SMN224 Financial statements and cash flow.pptx - Financial statements and cash flow a reminder SMN 224 – Corporate Finance Dr Mingzhu Wang Key

SMN224 Financial statements and cash flow.pptx - Financial...

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Financial statements and cash flow: a reminder SMN 224 Corporate Finance Dr. Mingzhu Wang
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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 firm’s cash flow
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Outline 1 The Balance Sheet 2 The Income Statement 3 Taxes 4 Net Working Capital 5 Financial Cash Flow
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1. The Balance Sheet An accountant’s snapshot of the firm’s accounting value at a specific point in time The Balance Sheet Identity is: Assets ≡ Liabilities + Stockholder’s Equity
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Ryanair Holdings plc’s 2007 balance sheet (in €m) 2007 2007 Current assets: Current Liabilities: Cash and equivalents 1,459.606 Trade payables 55.727 Trade receivables 24.519 Accrued expenses 676.863 Inventories 2.777 Current tax 42.300 Other 763.013 Total current liabilities 1,064.345 Total current assets 2,249.915 Long-term liabilities: Fixed (non-current) assets: Deferred taxes 153.824 Available for sale financial assets 325.478 Long-term debt 1,874.165 Total long-term liabilities 2,229.277 Property, plant, and equipment 3,252.192 Intangible assets 46.841 Shareholder's equity: Total fixed (non-current) assets 3,624.511 Issued share capital 9.465 Share premium account 591.400 Retained earnings 2,059.991 Other reserves (80.052) Total equity 2,580.804 Total assets €5,874.426 Total liabilities and shareholder's equity €5,874.426 The assets are listed in order by the length of time it would normally take a firm with ongoing operations to convert them into cash (degree of liquidity ) Clearly, cash is much more liquid than property, plant, and equipment. Other 289.455 Other 201.288
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Balance Sheet Analysis When analyzing a balance sheet, the Finance Manager should have three concerns: 1. Liquidity 2. Debt versus equity 3. Value versus cost
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Liquidity 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 Some fixed assets are intangible The more liquid a firm’s assets, the less likely the firm is to experience problems meeting short-term obligations Liquid assets frequently have lower rates of return than fixed assets
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Debt versus Equity Creditors generally receive the first claim on the firm’s cash flow Shareholder’s equity is the residual difference between assets and liabilities
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Value versus Cost Book value of a firm’s assets = accounting value There are different standards to report the value of assets Since 2005 EU countries have been using International Financial Reporting Standards (IFRS), which record assets at fair or market value Whereas the US continue to use Generally Accepted Accounting Principles (GAAP), which record assets at cost Market value is the price at which the assets, liabilities, and equity could actually be bought or sold, which is a completely different concept from historical cost.
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2. The Income Statement Measures financial performance over a specific period of time The accounting definition of income is: Revenue – Expenses ≡ Income
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  • Fall '17
  • Prof. Yvan Nezerwe

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