A B C D E F G H

1 c02model 9/6/2019 9:31 3/6/2001

2
3 Chapter 2. Model for Financial Statements, Cash Flows, and Taxes
4
5 THE ANNUAL REPORT
6
7 The annual report contains a verbal section plus four key statements: the balance sheet, income statement,
8 statement of retained earnings, and statement of cash flows. These statements contain a wealth of information
9 that is used by bankers, stock and bond analysts, and managers. Hence, they are quite important. Spreadsheets
10 are used both to create and to analyze these statements, as we demonstrate in this model.
11
12 Regarding statement creation, firms' accounting information is maintained in computer files, which are
13 adjusted as sales occur, materials are purchased, and so forth. The firm's accountants periodically--monthly,
14 quarterly, and annually--extract information from the general files and compile the four statements. These
15 statements-- in both printed and spreadsheet format --are made available to security analysts, and if the firm
16 wants to borrow money, the same information is provided to potential lenders.
17
18 The firm's financial staff also uses the data to analyze the firm's condition--its strengths and weaknesses--and
19 this information is used in the quest to improve operations and increase the firm's value.
20
21 In this model, we start with the same balance sheet and income statement that was used in the chapter, but in
22 an Excel format, and then we show how Excel (and other spreadsheet packages) can be used to analyze the data.
23 The analysis will be extended in Chapter 3, which go on to examine various ratios and other metrics used to
24 appraise firms and to compare them with other companies.
25
26 Notice that a spreadsheet model dealing with taxes is shown on the tab labeled "TAXES" found in the lower
27 left section of the screen. Click on this tab to see the taxes model. Then, to return to the financial statement
28 model, click on the tab for that model.
29
30 In addition, note that in cells which summarize data in other cells, such as sums or differences, the
31 spreadsheet uses formulas rather than fixed numbers. For example, the cell for Total Assets in 2001 (F65)
32 contains the SUM formula rather than just $2,000. (The cell itself shows $2,000, but if you put the pointer on
33 F65, then the formula line will show that the cell actually contains a formula.) That way, if the data for any
34 input (cash, for instance) changes, the spreadsheet will automatically recalculate and provide the correct net
35 value for Total Assets. As you will see as you go through our models, this automatic recalculation feature is
36 one of the most useful and powerful aspects of Excel and other spreadsheets.
37
38 Finally, note that we show just below this introduction, before the financial statements, some information
39 that is used to develop aspects of the financial statements, including the tax rate, number of shares
40 outstanding, and price per share. Generally, in financial models, data that are used to construct statements
41 are shown in an Input Data Section toward the top of the model.
42
43
44 INPUT DATA SECTION: Historical Data Used in the Analysis
45
46 2001 2000
47 Year-end common stock price $23.00 $26.00
48 Year-end shares outstanding (in millions) 50 50
49 Tax rate 40% 40%
50 After-tax cost of capital 11.0% 10.3%
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 A B C D E F G H
52
53 The balance sheet can be thought of as a snapshot in time of a firm's financial position. You can observe the
54 firm's level of assets and the manner in which they have used debt and equity to fund those assets.
55
56 BALANCE SHEETS - Allied Food Products - December 31
57 (in millions of dollars)
58 2001 2000
59 Assets
60 Cash and marketable securities $10 $80
61 Accounts receivable $375 $315
62 Inventories $615 $415
63 Total current assets $1,000 $810
64 Net plant and equipment $1,000 $870
65 Total assets $2,000 $1,680
66
67 Liabilities and equity
68 Accounts payable $60 $30
69 Notes payable $110 $60
70 Accruals $140 $130
71 Total current liabilities $310 $220
72 Long-term bonds $754 $580
73 Total debt $1,064 $800
74 Preferred stock (400,000 shares) $40 $40
75 Common stock (50,000,000 shares) $130 $130
76 Retained earnings $766 $710
77 Total common equity $896 $840
78 Total liabilities and equity $2,000 $1,680
79
80
81 The income statement summarizes a firm's revenues and expenses over an accounting period, usually a year.
82 The "bottom line" of an income statement is the firm's net income. Collectively, the income statement gives an
83 indication of a firm's operating ability.
84
85 INCOME STATEMENTS - Allied Food Products - Years Ending December 31
86 (in millions of dollars)
87 2001 2000
