
97.90
108.75
435.00
293.70
326.25
$565.00
$706.30
$673.75
Taxable income . . . .
Block
Hirt
Short
Aftertax income . .
McGraw-Hill Ryerson
. .
166.70
FIF T H
Foundations of Financial
Management
th
CANADIAN
EDI TI ON
Corporation B
$400,000
$400,000
100,000
300,000
120,000
400,000
160,000
Earnings aftertaxes
180,000
240,000
100,000
280,000
0
240,000
Earnings before
amortization and taxes .
Amortization (capital cost
allowance) . . . . . .
Block
Hirt
Short
LT 2-8
. .
+ amortization charged
without cash outlay . . .
Cash flow . . . . . . .
Difference - $40,000
McGraw-Hill Ryerson