Chapter02 - Outline Chapter 2. Financial Statements, Taxes,...

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Outline Chapter 2. Financial Statements, Taxes, and Cash Flow The Balance Sheet The Income Statement Cash Flow Taxes Summary and Conclusions
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L02-2 Balance Sheet In order to make financial decisions, one has to rely on financial statements . Our emphasis on this chapter is not on preparing financial statements, but to examine financial statements and point out some of the pitfalls. We then show how we can get the information on cash flow from financial statements. We should pay particular attention to two important differences: 1. the difference between accounting value and market value 2. the difference between accounting income and cash flow . Balance sheet is a snapshot of the firm. It is a convenient means of organizing and summarizing what a firm owns (its assets ), what a firm owes (its liabilities ), and the differences between the two (the firm’s equity ) at a given point in time. As shown in Figure 2.1, the left side lists the asset of the firm, and the right side lists the liabilities and equity. In other words, the right side shows how the assets are financed.
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L02-3 Balance Sheet Fig. 2.1 Assets are classified as either current or fixed. A current asset has a life of less than one year and listed according to the liquidity ; Cash, Accounts Receivable, Inventory A fixed asset is one that has a relatively long life. Fixed assets can be either tangible , such as a truck or a computer, or intangible , such as a trademark or patent.
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L02-4 Balance Sheet (continued) Liabilities are classified as either current or long-term. Current liabilities are the liabilities with less than one year maturity and listed according to the maturity ; Accounts payable, Notes payable. Long-term liability is a debt that is not due in the coming year . Finally, the shareholder’s equity is the difference between the total value of assets and the total value of liabilities. It is also called common equity or owners’ equity . This is a residual claim on the firm in the sense that if the firm were to sell all its assets and pay off debts, then whatever left is the shareholders’ equity. The balance sheet “ balances ” because the value of the left side always equals to the value of the right side. That is, Assets = Liabilities + Shareholders’ equity (Balance Sheet Identity)
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Balance Sheet (continued) The difference between a firm’s current asset and its current liabilities is called the net working capital . Net Working Capital (NWC) = Current Assets – Current Liabilities NWC is positive when current assets exceeds current liabilities, which means the cash that will become available over the next 12 months exceeds the cash that must be paid over the same period. So, a healthy firm usually has a positive NWC.
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This note was uploaded on 04/13/2010 for the course TECHNOLOGY 032913 taught by Professor Hong during the Spring '08 term at 서울대학교.

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Chapter02 - Outline Chapter 2. Financial Statements, Taxes,...

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