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Unformatted text preview: 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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