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Financial History

START HERE Comments to help you fill in yellow data entry boxes are in blue or red font. Take one row at a time: read row comment and enter data in the yellow cells only.
CURRENCY: USD <– This is the organization’s home or functional currency. E.g., USD, INR (Indian Rupee), BRL (Brazilian Real), EUR (Euro), CNY (Chinese Yuan). Information is found on financial statements.
SCALING: x 1,000 <– Local currency units: Usually 1000 is used. For example, if financial statement on Mergent Online says Scale = Thousands, 2,822,795 listed is actually 2,822,795,000.
[COMPANY’S FULL NAME] <– Any financial report should show the name of the organization in the heading.
INCOME STATEMENT HIGHLIGHTS <– Always identify the type of report.
Unaudited; Amounts USD x 1000 <– The currency and scaling needs to be defined.
For Fiscal Years ending: <– An organization’s fiscal year might end on Dec 31, or June 30, or something else. State it here.
% Growth vs Prior Year
(1) (2) (1) <– Replace leftmost year number (Cell C9) with most recent year of data available.
TOTAL REVENUES 0.0% 0.0%
Cost of revenues 0.0% 0.0% <– Cost of revenues is also referred to as cost of goods sold
Gross Profit or (Loss) $ – 0 $ – 0 $ – 0 0.0% 0.0%
Other Operating Expenses 0.0% 0.0% <– To enter multiple numbers, the formula would start with the equal sign like this: =1278022+1052778+863568
OPERATING INCOME or (Loss) $ – 0 $ – 0 $ – 0 0.0% 0.0% <– Confirm this matches what is listed on the financial statement you downloaded.
Interest expense 0.0% 0.0%
Interest & other income (expense) 0.0% 0.0%
INCOME (LOSS) BEFORE INCOME TAXES $ – 0 $ – 0 $ – 0 0.0% 0.0% <– Confirm this matches what is listed on the financial statement you downloaded.
Provision for (or benefit from) Income Taxes 0.0% 0.0%
Net Income or (Loss) from Continuing Operations $ – 0 $ – 0 $ – 0 0.0% 0.0% <– FYI, most analysts consider this better than total Net Income as an indicator of underlying business performance.
Discontinued Operations Income (Loss), Net $ – 0 $ – 0 $ – 0 0.0% 0.0% <– Typically, from shutting down or selling part of the business.
NET INCOME OR (LOSS) $ – 0 $ – 0 $ – 0 0.0% 0.0% <– Confirm this matches what is listed on the financial statement you downloaded.
Weighted average (Number of) Diluted Shares Outstanding 0.0% 0.0% <– Make sure this value is scaled the same way as the other numbers (thousands or millions).
DILUTED EARNINGS OR (LOSS) PER SHARE $ – 0 $ – 0 $ – 0 0.0% 0.0%
Net Income Margin % 0.0% 0.0% 0.0% <– Net income or Loss / Total Revenue. Typical values are 2% to 20%, but it can be negative, too.
Common Stock Share Price at each Year-End 0.0% 0.0% <– Mergent Online instructions include how to find historical stock prices. Go back four years because you will need fourth year for Line 123.
Total Equity Value (= share price x shares) $ – 0 $ – 0 $ – 0 <– Better to use end-of-year shares outstanding, but this figure is close enough for this course.
Price / Earnings Ratio (P/E) – 0 – 0 – 0 0.0% 0.0% <– Market price at the end of the year divided by that year’s earnings per share. Typical values are 10 to 30.
Source. (Publication Year). Title Retrieved from: http://www.?????????????? <– Include APA citation for where you found the financial statement data.
[COMPANY’S FULL NAME]
CASH FLOW STATEMENT HIGHLIGHTS
Unaudited; Amounts USD x 1000
For Fiscal Years ending:
% Growth vs Prior Year
(1) (2) (1)
Net Income or (Loss), from Above $ – 0 $ – 0 $ – 0 0.0% 0.0%
Depreciation and Amortization Expense 0.0% 0.0% <– This is a noncash expense, so we add it back to net income here.
Other Operating Sources and (Uses) $ – 0 $ – 0 $ – 0 0.0% 0.0% <– These are working capital changes and other adjustments.
