Chap002(WW-FIN357)NT - Chapter 2 Financial Statements and...

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Unformatted text preview: Chapter 2 Financial Statements and Cash Flow Chapter Outline 2.1 The Balance Sheet 2.2 The Income Statement 2.3 Taxes 2.4 Net Working Capital 2.4 Financial Cash Flow 2.5 The Statement of Cash Flows Key Concepts and Skills Understand the information provided by financial statements Differentiate between book and market values Know the difference between average and marginal tax rates Know the difference between accounting income and cash flow Calculate a firms cash flow Sources of Information Annual reports Wall Street Journal Internet NYSE (www.nyse.com) Nasdaq (www.nasdaq.com) Text ( www.mhhe.com ) Yahoo finance (http://finance.yahoo.com) SEC EDGAR 10K & 10Q reports 2.1 The Balance Sheet Snapshot of the firms accounting (i.e., book) value as of a specific date. Balance sheet identity: Assets Liabilities + Stockholders Equity U.S.C.C. Balance Sheet (in $ millions) 20X2 and 20X1 Balance Sheet U.S. COMPOSITE CORPORATION Liabilities (Debt) Assets 20X2 20X1 and Stockholder's Equity 20X2 20X1 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 Balance Sheet Analysis Three concerns when analyzing a balance sheet: 1.Accounting liquidity 2.Debt versus equity 3.Value versus cost Accounting Liquidity Refers to the ease and quickness with which assets can be converted to cash. Current assets are the most liquid. Some fixed assets are intangible. The more liquid a firms assets, the less likely the firm is to experience problems meeting short-term obligations. Accounting Liquidity Liquid assets usually have lower rates of return than fixed assets. Cash in corporate checking accounts generates no return Marketable securities generate low, risk free rates of return Trade-off between too little and too much liquidity. Debt versus Equity When a firm borrows it gives the bondholders first claim on the firms cash flow....
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Chap002(WW-FIN357)NT - Chapter 2 Financial Statements and...

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