Lecture 2

Lecture 2 - FIN 311 Instructor Syed Walid Reza Lecture 2...

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FIN 311 Instructor: Syed Walid Reza Lecture 2 Spring 2016
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Today: Chapter 2 Financial Statements, Taxes, and Cash Flow The Balance Sheet The Income Statement Taxes Cash Flow 2
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Balance sheet What is balance sheet? What’s the balance sheet identity? a. Total assets = Total liabilities + Shareholders’ equity? b. Total assets = Total liabilities – Shareholders’ equity? c. Total assets – Total liabilities = Shareholders’ equity? d. Current assets + Long-term assets = Short-term liabilities + Long-term debt + Shareholders’ equity? 3
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Balance sheet 4
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Net working capital NWC = Current assets – Current liabilities What’s the explanation? What kind of NWC signals good financial health of a firm? 5
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Balance sheet – Liquidity Ability to convert to cash quickly without a significant loss in value Liquid firms are less likely to experience financial distress So, hold as much cash as possible? Trade-off to find balance between liquid and illiquid assets 6
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Balance sheet – debt vs. equity
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