88
89 Net sales $3,000.0 $2,850.0
90 Operating costs except depreciation $2,616.2 $2,497.0
91 Earnings before interest, taxes, deprn, and amortization (EBITDA)* $383.8 $353.0
92 Depreciation $100.0 $90.0
93 Earnings before interest and taxes (EBIT) $283.8 $263.0
94 Less interest $88.0 $60.0
95 Earnings before taxes (EBT) $195.8 $203.0
96 Taxes $78.3 $81.2
97 Net Income before preferred dividends $117.5 $121.8
98 Preferred dividends $4.0 $4.0
99 Net Income available to common stockholders $113.5 $117.8
100
101 Common dividends $57.5 $53.0
102 Addition to retained earnings $56.0 $64.8
103
104 *Allied has no amortization charges.
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 A B C D E F G H
106
107 PER-SHARE DATA
108
109 We can now use the above information to calculate three specific per-share data measures: earnings per share
110 (EPS), dividends per share (DPS), and book value per share (BVPS). Simply divide the totals by the appropriate
111 number of shares outstanding. Note that BVPS is calculated by dividing total common equity (common stock
112 plus retained earning) by shares outstanding.
113
114 2001 2000
115 Earnings per share (EPS) $2.27 $2.36
116 Dividends per share (DPS) $1.15 $1.06
117 Book value per share (BVPS) $17.92 $16.80
118
119 The per share data give managers and investors a quick look at the some items that affect the price of the stock.
120
121
122 STATEMENT OF RETAINED EARNINGS - Allied Food Products (2001)
123
124 The statement of retained earnings takes the previous year's balance of retained earnings, adds the current
125 year's net income, and then subtracts dividends paid to common stockholders. The end result is the new balance
126 of retained earnings. Allied's statement is shown below, in millions:
127 2001
128 Balance of Retained Earnings, Dec. 31, 2000 $710.0
129 Add: Net Income, 2001 $113.5
130 Less: Dividends to common stockholders ($57.5)
131 Balance of Retained Earnings, Dec. 31, 2001 $766.0
132
133
134 STATEMENT OF CASH FLOWS - Allied Food Products (2001)
135
136 Information from the balance sheet and income statement can be used to construct the Statement of Cash Flows,
137 which is shown below for Allied, in millions of dollars.
138
139 2001
140 Operating Activities
141 Net Income before preferred dividends $117.5
142 Additions (Sources of Cash)
143 Depreciation and amortization $100.0
144 Increase in accounts payable $30.0
145 Increase in accruals $10.0
146 Subtractions (Uses of Cash)
147 Increase in accounts receivable ($60.0)
148 Increase in inventories ($200.0)
149 Net cash provided by operating activities ($2.5)
150
151 Long-term investing activities
152 Cash used to acquire fixed assets ($230.0)
153
154 Financing Activities
155 Increase in notes payable $50.0
156 Increase in bonds $174.0
157 Payment of common and preferred dividends ($61.5)
158 Net cash provided by financing activities $162.5
159 Net decrease in cash and marketable securities ($70.0)
160 Cash and securities at beginning of the year $80.0
161
162 Cash and securities at end of the year $10.0
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 A B C D E F G H
164
165 SUMMARY DATA - Relating to Operating Performance and Cash Flows
166
167 Now that the statements have been developed, we can use the data contained in them to calculate some items
168 that are of interest to managers, investors, and lenders. All of these items are used more extensively in
169 subsequent chapters, where we look in more depth at how historical financial statements are analyzed and how
170 future financial results are predicted.
171 2001 2000
172 Net operating working capital (NOWC) $800.0 $650.0
173 Total operating capital $1,800.0 $1,520.0
174 Net Operating Profit After Taxes (NOPAT) $170.3 $157.8
175 Net Cash Flow (NCF) $213.5 $207.8
176 Cash Flow Per Share (CFPS) $4.27 $4.16
177 Operating Cash Flow (OCF) $270.3 $247.8
178 Free Cash Flow (FCF) ($109.7) N/A
179 Economic Value Added, EVA (in millions of dollars) ($27.7) $1.2
180 Market Value Added, MVA (in millions of dollars) $254.0 $460.0
181
182 CONCLUSIONS
183
184 This spreadsheet model should have either refreshed your memory of or introduced you to spreadsheet
185 models. A second sheet in this file, found under the tab TAXES, introduces another spreadsheet application.
186 You can access the TAXES model by clicking on the tab in the lower section of the screen.
187
188 It is worth noting that the models developed for Chapter 2 are all relatively simple, and the tasks they
189 perform, could be done just as easily, or more easily, with a calculator. However, in Chapter 3 and
190 subsequently, you will see that spreadsheet models are extremely valuable, hence why they are terribly
191 important to business today.
192

