fin1 - Financial Statements and Cash Flow: An Overview...

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ECON 333 Spring 08 1 Financial Statements and Cash Flow: An Overview Accounting is not the same as finance, but if you don’t understand the basics of accounting, you don’t understand finance, either. An expert
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ECON 333 Spring 08 2 Financial Statements and Cash Flow Learning objectives: – Interpret the information contained in the balance sheet, income statement, and the statement of cash flows. – Distinguish between book and market values. – Understand the essential features of the taxation of corporate and personal income, and know the difference between average and marginal tax rates. – Understand and explain the difference between accounting income and cash flow. – Calculate a firm’s cash flow.
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ECON 333 Spring 08 3 This section focuses on: 1- The Balance Sheet 2- The Income Statement 3- Taxes 4- Net Working Capital 5- Financial Cash Flow 6- The Accounting Statement of Cash Flows
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ECON 333 Spring 08 4 The Balance Sheet The Balance Sheet is a financial statement that shows the firm’s assets and liabilities at a particular time (from an accounting perspective). The Balance Sheet identity: Assets Liabilities + Stockholder’s Equity The first important point to notice is that the assets (LHS of the table) are listed in order by the length of time it would normally take a firm with ongoing operations to convert them into cash.
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ECON 333 Spring 08 5 The Balance Sheet •. The Main Balance Sheet Items Current Assets Cash & Securities Receivables Inventories + Fixed Assets Tangible Assets Intangible Assets Current Liabilities Payables Short-term Debt + Long-term Liabilities + Shareholders’ Equity =
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ECON 333 Spring 08 6 The Balance Sheet: An illustration . 2007 2006 2007 2006 Current assets: Current Liabilities: Cash and equivalents $140 $107 Accounts payable $213 $197 Accounts receivable 294 270 Notes payable 50 53 Inventories 269 280 Accrued expenses 223 205 Other 58 50 Total current liabilities $486 $455 Total current assets $761 $707 Long-term liabilities: Fixed assets: Deferred taxes $117 $104 Property, plant, and equipment $1,423 $1,274 Long-term debt 471 458 Less accumulated depreciation (550) (460) Total long-term liabilities $588 $562 Net property, plant, and equipment 873 814 Intangible assets and other 245 221 Stockholder's equity: Total fixed assets $1,118 $1,035 Preferred stock $39 $39 Common stock ($1 per value) 55 32 Capital surplus 347 327 Accumulated retained earnings 390 347 Less treasury stock (26) (20) Total equity $805 $725 Total assets $1,879 $1,742 Total liabilities and stockholder's equity $1,879 $1,742 U.S. Composite Corporation Balance Sheet
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ECON 333 Spring 08 7 The Balance Sheet: How to analyze it? When analyzing a balance sheet, one should be aware of three concerns: 1. Liquidity 2. Debt versus equity 3. Value versus cost
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ECON 333 Spring 08 8 The Balance Sheet: How to analyze it? •L i q u i d i t y : – Refers to the ease and quickness with which assets can be converted to cash—without a significant loss in value – Current assets are the most liquid.
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This note was uploaded on 02/18/2008 for the course ECON 3330 taught by Professor Mbiekop during the Spring '08 term at Cornell University (Engineering School).

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fin1 - Financial Statements and Cash Flow: An Overview...

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