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chapter2a - Chapter 2 Financial Statements and Cash Flow...

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Chapter 2 Financial Statements and Cash Flow Issues: Book value vs. market value Accounting income vs. cash flow How to determine a firm’s cash flow from its financial statements
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The Balance Sheet A snapshot of firm’s assets and liabilities at a specific point in time Basic accounting identity: This identity holds both for book values and for market values Debt versus Equity: Assets = Liabilities + Stockholder’s equity Liabilities are obligations that require a payout of cash within a stipulated period. Stockholders’ equity is a claim against the firm’s assets that is residual and not fixed. 2
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3 U.S. Corporation Balance Sheet
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Market Value vs. Book Value Balance sheet reports book values of assets and liabilities Financial managers care primarily about market values -- For current assets, current liabilities, and most debt liabilities the distinction is unimportant --For fixed assets and equity, the distinction is often very important 4
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The Income Statement
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