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THE FEDERAL INCOME TAX SYSTEM 9/6/2019 9:31 3/6/2001

This worksheet explores the calculation of corporate income taxes under the federal tax system. By using
special Excel functions, we can input a corporate tax schedule into a spreadsheet and then have a cell
automatically display a company's tax liability. Either of two procedures can be used, the IF function or the
VLOOKUP function. Both functions are explained below, using the data shown in the following tax table.

LOOKUP
There are actually two lookup functions, VLOOKUP for looking up items in vertical columns, and HLOOKUP
for looking up things in horizontal rows. Since our tax table is arranged in columns, we use VLOOKUP.

In words, Excel first looks down Column 1 (or A) and finds the largest value that does not exceed the firm's taxable
income. Next, it looks for the corresponding value in Column 3 (or C), which is the base amount of the tax. Then, it
again looks down Column (1) and finds the corresponding marginal tax rate as shown in Column 4. Then it
multiplies the tax rate times the difference between the firm's taxable income and the bottom tax bracket to get the
incremental tax. Then it adds the base tax to the incremental tax to get the firm's total tax liability.

Begin by highlighting the range A40:D47, which contains the tax table. Then click on the inverted triangle at the
left of the 4th row (the formula bar) and type the word "taxtable" to name the range. Then put the pointer on E50,
and then click the function wizard, fx, select "Lookup & Reference," and then select VLOOKUP. You will then get
a menu box like the one shown out in Column G (ours is filled in). When you fill in the menu box, and click OK,
you will get this equation on the formula bar and $3,400,000 in cell E50.
=VLOOKUP(B32,taxtable,3)
Next, put the pointer on D51, get the VLOOKUP menu box, and look up the marginal tax rate. The correct value is
35%, and here is the formula:
=VLOOKUP(B32,taxtable,4)
Next, put the pointer on D52 and look up the marginal tax bracket and then subtract it from the firm's income to
find the incremental income. Here is the formula: =B32-VLOOKUP(B32,taxtable,1)

Finish by adding the tax on the marginal income to the tax on the bracket base.

Taxable Income: $12,000,000

Corporate Tax Rates, as of January 2001

If a corporation's It pays this Plus this percentage

taxable income amount on the on the excess
is between: base of the bracket over the base
(1) (2) (3) (4)
$0 $50,000 $0 15.0%
$50,000 $75,000 $7,500 25.0%
$75,000 $100,000 $13,750 34.0%
$100,000 $335,000 $22,250 39.0%
$335,000 $10,000,000 $113,900 34.0%
$10,000,000 $15,000,000 $3,400,000 35.0%
$15,000,000 $18,333,333 $5,150,000 38.0%
$18,333,333 and up $6,416,667 35.0%

1st VLOOKUP to find the base amount of tax: $ 3,400,000

2nd VLOOKUP to find the marginal tax rate: 35.0%
3rd VLOOKUP to find the marginal income to be taxed: $ 2,000,000 $ 700,000

Total tax liability: $4,100,000

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Harcourt, Inc. items and derived items copyright © 2002 by Harcourt, Inc.