Cash Flow from Operating Activities 0.0% 0.0% <– By entering the total here, the row above will be automatically calculated.
Purchases of property & equip., & other capital expenditures 0.0% 0.0% <– This is normally a negative number.
Other Investing Activities $ – 0 $ – 0 $ – 0 0.0% 0.0% <– This is normally a negative number.
Cash Flow from Investing Activities 0.0% 0.0% <– This is normally a negative number. By entering the total here, the row above will be automatically calculated.
Increase or (Decrease) in Debt 0.0% 0.0% <– Borrowing money (debt) is a source of cash, “proceeds,” repaying it is a use of cash.
Increase or (Decrease) in Common Stock 0.0% 0.0% <– Issuing stock is a source of cash, “proceeds,” repurchasing it is a use of cash
Dividend Payments $ – 0 $ – 0 $ – 0 0.0% 0.0% <– Dividend payments should normally be a negative number, because they are a cash outflow.
Other Financing Activities $ – 0 $ – 0 $ – 0 0.0% 0.0%
Cash Flow from Financing Activities 0.0% 0.0% <– By entering the total here, the row above will be automatically calculated.
Cumulative Translation Adjustment 0.0% 0.0% <– Don’t try to understand what this exchange rate-related number means at this time. It is applicable to most multicurrency organizations.
NET CASH FLOW $ – 0 $ – 0 $ – 0 0.0% 0.0% <– Confirm this matches what is listed on the financial statement you downloaded.
Memo: Free Cash Flow $ – 0 $ – 0 $ – 0 0.0% 0.0% <– Usually defined as Cash Flow from Operating Actitivies less Capital Expenditures. Note: If cap exp is a negative number, you will use the
Source. (Publication Year). Title Retrieved from: http://www.?????????????? absolute value of that number; this means change the negative sign to positive for the calculation. If Cap Expenditures are -$100:
[COMPANY’S FULL NAME] Formula is Op Cash Flow less absolute value of Cap Exp, e.g., 1,000-100 = 900. Free Cash Flow must be less than Operating Cash Flow.
BALANCE SHEET HIGHLIGHTS
Unaudited; Amounts USD x 1000
For Fiscal Years ending:
% Growth vs Prior Year
(1) (2) (1)
Current Assets
Cash & cash equivalents 0.0% 0.0% <– Cash equivalents include Accounts Receivable (invoices the organization has sent to clients, but that they have not yet paid) although some disagree AR should be considered this.
All Other Current Assets $ – 0 $ – 0 $ – 0 0.0% 0.0%
Total Current Assets 0.0% 0.0% <– Enter total current assets values, and the spreadsheet will calculate “other current assets.”
Non-current Assets
Property, Plant and Equipment, Net 0.0% 0.0% <– These are for PP&E net of accumulated depreciation.
Other Non-current Assets $ – 0 $ – 0 $ – 0 0.0% 0.0% <– Includes intellectual property (IP), such as patents and acquired technology.
Total Non-current Assets $ – 0 $ – 0 $ – 0 0.0% 0.0%
TOTAL ASSETS 0.0% 0.0% <– Enter Total Assets, and the spreadsheet will calculate Total Noncurrent Assets and Other Noncurrent Assets.
Current Liabilities
Accounts Payable, Net 0.0% 0.0% <– These are for bills the organization has received but not yet paid.
Other Current Liabilities $ – 0 $ – 0 $ – 0 0.0% 0.0%
Total Current Liabilities 0.0% 0.0% Note: Working Capital, capital used for day-to-day operations, is Total Current Assets – Total Current Liabilities
Non-current Liabilities
Long-term Debt 0.0% 0.0%
Other Non-current Liabilities $ – 0 $ – 0 $ – 0 0.0% 0.0%
Total Non-current Liabilities $ – 0 $ – 0 $ – 0 0.0% 0.0%
TOTAL LIABILITIES 0.0% 0.0% <– Enter Total Liabilities and spreadsheet will calculate other non-current and total liabilities.
