Lecture2 - Lecture 2 - Financial Statements,Income...

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Lecture 2 - Financial Statements,Income Statements and Cash Statements by Diep Duong 1 JUN 2010
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Table of contents 1 Balance Sheet Asset,Liability and Owner Equity Asset, Liability and Liquidity Balance Sheet and Value of Firm 2 Income Statement Taxes 3 Cash Flows and Statement of Cash Flows Cash Flows Statement of Cash Flows
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Balance Sheet Balance Sheet Balance Sheet keeps track of What firm owns (Asset) What firm owes (Liability) How much owners invest in the firm (Owner’s equity) The balance sheet is a snapshot of the firms assets and liabilities at a given point in time Asset and investment decisions Liabilities, owner’s equity and financing decision Balance sheet is important as it provides information to the public Example: In the case of IPO, investors need to know Balance Sheet . .. BS could be seen as one of health indicators of firms BS and financial ratios () 1 JUN 2010 1 / 27
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Balance Sheet Asset,Liability and Owner Equity Asset, Liablity and Owner Equity How to arrange asset and liability items in balance sheet ? Asset: On the left side of Balance Sheet Assets are divided into several catetories Short life (Current Asset) Long life (Fixed Asset) Liability and Owner’s Equity: On the right side Liability (Debt) Short life (Current Liabilities) Long Life (Long-term Debt) Assets are listed in order of decreasing liquidity which means Ease of conversion to cash Without significant loss of value () 1 JUN 2010 2 / 27
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Balance Sheet Asset,Liability and Owner Equity A Sample Simplified Organizational Chart Figure: () 1 JUN 2010 3 / 27
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Balance Sheet Asset,Liability and Owner Equity Asset, Liablity and Owner Equity Current Asset Cash Account Receivable Inventory ... Fixed Asset Tangible Assets Intangible Assets Current Liability Account Payable Note Payable .... Owner’s Equity: What left afer paying all debts Balance sheet Identity: Assets = Liabilities + Stockholders Equity Decision made by financial managers and balance sheet Investment decisions: Purchase and Sales of Assets - Left side of BS () 1 JUN 2010 4 / 27
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Balance Sheet Asset, Liability and Liquidity Current Asset, Current Liablity and Liquidity In short term, what matters is how much cash firm can generate Short term or current value of cash is summarized by Net Working Capital (NWC) NWC = Current Asset - Current Liablity Positive when the cash that will be received over the next 12 months exceeds the cash that will be paid out Usually positive in a healthy firm Liquidity and NWC Illiquid asset does not help in generating cash Relationshipo between Liquidity and Healthy Firm, Illiquidity and Unhealthy Firms ? For example, firm in Financial Distress
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This note was uploaded on 07/01/2010 for the course ECON 393 taught by Professor D during the Spring '10 term at Rutgers.

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Lecture2 - Lecture 2 - Financial Statements,Income...

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