Financial Managment2 - CONFIRMING PAGES PA RT T WO c ha p...

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22 AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO: ± ±Differentiate±between±accounting±value± (or “book” value) and market value. ± ±Distinguish±accounting±income±from± cash flow. Explain the difference between average and marginal tax rates. Determine a firm’s cash flow from its financial±statements.± LO 2 LO 1 LO 3 LO 4 Visit us at 2 chapter PART TWO Understanding Financial Statements and Cash Flow ±Financial±Statements,± Taxes, and Cash Flow I n this chapter, we examine f nancial statements, taxes, and cash F ow. Our emphasis is not on preparing f nancial statements. Instead, we recognize that f nancial statements are ±requently a key source o± in±ormation ±or f nancial decisions, so our goal is to brieF y ex- amine such statements and point out some o± their more relevant ±eatures. We pay special attention to some o± the practical details o± cash F ow. W hen a company announces a “write-off,” it frequently means that the value of the company’s assets has declined. For example, in the fi rst quarter of 2009, luxury homebuilder Toll Brothers said it was writing down $157 million in assets, much of which was a refl ection of the reduced value of land the company owned. Of course, Toll Brothers was not the only homebuilder suffering. Hovnanian Enterprises announced it would take a $132 million write-off, and Centex Corp. announced a $590 million write- off. At the same time, D. R. Horton, the largest homebuilder by volume, had a much smaller write-off of only $56 million. However, D. R. Horton had already writ- ten off $1.15 billion in the fourth quarter of 2008. So did stockholders in these homebuilders lose hundreds of millions of dollars (or more) because of the write-offs? The answer is probably not. Understanding why ultimately leads us to the main subject of this chapter: that all important substance known as cash f ow .
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CHAPTER 2 Financial Statements, Taxes, and Cash Flow 23 THE BALANCE SHEET 2.1 ±The±± balance sheet is a snapshot of the ² rm. It is a convenient means of organizing and summarizing what a ² rm owns (its assets ), what a ² rm owes (its liabilities ), and the differ- ence between the two (the ² rm’s equity ) at a given point in time. Figure 2.1 illustrates how the balance sheet is constructed. As shown, the left-hand side lists the assets of the ² rm, and the right-hand side lists the liabilities and equity. Assets: The Left-Hand Side Assets are classi² ed as either current or f xed ± .±A±² xed asset is one that has a relatively long life. Fixed assets can either be tangible , such as a truck or a computer, or intangible , such as a trademark or patent. A current asset has a life of less than one year. This means that the asset will normally convert to cash within 12 months. For example, inventory would normally be purchased and sold within a year and is thus classi² ed as a current asset. Ob- viously, cash itself is a current asset. Accounts receivable (money owed to the ² rm by its customers) is also a current asset.
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This note was uploaded on 08/18/2010 for the course ACCOUNTING Mktg 101 taught by Professor Smith during the Spring '10 term at DeVry Fresno.

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Financial Managment2 - CONFIRMING PAGES PA RT T WO c ha p...

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