03 Chapter model 12/08/11

Chapter 3. Financial Statements, Cash Flows, and Taxes

This model is STRICTLY OPTIONAL. Neither students nor instructors need to go through it. However, if someone
wants to practice with Excel, then the model can be useful. Also, on the tabs we show solutions for the within-
chapter self-test questions.
THE ANNUAL REPORT
The annual report contains a verbal section plus four key statements: the balance sheet, income statement,
statement of stockholders' equity, and statement of cash flows. These statements contain a wealth of information
that is used by bankers, stock and bond analysts, and managers. Hence, they are quite important. Spreadsheets
are used both to create and to analyze these statements, as we demonstrate in this model.

In this model, we start with the same balance sheet and income statement that was used in the chapter, but in an
Excel format, and then we show how spreadsheets can be used to analyze the data. The analysis continues to
cover the statement of stockholders' equity, statement of cash flows, and shows how accounting data may be
modified to evaluate managerial performance.

INPUT DATA SECTION: Historical Data Used in the Analysis 2012 2011
Year-end stock price $23.06 $26.00
Shares outstanding (in millions) 50 50
Tax rate 40% 40%
BALANCE SHEET (Section 3-2)
The balance sheet can be thought of as a snapshot in time of a firm's financial position. You can observe the firm's
level of assets and the manner in which they have used debt and equity to fund those assets.
BALANCE SHEETS - Allied Food Products - December 31 2012 2011
(in millions of dollars)
Assets
Cash and equivalents $ 10 $ 80
Accounts receivable 375 315
Inventories 615 415
Total current assets $ 1,000 $ 810
Net plant and equipment 1,000 870
Other assets expected to last more than 1 year - -
Total assets $ 2,000 $ 1,680

Liabilities and Equity

Accounts payable $ 60 $ 30
Accruals 140 130
Notes payable 110 60
Total current liabilities $ 310 $ 220
Long-term bonds 750 580
Total debt $ 1,060 $ 800
Common stock (50,000,000 shares) 130 130
Retained earnings 810 750
Total common equity $ 940 $ 880
Total liabilities and equity $ 2,000 $ 1,680
INCOME STATEMENT (Section 3-3)
The income statement summarizes a firm's revenues and expenses over an accounting period, usually a year. The
"bottom line" of an income statement is the firm's net income. Collectively, the income statement gives an
indication of a firm's operating ability.

INCOME STATEMENTS - Allied Food Products - Years Ending December 31

(in millions of dollars) 2012 2011

Net sales $ 3,000.0 $ 2,850.0

Operating costs except depreciation and amortization 2,616.2 2,497.0
Depreciation and amortization 100.0 90.0
Earnings before interest and taxes (EBIT) $ 283.8 $ 263.0
Less interest 88.0 60.0
Earnings before taxes (EBT) $ 195.8 $ 203.0
Taxes 78.3 81.2
Net income $ 117.5 $ 121.8

Common dividends $ 57.5 $ 53.0

Addition to retained earnings $ 60.0 $ 68.8

PER-SHARE DATA
We can now use the above information to calculate three specific per-share data measures: earnings per share
(EPS), dividends per share (DPS), and book value per share (BVPS). Simply divide the totals by the appropriate
number of shares outstanding. Note that BVPS is calculated by dividing total common equity (common stock plus
retained earnings) by shares outstanding.
2012 2011
Common stock price $ 23.06 $ 26.00
Earnings per share (EPS) $ 2.35 $ 2.44
Dividends per share (DPS) $ 1.15 $ 1.06
Book value per share (BVPS) $ 18.80 $ 17.60

The per-share data give managers and investors a quick look at some items that affect the stock price.
STATEMENT OF CASH FLOWS (Section 3-4)
Information from the balance sheet and income statement can be used to construct the statement of cash flows,
which is shown below for Allied, in millions of dollars.

STATEMENT OF CASH FLOWS - Allied Food Products (2012)

Parentheses indicate net cash outflows, no parentheses indicates net
cash inflows.
(in millions of dollars)

I. Operating Activities 2012

Net income $ 117.5
Depreciation and amortization 100.0
Increase in inventories (200.0)
Increase in accounts receivable (60.0)
Increase in accounts payable 30.0
Increase in accrued wages and taxes 10.0
Net cash provided by (used in) operating activities $ (2.5)

II. Long-Term Investing Activities

Additions to property, plant, and equipment $ (230.0)
Net cash used in investing activities $ (230.0)

III. Financing Activities

Increase in notes payable $ 50.0
Increase in bonds outstanding 170.0
Payment of dividends to stockholders (57.5)
Net cash provided by financing activities $ 162.5

IV. Summary
Net decrease in cash and equivalents: (Net sum of I, II, III) $ (70.0)
Cash and equivalents at beginning of the year 80.0
Cash and equivalents at end of the year $ 10.0
STATEMENT OF STOCKHOLDERS' EQUITY (Section 3-5)
The statement of stockholders' equity takes the previous year's balance of retained earnings, adds the current
year's net income, and then subtracts dividends paid to common stockholders. The end result is the new balance of
retained earnings. Allied's statement is shown below, in millions:

STATEMENT OF STOCKHOLDERS' EQUITY - Allied Food Products (2012)

(in millions of dollars) Total
Common Stock Retained Stockholders'
Shares (000) Amount Earnings Equity
Balances, December 31, 2011 50,000 $130.0 $750.0 $880.0
2012 Net income 117.5
Cash dividends (57.5)
Addition to retained earnings $60.0
Balances, December 31, 2012 50,000 $130.0 $810.0 $940.0

FREE CASH FLOW (Section 3-7)

FCF = EBIT(1 – T) + Depr'n – (Capital expenditures + Δ Net operating working capital)

FCF = $170.3 + $100.0 – ( $230.0 + $150.0 )
FCF = -$109.7