SHAREHOLDERS’ EQUITY Note: Working Capital is Total Current Assets – Total Current Liabilities
Common Stock, at par
Additional Paid-in Capital
Retained Earnings
Cumulative Translation Adjustment and Other $ – 0 $ – 0 $ – 0
TOTAL SHAREHOLDERS’ EQUITY $ – 0 $ – 0 $ – 0 <– Confirm this matches what is listed on the financial statement you downloaded. By definition, Shareholders’ equity equals total assets minus total liabilities.
Total Liabilities+Total Shareholders’ Equity $ – 0 $ – 0 $ – 0 <– Confirm this matches Total Assets since Total Assets = Total Liabilities + Total Shareholders’ Equity
Source. (Publication Year). Title Retrieved from: http://www.??????????????
[COMPANY’S FULL NAME]
SELECTED FINANCIAL RATIOS
Unaudited; Amounts USD x 1000
For Fiscal Years ending:
% Growth vs Prior Year
(1) (2) (1)
FINANCIAL RATIOS
Price / Earnings Ratio 0.0 0.0 0.0 0.0% 0.0% <– Price per Share / Earnings per Share. Typical values are 10 to 40 times.
Debt Ratio 0% 0% 0% 0.0% 0.0% <– Total Liabilities / Total Assets. Result < 0.5, most of the assets are financed through equity. Result > 0.5, most of the assets are financed through debt.
Total Debt / Equity Ratio 0.0 0.0 0.0 0.0% 0.0% <– Total Liabilities / Total Shareholders’ Equity. Typical values are 0.2 to 0.6.
Return on Equity (ROE) % 0.0% 0.0% 0.0% 0.0% 0.0% <– Net Income / Total Shareholders’ Equity. Typical values are 2% to 40%.
Return on Assets (ROA) % 0.0% 0.0% 0.0% 0.0% 0.0% <– Net Income / Total Assets. Typical values are 2% to 40%. Almost always LOWER than ROE.
Net Profit Margin % 0.0% 0.0% 0.0% 0.0% 0.0% <– Net Income / Total Revenue. Typical values are 1% to 15%.
Free Cash Flow $ – 0 $ – 0 $ – 0 0.0% 0.0% <– If FCF is negative, consider what that means. Is a negative FCF a bad thing?
OTHER USEFUL RATIOS
Earnings per Share or EPS $ – 0 $ – 0 $ – 0 0.0% 0.0% <– Net Income / Diluted Shares Outstanding. Typical values are $1.00 to $10.00. May also be negative.
Current Ratio 0.0 0.0 0.0 0.0% 0.0% <– Current Assets / Current Liabilities. Typical values are 0.7 to 1.5.
COMMON STOCK PRICE
Adjusted Close Price on or near $ – 0 $ – 0 $ – 0 0.0% 0.0% <– Usually, somewhere between a few dollars and a couple of hundred dollars per share
RATE OF RETURN CALCULATIONS (3) (2) (1) Pct Change <– Need fiscal end-of-year information for four years to calculate three-year percentage change.
Adjusted Close Stock Price at fiscal End of Year (EOY) $ – 0 0.0% <– For this, ROI% = ($End – $Beg) / $Beg. More precisely, you would add dividends received to the $End value.
Annual Dividends per Share $ – 0 $ – 0 $ – 0 <– Approximate dividends/share are calculated here, but you may want to override those with disclosed div/share figures.
If you buy 1 share at end of fiscal -3, collect dividends, then sell at end of fiscal 0, your 3-year percent gain would be: 0.0% <– Not required here, but a more complete measurement.
BUT WHAT IF WE VIEW THIS AS A TIME VALUE OF MONEY QUESTION?
Investor’s Annual Cash Flow for 1 Share $ – 0
C. Jeffrey Smith: This is negative because we’re assuming you pay this out (“cash outflow”) to buy your 1 share of stock.
$ – 0 $ – 0 $ – 0 <– For an investor who buys 1 share at beginning, collects dividends, then sells at end of third year.
Solve for the annual Internal Rate of Return or IRR, with N=3 Yrs ERROR:#NUM!
C. Jeffrey Smith: This will always be LESS THAN 1/3 of the total 3-yr Percent Change figures above. Why? Because of time value of money and compounding. When N = 1, ROI and IRR will be the same. For N > 1, they will be different because IRR calculates the return on an annualized basis; average annual return over the investment period.
