ECO359S-2 - 1 ECO359 – Lecture 2 Financial Statements...

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Unformatted text preview: 1 ECO359 – Lecture 2 Financial Statements, Cash Flow Analysis Ata Mazaheri 2 Lecture Outline • Financial statements – The Balance sheet – The Income statement – Financial cash flow – Financial ratios • Estimating Cash Flow 3 The Balance Sheet • An accountant’s snapshot of the firm’s accounting value as of a particular date. • The Balance Sheet Identity is: Equity s r' Stockholde s Liabilitie Assets + ≡ 4 The Balance Sheet of the Canadian Composite Corporation (in $ millions) 20X2 and 20X1 Balance Sheet CANADIAN COMPOSITE CORPORATION Liabilities (Debt) Assets 20X2 20X1 and Stockholder's Equity 20X2 20X1 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 5 Balance Sheet Analysis • When analyzing a balance sheet, the financial manager should be aware of three concerns: 1.Liquidity • Refers to the ease and speed with which assets can be converted to cash • Current assets are the most liquid • The more liquid a firm’s assets, the less likely the firm is to experience problems meeting short-term obligation 2. Value versus cost • Audited financial statements of firms in Canada carry assets at historical cost adjusted for depreciation • Market value is a completely different concept. It is the price at which buyers and sellers trade the assets 6 Balance Sheet Analysis (Cont’d) • Preferred stock: Essentially a mix between a stock and a bond. Preferred stock is ownership in a company, just as common stock is. It generally pays a dividend and does not possess voting rights. In the event of a corporate liquidation, payment is guaranteed first to the company's bond holders, then preferred stock holders, then common stock holders. • Common stock: One of the two main classes of a corporation's stock [Preferred and Common]. Common stock gives the holder the right to vote at shareholder meetings and may or may not pay a dividend depending upon management's fiscal policies....
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ECO359S-2 - 1 ECO359 – Lecture 2 Financial Statements...

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