FM_ch2_notes2 - Chapter 2 Financial Statements Cash Flows...

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Chapter 2: Financial Statements, Cash Flows, and Taxes The Four Principal Financial Statements Income Statement Provides the firm’s financial operating results for a specified period Monthly statements are typically prepared for use by management o Quarterly statements must be made available to shareholders of publically owned companies Sales revenue = total dollar amount of sales during the period Cost of goods sold = total direct cost of producing or purchasing the product sold (direct materials, direct labour, and direct factory overhead) The difference between sales revenue and COGS is gross margin Operating Expenses includes selling expense, general administrative expense, lease expense and amortization expense o Operating expenses are deducted from gross margin Amortization is associated with capital assets (assets that have an expected life of more than a year) Operating earnings are often called earnings before interest and taxes , EBIT Balance Sheet: a summary statement of the firm’s financial position at a given point in time Assets = Liabilities + Equity Assets are listed beginning with the most liquid down to the least liquid (i.e. cash would be before equipment) Intangible assets cannot be seen or touched, but are valuable o Goodwill is created when a business is purchased and the amount paid for the business is greater than the worth of the assets Common equity consists of two things: the value of common shares and retained earnings Retained earnings is not cash & cannot be used to pay expenses or purchase assets (represents profits that have been made) Statement of Retained Earnings: Change in retained earnings from one year to the other Changes are based on net income after tax Statement of Cash Flows: Summary of inflows and outflows of cash over the same period of time as the balance sheet Contains operating, investment and financing cash flows & reconciles them with changes in its cash and marketable securities The Firm’s Cash Flows: 1
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