<– This IRR is the best overall measure of this stock’s performance over the time period.
Source. (Publication Year). Title Retrieved from: http://www.??????????????

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Capital Structure

This tab is used to calculate Weighted Average Cost of Capital (WACC). Enter data in the yellow cells only. Comments to help you are indicated by a red triangle in the top right corner of cell; hover over the cell to review.
Enter Company Full Name: [COMPANY’S FULL NAME]
Enter Fiscal Year: 0
[COMPANY’S FULL NAME]
CAPITAL STRUCTURE
For End of Fiscal Year 0
Unaudited; Amounts USD x 1000
SIMPLE METHOD TEXTBOOK METHOD
Capital Funding Amount
C. Jeffrey Smith: C. Jeffrey Smith: All of the funds the organization has received from banks, bond-buyers, stockholders, and other investors. (Does not include Accounts Payable and accrued expenses.) Funds invested found on Form 10-K (Annual Report) filed with the Securities and Exchange Commission (SEC) https://www.sec.gov/edgar/searchedgar/companysearch.html Form 10-K also available on Mergent Online under Reports tab. Important to review cost of capital reading in text.
Cost of Capital: Estimated % Return Req’d by Investors
Regis, Kristin: Regis, Kristin: See Cost of Capital in text. For cost of debt, we would use current market value; however, that is not feasible for this project. For this project, review Form 10-K filed with the SEC https://www.sec.gov/edgar/searchedgar/companysearch.html to see debt interest rates so you may estimate here. Consider why market values would be more appropriate.
Corporate Marginal Tax Rate %
C. Jeffrey Smith: C. Jeffrey Smith: Always 0% for stock and retained earnings; may be 0% – 50% for debt and leases. See marginal tax rate explanation in the course text. Research corporate tax rate for fiscal year listed on this spreadsheet (e.g. IRS site). Tax information also available in Form 10-K.
1 – Corp Tax Rate % Cost of Capital, After Tax Savings
C. Jeffrey Smith: C. Jeffrey Smith: Equals Column D times column F.
$ Cost of Capital per Year (Column C x Coumn G) Wgt x Cost % of Total
Debt: Bank Loans $ – 0 0.0% 20.0% 80.0% 0.0% $ – 0 ERROR:#DIV/0! ERROR:#DIV/0!
Debt: Bonds – 0 0.0% 20.0% 80.0% 0.0% – 0 ERROR:#DIV/0! ERROR:#DIV/0!
Debt: Commercial Paper – 0 0.0% 20.0% 80.0% 0.0% – 0 ERROR:#DIV/0! ERROR:#DIV/0!
Debt: Other or Unidentified – 0 0.0% 20.0% 80.0% 0.0% – 0 ERROR:#DIV/0! ERROR:#DIV/0!
Leases (a form of Debt) – 0 0.0% 20.0% 80.0% 0.0% – 0 ERROR:#DIV/0! ERROR:#DIV/0!
Preferred Stock (if any) – 0 0.0% 0.0% 100.0% 0.0% – 0 ERROR:#DIV/0! ERROR:#DIV/0!
Common Stock: At Par – 0 0.0%
Regis, Kristin: Regis, Kristin: “Cost of equity”
0.0% 100.0% 0.0% – 0 ERROR:#DIV/0! ERROR:#DIV/0!
Common Stock: Add’l Paid-in Capital – 0 0.0% 0.0% 100.0% 0.0% – 0 ERROR:#DIV/0! ERROR:#DIV/0!
Retained Earnings – 0 0.0% 0.0% 100.0% 0.0% – 0 ERROR:#DIV/0! ERROR:#DIV/0!
[Other] – 0 0.0% 0.0% 100.0% 0.0% – 0 ERROR:#DIV/0! ERROR:#DIV/0!
TOTAL $ – 0 $ – 0 ERROR:#DIV/0! ERROR:#DIV/0!
