Chapter_02 - 2 Financial Statements Taxes and Cash Flows...

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2 2 Financial Statements, Taxes, and Cash Flows
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2-2 The Balance Sheet - Figure 2.1 The Balance Sheet - Figure 2.1 The balance sheet is a snapshot of the firm’s assets and liabilities at a given point in time Balance Sheet Identity: Assets = Liabilities + Stockholders’ Equity
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2-3 Balance Sheet: Assets Balance Sheet: Assets Assets are listed in order of liquidity Current assets (<1 year) more liquid than fixed (long-term) assets Liquidity means ease of conversion to cash without significant loss of value Examples of current assets: cash, marketable securities, inventory, accounts receivable Examples of fixed assets: PP&E, patents, long-term investment in securities Assets can be tangible (truck, machine), or intangible (patents)
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2-4 Balance Sheet: Balance Sheet: Liabilities and Owners’ Equity Liabilities and Owners’ Equity Liabilities are either current (<1yr.) or long- term. Examples of current liabilities: notes, long-term debt payable within one year, accounts payable, taxes payable, salaries payable, etc. Long-term liabilities and owners’ equity are a firm’s long-term sources of funds Bonds and stocks (equity)
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2-5 Balance Sheet (cont’d) Balance Sheet (cont’d) Net Working Capital Current Assets – Current Liabilities Positive when the cash that will be received over the next 12 months exceeds the cash that will be paid out Usually positive in a healthy firm Three things to keep in mind with examining a balance sheet: liquidity, debt versus equity, and market value versus book value
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2-6 Liquidity Liquidity Ability to convert to cash quickly without a significant loss in value Liquid firms are less likely to experience financial distress But liquid assets earn a lower return Trade-off to find balance between liquid and illiquid assets; to put it another way, a balance between risk and return.
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