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chapter_2_notes - CHAPTER 2 FINANCE 300 Spring 2010 HANDOUT...

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CHAPTER 2 HANDOUT II FINANCE 300 FINANCIAL STATEMENTS Spring 2010 FINANCIAL ANALYSIS Financial Statements report both on a firm's position at a point in time and on its operations over some past period. Managers use past financial statements to review performance and identify actual or potential problems (financial statement analysis, ratio analysis). Investors and creditors also use historic statements to investigate past performance and project future results. Financial statements can reveal problems or potential problems, including poor or ineffective management practices. The real importance for investors of financial statements lies in the fact that they can be used to help predict the firm's future earnings and dividends. From management's standpoint financial statement analysis is important to review past performance and is useful as a way to anticipate future conditions and more important as a starting point for planning actions that will influence the future value of the firm. Managers prepare future financial statements (pro formas) that reflect the results of their plans and what they anticipate as to the future performance and financial position of the company. REMEMBER: Cash is the lifeblood of every business not profits. Primary focus of the financial manager is increasing the value of the firm (stock price). Income Statement : FLOW, PERFORMANCE REPORT- represents the performance of the firm for some specified time period. Measures REVENUE generated for that period and to it we match all associated expenses. Profit and Loss Statement Balance Sheet : STOCK, FINANCIAL POSITION OF THE FIRM-Left Hand Side is the INVESTMENTS or ASSETS and the Right Hand side is the FINANCING MIX or the LIABILITIES AND EQUITY Statement of Cash Flow : FLOW, SUMMARY OF CASH FLOW- Where cash came from, how it was used and cash balance.
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