C. Jeffrey Smith: C. Jeffrey Smith: The % of Total should always add up to 100.0%. If not, you’ve done something wrong.
WEIGHTED AVERAGE COST OF CAPITAL:
WACC = [$ Total Annual Cost of Capital] / [$ Total Capital Funding] = $0 / $0 = ERROR:#DIV/0!
Amount Pct of Total
Total Debt, incl. Leases & Preferred Stock – 0 0.0% So Debt/Equity Ratio = 0.0000%
Total Equity, incl “Other” – 0 0.0% And Debt/Total Capital Ratio = 0.0000%
TOTAL CAPITAL $ – 0 0.0%
NOTES:
a) The Corporate Marginal Tax Rate only affects debt and leases. For businesses, it is usually between 0% and 50%. For nonprofits and goverments, it is always 0%.
b) Leases are a form of debt.
c) Retained Earnings are basically common stock dividends that have not been paid out. Retained earnings therefore have the same required rate of return as common stock.
d) In an organization, the treasurer is typically the best source for all of this information.
HOW TO ESTIMATE REQUIRED RATE OF RETURN FOR COMMON STOCK
Dividend Constant Growth Stock Valuation Model: ($Dividend / $Current Price) + Expected % Dividend Growth Rate <– Only works if constant future growth is expected.
Example: ($1.50 / $20.00) + 6.5% = 0.075 + 0.065 = 0.140 = 14.0%
Intrinsic Value Method The internal rate of return (IRR) of the future cash flows investors expect to receive. Use a spreadsheet IRR function to calculate.
Industry Averages Evaluate reasonable estimates for industry averages or for other organizations with similar risk. Not easy, by the way.
(Note to Instructional Designers and Teachers: Financial History tab data does not feed into this worksheet.)

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Valuation

This tab is used for the corporate valuation report (Final Project I). Enter data (forecasts based on assumptions you will explain in written report) in yellow cells only. Past performance and trends, text, course resources, research and most recent Annual Report Form 10-K on https://www.sec.gov/edgar/searchedgar/companysearch.html and on Mergent Online (under Reports) will help you determine assumptions. Questions? Post to your class General Questions discussion board or ask your instructor.
CURRENCY: USD <– Probably U.S. dollars, or perhaps another (e.g., euros or pesos). We will use U.S. dollars.
SCALING: x 1,000 <– Could be x1 (such as just dollars), x1000 (meaning amounts in Thousands), or Millions (meaning amounts in millions). We will use x1000.
[COMPANY’S FULL NAME] – COMPANY VALUATION
(Unaudited; USD 1000)
Fiscal Year –> 0 1 2 3 4 5 Total
TOTAL REVENUES 0 0 0 0 0 0 0
Growth Rate vs Prior Year 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Total Operating Expenses 0 0 0 0 0 0 0
OPERATING INCOME or (Loss) 0 0 0 0 0 0 0
Operating Margin 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Operating margin equals Operating Income (or Loss) divided by Revenue.
Interest expense 0 0 0 0 0 0
Interest & other income (expense) 0 0 0 0 0 0
INCOME (LOSS) BEFORE INCOME TAXES 0 0 0 0 0 0 0
Provision for (or benefit from) Income Taxes 0 0 0 0 0
Discontinued Operations Income (Loss), Net 0 0 0 0 0 0 0
NET INCOME OR (LOSS) 0 0 0 0 0 0 0
Weighted average (Number of) Diluted Shares Outstanding 0 0 0 0 0
DILUTED EARNINGS OR (LOSS) PER SHARE $ – 0 $ – 0 $ – 0 $ – 0 $ – 0 $ – 0 $ – 0
Net Income or (Loss), from Above 0 0 0 0 0 0 0
Depreciation and Amortization Expense 0 0 0 0 0 0
Other Operating Sources and (Uses) 0 0 0 0 0 0
Cash Flow from Operating Activities 0 0 0 0 0 0 0
Purchases of property & equip., & other capital expenditures 0 0 0 0 0 0
Other Investing Activities 0 0 0 0 0 0
Cash Flow from Investing Activities 0 0 0 0 0 0 0
Increase or (Decrease) in Debt 0 0 0 0 0 0
Increase or (Decrease) in Common Stock 0 0 0 0 0 0
Dividend Payments 0 0 0 0 0 0 Payments would be entered as a negative.
