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Unformatted text preview: Chapter 3: Financial Statements, Cash Flow, and Taxes Learning Objectives 49 Chapter 3 Financial Statements, Cash Flow, and Taxes Learning Objectives After reading this chapter, students should be able to: Briefly explain the history of accounting and financial statements, and how financial statements are used. List the types of information found in a corporations annual report. Explain what a balance sheet is, the information it provides, and how assets and claims on assets are arranged on a balance sheet. Explain what an income statement is and the information it provides. Differentiate between net cash flow and accounting profit. Identify the purpose of the statement of cash flows, list the factors affecting a firms cash position that are reflected in this statement, and identify the three categories of activities that are separated out in this statement. Specify the changes reported in a firms statement of retained earnings. Discuss what questions can be answered by looking through the financial statements, and explain why investors need to be cautious when they review financial statements. Discuss how certain modifications to the accounting data are needed and used for corporate decision making and stock valuation purposes. In the process, explain the terms: net operating working capital, total operating capital, NOPAT, operating cash flow, and free cash flow; and explain how each is calculated. Define the terms Market Value Added (MVA) and Economic Value Added (EVA), explain how each is calculated, and differentiate between them. Explain why financial managers must be concerned with taxation, and list some of the most important elements of the current tax law, such as the differences between the treatment of dividends and interest paid and interest and dividend income received. 50 Integrated Case Chapter 3: Financial Statements, Cash Flow, and Taxes Answers to End-of-Chapter Questions 3-1 The four financial statements contained in most annual reports are the balance sheet, income statement, statement of retained earnings, and statement of cash flows. 3-2 Accountants translate physical quantities into numbers when they construct the financial statements. The numbers shown on balance sheets generally represent historical costs. When examining a set of financial statements, one should keep in mind the physical reality that lies behind the numbers, and the fact that the translation from physical assets to numbers is far from precise. 3-3 Bankers and investors use financial statements to make intelligent decisions about what firms to extend credit or invest in, managers need financial statements to operate their businesses efficiently, and taxing authorities need them to assess taxes in a reasonable way....
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This note was uploaded on 03/04/2009 for the course FIN 221 taught by Professor Dyer during the Spring '08 term at University of Illinois at Urbana–Champaign.
- Spring '08
- Corporate Finance