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chapter3overview New - Chapter 3 Overview The need for...

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Chapter 3 Overview
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The need for financial statements By Lenders and investors Tax authorities Managers
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Annual report Two types of information used by investors to form expectations about future earnings and dividends 1) Verbal section – chairmen explains why things turned out the way they did 2) Quantitative section – states what actually happened in numerical terms. 1)balance sheet, 2)income statement, 3)statement of retained earnings, and 4)the statement of cash flows
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Balance sheet vs. income statement The balance sheet is a statement of the firm’s financial condition at a specific point in time vs. The income statement summarizes the firms income and expenses over an accounting period
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ABC corporation Balance Sheet as of 12/31/2007 Assets = Liabilities + Equity Cash + S.T.Securities 10 Accounts Payable 50 Accts Receivable 50 Notes Payable 50 Inventory 90 Accruals 5 Total Current Assets 150 Total Current Liab. 105 Long Term Debt 10 Gross Fixed assets 55 Preferred Stock 1 Less Depreciation 5 Common Stock 75 Net Fixed Assets 50 Retained Earnings 9 Total Equity 84 Total Assets 200 Total Liabilities +E 200
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Listing order of accounts on a balance sheet Assets to the left – divided into current assets and long term assets Liabilities and equity to the right. Liabilities divided into current liabilities and long term debt. Equity divided into common stock and retained earnings Assets are listed in order of their liquidity – i.e. how quickly they can be converted to cash Liabilities are listed in order in which they must be paid
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Liabilities + equity are claims against assets. Two types of claims - Liabilities and ownership equity Risk of asset value fluctuations is borne by the common stock holders (ownership equity). If receivables go bad then common stock holders equity is hurt – Liabilities remain untouched and unchanged
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Equity is broken into two parts common stk. and retained earnings Common stock comes about by issuing stock to raise capital Retained earning is built up over time as the firm makes money that is not paid out in dividends.
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Preferred stocks Preferred stocks are a hybrid between debt and common equity. The dividend is fixed so stockholders do not benefit if the company does well. Also preferred stock not hurt if assets become non performing.
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