Other Financing Activities 0 0 0 0 0 0
Cash Flow from Financing Activities 0 0 0 0 0 0 0
Cumulative Translation Adjustment 0 0 0 0 0 0 0 For this course, we will assume zero change over 10 years.
NET CASH FLOW 0 0 0 0 0 0 0
Free Cash Flow 0 0 0 0 0 0 0
VALUATION CALCULATIONS
FREE CASH FLOW “FCF” (from above) 0 0 0 0 0 0 0 For the project analysis, we EXCLUDE the funding proceeds & repayment.
NET PRESENT VALUE “NPV” OF FUTURE FREE CASH FLOWS
NPV @ discount rate of 5.0% $0 For low-risk companies. The value here is what you may be willing to pay to buy the company under these assumptions.
NPV @ discount rate of 10.0% $0 For medium-risk companies. The value here is what you may be willing to pay to buy the company under these assumptions.
NPV @ discount rate of 18.0% $0 For high-risk companies. The value here is what you may be willing to pay to buy the company under these assumptions.
If you had bought the whole company at the end of fiscal 0 for its actual market value of —> $0 (From Financial History worksheet, = share price x # of shares)
Free Cash Flows w/Initial Investment 0 0 0 0 0 0 0 Initial Investment = initial cash outflow, which would be entered as a negative
Cumulative (initial cash outflow and future FCF’s) 0 0 0 0 0 0
Positive cumulative cash flows during the 10-year period? TRUE TRUE TRUE TRUE TRUE Breakeven point happens between the years when the negative cumulative NCF first changes to positive. (It could turn negative again in future years.) Discounted Payback Period formula needed to determine accurate year/months result.
Internal Rate of Return (IRR) ERROR:#NUM! IRR At this discount rate (IRR,) the present value of future cash flows (Cells F56 through O56) equals initial invesment (E56) aka NPV will equal $0. Consider what the result means especially if it’s negative. Also consider what forecasting additional years may do to this rate.
MODIFIED INTERNAL RATE OF RETURN (MIRR)
Financing Rate 0.0% <– This is the assumed cost to obtain financing. It could be the firm’s cost of equity (rate of return a shareholder requires for investing into the business).
Reinivestment Rate ERROR:#NUM! <– Assumes cash flows are reinvested at the IRR. In reality (vs. assumption), it might or might not equal the IRR from above.
MIRR ERROR:#NUM! MIRR
ECONOMIC VALUE ADDED (EVA), ALSO CALLED ECONOMIC PROFIT
Assumed Tax Rate (for NOPAT calculation below) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Net Operating Profit After Tax (NOPAT) 0 0 0 0 0 0 Profit (the P in NOPAT) = Income
Invested Capital 0 0 0 0 0 0
WACC ERROR:#DIV/0! 0.0% 0.0% 0.0% 0.0% 0.0%
EVA Cash Flows ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! EVA = Net Income – (Invested Capital x WACC)
NOTES: This introductory forecasting spreadsheet does not consider Terminal Value; the continuing value after the 5-year period.
We are only looking five years in the future for this introductory course but many analysts would forecast to 10 years.
Projections of future cash flows are always uncertain; consider doing several scenarios of cash flows, such as most likely, best case,
and worst case.
You should use a low discount rate to calculate NPV for low-risk projects such as replacing equipment; perhaps 5%. Use a higher rate, such as
10%, for medium-risk projects, and use a higher rate of, say, 15% or 20% for the riskiest projects. Company treasurer would have this information.

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Sheet1

Month -> 1 2 3 4 5 6 7 8 9 10 11 12
Interest Rate 0.8333% 0.8333% 0.8333% 0.8333% 0.8333% 0.8333% 0.8333% 0.8333% 0.8333% 0.8333% 0.8333% 0.8333%
Start of Month $1,000.00 $1,008.33 $1,016.74 $1,025.21 $1,033.75 $1,042.37 $1,051.05 $1,059.81 $1,068.64 $1,077.55 $1,086.53 $1,095.58
Interest Charge $8.33 $8.40 $8.47 $8.54 $8.61 $8.69 $8.76 $8.83 $8.91 $8.98 $9.05 $9.13
End of Month $1,008.33 $1,016.74 $1,025.21 $1,033.75 $1,042.37 $1,051.05 $1,059.81 $1,068.64 $1,077.55 $1,086.53 $1,095.58 $1,104.71

Help-Depreciation

DOES DEPRECIATION EXPENSE AFFECT CASH FLOW?
