Chapters 2 and 3 Handouts

1. The basic structure of balance sheet (Q1, Q3, Q12, Q14, Q15)
-Current Asset: A paid off car

-Future Asset: Bond

-Equity

-Liability

The basic structure of the balance sheet is the square

*Shorthand Key:

CA: Current Asset

FA: Future Asset

E: Equity

L: Liability

TA: Total Asset

FA: Future Asset

2. The basic structure of income statement (Q9)

Revenue

-Expense

-EBIT: Earnings before interest and tax

-ZnT:

Taxable income
-Tax

=Net income

Then pay dividend to shareholders

Rev – expenses – interest – taxable income - tax

3. Liquidity, book value vs market value (Q4, Q13)

Liquidity refers to how fast you can convert an asset into cash without losing value on the transaction.

Formula:

NWC = CA – CL

Current assets – Current Liabilities = Net Working Captial

A=L+E

Liability + Equity = Asset

4. Total tax liability, marginal tax rate, average tax rate

If you have made 1M of taxable income, what will be your total tax
liability, marginal tax rate, and average tax rate? (Q5)

(20,550 - 0) x 10% = 2,055$

(83,550 - 20,550) x 12% = 7,560$
(178,150 - 83,550) x 22% = 20,812$
(340,100 - 178,150) x 24% = 38,868$
(431,900 - 340,100) x 32% = 29,376$
(647,850 - 431,900) x 35% = 75,582.50$
(1,000,000 – 647,850) x 37% = 304,547$
Average tax rate is the amount of tax to be paid – equity
ATR = Tax / Equity
ATR for 1 million is 30.45%

5. Cash flow from assets: two equations, one “from”, one “to”
What is the CFFA based on the two financial statements in the
handouts? (Q6, Q9)
Equation:

CFFA = OCF – NCS - ^NWC

Equation Part 1:

OFC = EBIT + Dep – Tax

-EBIT = 1,138

-Dep = 116

-Tax = 442

-OFC = 812

Equation part 2:

NCS = Ending FA - Beginning FA + Dep

-Ending FA = 3,138

-Beginning FA = 3,358

-Dep = 116

-NCS = -104

Equation Part 3:

^NWC = Change in Net Working Capital

^NWC = (CA of 2021 – CL of 2021) - (CA of 2020 – CA of 2020)

-CA2021 = 2,256

-CL2021 = 1,995

-CA2020 = 1,675

-CL2020 = 1,775

-NWC = 361

CFFA = 812 - (-104) - 361

CFFA = 555
6. Financial Ratios – What are the five categories, what information does
each category provide, and how to compute and interpret the ratios.
(Q2, Q7, Q8, Q10, Q11)
1) liquidity ratios
2) leverage ratios
3) efficiency ratio
4) price earning ratios
5) market value ratios
Net Working Capital = Current Assets – Current Liabilities

Average tax rate = the tax bill / taxable income

CFFA = Cash Flow to Creditors + Cash Flow to Stockholders

= Operating Cash Flow – Net Capital Spending – Changes in NWC

𝑂𝐶𝐹 = 𝐸𝐵𝐼𝑇 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 – 𝑇𝑎𝑥𝑒𝑠

𝑁𝐶𝑆 = 𝐸𝑛𝑑𝑖𝑛𝑔 𝑁𝑒𝑡 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 – 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑁𝑒𝑡 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛

CF to Creditors = Interest paid – Net new borrowing

Net New Borrowing = ending LT debt – beginning LT debt

CF to Stockholders = Dividends paid – Net new equity raised

Dividend = Net Income – Difference of Returned earnings

 2021 2020 2021 2020

Cash 696 58 A/P 307 303

A/R 956 992 N/P 26 119

Inventory 301 361 Other CL 1,662 1,353

Other CA 303 264 Total CL 1,995 1,775

Total CA 2,256 1,675 LT Debt 843 1,091

Net FA 3,138 3,358 C/S 2,556 2,167

Total 5,394 5,033 Total Liab. 5,394 5,033

Assets & Equity

Revenues 5,000

Cost of Goods Sold (2,006)

Expenses (1,740)

Depreciation (116)

EBIT 1,138

Interest Expense (7)

Taxable Income 1,131

Taxes (442)

Net Income 689

EPS 3.61

Dividends per share 1.08

 I. Short Term Solvency Ratios II. Long Term Solvency Ratios

Current Ratio= Current assets Total Debt Ratio= Total Assets-Total Equities
Current Liabilities Total Assets

Quick Ratio= Current Assets-Inventory Debt- Equity Ratio= Total Debt

Current Liabilities Total Equity

Cash Ratio= Cash Equity Multiplier= Total Assets

Current Liabilities Total Equity

Net Working Capital to Total Assets= Net Working Capital Long Term Debt Ratio= Long Term Debt
Total Assets Long Term Deb+ Total Equity

Interval Measure= Current Assets Times Interest Earned Ratio= EBIT

Average Daily Operating Costs Interest

Cash Coverage Ratio= EBIT + Depreciation

III. Asset Management Ratios Interest

Inventory Turnover= Cost of Goods Sold

Inventory IV. Profitability Ratio

Days’ Sale in Inventory= 365 Days Profit Margin= Net Income

Inventory Turnover Sales

Receivables Turnover= Sales Return on Assets (ROA) = Net Income

Accounts Receivable Total Assets

NWC turnover=Sales Return on Equity (ROE) = Net Income

NWC Total Equity

Fixed Assets Turnover= Sales ROE= Net Income X Sales X Assets

Net Fixed Assets Sales Assets Equity

Total Asset Turnover= Sales

Total Assets

V. Market Value Ratios

Price-Earnings Ratio= Price per Share Market to Book Ratio= Market Value per Share
Earnings per Share Book Value per Share

PEG Ratio= Price-Earnings Ratio Tobin’s Q Ratio= Market Value of Assets

Earnings Growth Rate Replacement Costs of Assets

Price-Sales Ratio= Price per Share Enterprise Value-EBITDA ratio= Enterprise Value
Sales per Share EBITDA