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Chapter 2

MGMT 3320 Chapter Notes - Chapter 2: Tax Shield, Accrual, Investment


Department
Management
Course Code
MGMT 3320
Professor
Elliot Currie
Chapter
2

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Chapter 2: Review of Accounting 01/27/2016
Outline:
Accounting and finance
Income statement
Income and value
Balance sheet (with IFRS impact)
Income and cash flow
Statement of cash flows
Free cash flow
Tax and financial decision
Summary and conclusion
Learning Objective
1. Prepare and analyze the four basic financial statements
2. Examine the limitations of the income statement as a measure of a
firms profitability
3. Examine the limitations of the balance sheet as a measure of a
firms financial position
4. Explain the importance of cash flows identified in the statement of
cash flows
5. Explain and apply the effects of IFRS (international financial
reporting standards) on financial analysis
6. Outline the effect of corporate tax considerations on after tax cash
flow
7. Identify the different forms of investment income and the effects on
investors taxes payable
8. Explain the concept of tax savings for companies
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Notes 01/27/2016
LO 1:
Accounting and Finance
Finance is about making decisions to produce value
It is important to understand a firms past and present financial
position
Accounting provides such information
Information is organized into 4 financial statements:
oIncome Statement
oStatement of Retained Earnings
oBalance Sheet
oStatement of Cash Flows
The Income Statement
An income statement measures profitability for a time period (e.g.
month, 1 year)
Assists financial decision making and analysis, utilizing past
patterns for predicting the timing, uncertainty, and amount of
future earnings and cash flows.
Revenues from customers for services or merchandise
Expenses from vendors for merchandise, services or supplies
Can be prepared in steps
Revenues – (less) Expenses = Net Incomes
Gross Profit: Sales (revenues) less cost of goods sold (direct costs
related to sales). May contain some fixed costs but exclude
overheads.
Contribution Margin: sales less variable costs
Operating Income: gross profit minus selling and admin expenses
and amortization (or fixed costs from contribution margin)
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Operating Profit: (earnings before interest and taxes) a measure
of how efficient management is in generating revenues and
controlling expenses
Earnings: (or net income / loss): operating profit is adjusted for
revenues and expenses not related to operational matters.
Classifications on the Income Statement
Step 1: Sales – (less) Cost of Goods Sold
o= Gross Profit
Step 2: Gross Profit – (less) Operating Expenses
o= Operating Profit
Step 3: Operating Profit – (less) Interest Expense
o= Earnings before Taxes
Step 4: Earnings before Taxes – (less) Income Taxes
o= Earnings after Taxes
Table 2-1 shows the Income Statement
It is presented in an multi-step format to better allow the user to
analyze and examine the profit or loss after each major type of
expense item.
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