SITUATION
Suppose you have a really simple business: you’ve bought a new 3-D printer, and you rent it out to fellow SNHU students for $4000/yr.
The students who rent the printer are responsible for supplies and maintenance.
You estimate the printer’s useful life is 3 years, and at the end of that time you can sell it for $500.
Accounting rules require you to “recognize” the printer’s cost by spreading it over the estimated useful life.
YEAR 1 YEAR 2 YEAR 3 CUMULATIVE
1. You buy the printer for cash, & sell it 3 yrs later. Investment $ (10,000) $ – 0 $ 500 $ (9,500)
2. You rent it to other students for $4,000 / year Revenue $ 4,000 $ 4,000 $ 4,000 $ 12,000
3. You record depreciation expense for the printer Expense $ (3,167) $ (3,167) $ (3,167) $ (9,500)
Notice the “Cumulative” column: Cumulative depreciation equals cumulative cash flow. Depreciation is simply a spreading out of the cash flow.
IN A REALLY SIMPLE WORLD, YOUR FINANCIALS MIGHT LOOK LIKE THIS:
REVENUE $ 4,000 $ 4,000 $ 4,000 $ 12,000
Buying and Selling of 3-D Printer $ (10,000) $ – 0 $ 500 $ (9,500)
PRETAX PROFIT OR (LOSS), EQUALS PRETAX CASH FLOW $ (6,000) $ 4,000 $ 4,500 $ 2,500
Tax Refunds or (Payments), @ 40% Tax Rate $ 2,400 $ (1,600) $ (1,800) $ (1,000)
NET PROFIT OR (LOSS), EQUALS NET CASH FLOW $ (3,600) $ 2,400 $ 2,700 $ 1,500
Notice that the net profit line is rather lumpy.
BUT YOUR ACCOUNTING INCOME STATEMENTS WILL LOOK LIKE THIS:
REVENUE $ 4,000 $ 4,000 $ 4,000 $ 12,000
Depreciation Expense $ (3,167) $ (3,167) $ (3,167) $ (9,500)
OPERATING PROFIT OR (LOSS) $ 833 $ 833 $ 833 $ 2,500
Tax Provision Expense @40% Tax Rate $ (333) $ (333) $ (333) $ (1,000)
NET PROFIT (OR LOSS) $ 500 $ 500 $ 500 $ 1,500
Notice that the net profit line above is smooth, but the Cumulative column hasn’t changed.
AND YOUR CASH FLOW STATEMENTS (STANDARD FORMAT) WILL LOOK LIKE THIS:
Net Profit (Or Loss) from Above $ 500 $ 500 $ 500 $ 1,500
Add back: Depreciation Expense $ 3,167 $ 3,167 $ 3,167 $ 9,500
Change in Working Capital & Other Operating Activities $ – 0 $ – 0 $ – 0 $ – 0
Cash Flow From Operating Activities $ 3,667 $ 3,667 $ 3,667 $ 11,000
Capital Expenditures $ (10,000) $ – 0 $ – 0 $ (10,000)
Proceeds from Sale of Assets $ – 0 $ – 0 $ 500 $ 500
Cash Flow from Investing Activities $ (10,000) $ – 0 $ 500 $ (9,500)
Additional Paid-in Capital $ – 0 $ – 0 $ – 0 $ – 0
Dividends Paid $ – 0 $ – 0 $ – 0 $ – 0
Cash Flow from Financing Activities $ – 0 $ – 0 $ – 0 $ – 0
NET CASH FLOW $ (6,333) $ 3,667 $ 4,167 $ 1,500
Cash Balance at Beginning Of Year $ 10,000 $ 3,667 $ 7,333
Cash Balance at End of Year $ 3,667 $ 7,333 $ 11,500