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Lecture 3 Financial Statements (3).pdf - 3 Financial...

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3Financial StatementsAnnual ReportA report issued annually by a corporation to its stockholders. It contains basicfinancial statements as well as management’s analysis of thefirm’s past operationsand future prospects.Four basic financial statements:The Balance SheetThebalance sheetis a “snapshot” of a firm’s position at a specific point in time.The left side of the statement shows the assets that the company owns, and the right side shows thefirm’sliabilities andstockholders’ equity,which are claims against the firm’s assets.
Cash versus other assets.Although assets are reported in dollar terms, only the cash and equivalentsaccount represents actual spendable money.Working capital.Current assets are often calledworking capitalbecausethese assets “turn over”; that is,they are used and then replaced throughout the year.Net Working Capital(NWC)Current assets minus current liabilities.NWC (Net Working Capital)=Current assetscurrent liabilities.2018
Net Operating Working Capital(NOWC)Operating current assets minus operating currentliabilities.When calculating NOWC, first analysts make an estimate of excess cash and subtract this from thecompany’scurrent assets to get the company’s operating current assets.Second, when looking at acompany’s current liabilities, analysts distinguish between its “free” liabilities(accruals and accounts payable) and its interest-bearing notes payable. These interest-bearing liabilities aretypically treated as a financing cost, rather than an operating cost, which explains why they are notincluded as part of thecompany’s operating current liabilitiesNOWC = Current Assets(Current LiabilitiesNotes Payable)
Total debt versus total liabilities.A company’s total debt includes both its short term and long-terminterest-bearing liabilities. Total liabilities equal totaldebt plus the company’s “free” (non-interest bearing)liabilities.Other sources of funds.Most companies finance their assets with a combination of short-term debt, long-term debt, and commonequity.Some companies alsouse “hybrid” securities such aspreferred stock, convertible bonds, and long-termleases.Preferred stock is a hybrid between common stock and debt, while convertible bonds are debt securitiesthat give the bondholder an option to exchange their bonds for shares of common stock. In the event ofbankruptcy, debt is paid off first, and then preferred stock. Common stock is last, receiving a payment onlywhen something remains after the debt and preferred stock are paid off.Depreciation.Most companies prepare two sets of financial statementsOne is based on Internal Revenue Service (IRS) rules and is used to calculate taxes;The other is based on GAAP and is used for reporting to investors.

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Term
Spring
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Generally Accepted Accounting Principles

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