Chap2 - Financial Statement and Cash Flows

Chap2 - Financial Statement and Cash Flows - Financial...

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Unformatted text preview: Financial Statements and Cash Flow Chapter 2 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 Chapter Outline 2.1 The Balance Sheet 2.2 The Income Statement 2.3 Taxes 2.4 Net Working Capital 2.5 Financial Cash Flow 2.6 The Accounting Statement of Cash Flows 2.1 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 U.S. Composite Corporation Balance Sheet 2007 2006 2006 2005 Current assets: Current Liabilities: Cash and equivalents $140 $107 Accounts payable $213 $197 Accounts receivable 294 270 Notes payable 50 53 Inventories 269 280 Accrued expenses 223 205 Other 58 50 Total current liabilities $486 $455 Total current assets $761 $707 Long-term liabilities: Fixed assets: Deferred taxes $117 $104 Property, plant, and equipment $1,423 $1,274 Long-term debt 471 458 Less accumulated depreciation (550) (460) Total long-term liabilities $588 $562 Net property, plant, and equipment 873 814 Intangible assets and other 245 221 Stockholder's equity: Total fixed assets $1,118 $1,035 Preferred stock $39 $39 Common stock ($1 per value) 55 32 Capital surplus 347 327 Accumulated retained earnings 390 347 Less treasury stock (26) (20) Total equity $805 $725 Total assets $1,879 $1,742 Total liabilities and stockholder's equity $1,879 $1,742 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. Clearly, cash is much more liquid than property, plant, and equipment. Balance Sheet Analysis When analyzing a balance sheet, the Finance Manager should be aware of three concerns: 1. Accounting liquidity 2. Debt versus equity 3. Value versus cost Accounting 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. 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. Value versus Cost Under Generally Accepted Accounting Principles (GAAP), audited financial statements of firms in the U.S. carry assets at cost....
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Chap2 - Financial Statement and Cash Flows - Financial...

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