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

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Lecture 2 - Financial Statements,Income Statements and Cash Statements by Diep Duong 20 JAN 2011
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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 () Lecture 2 - Financial Statements,Income Statements and Cash Statements 20 JAN 2011 1 / 26
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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 Short-term (Current Asset) Long-term (Fixed Asset) Liability and Owner’s Equity: On the right side Liability (Debt) Short-term (Current Liabilities) Long-term (Long-term Debt) Owner’s Equity Assets are listed in order of decreasing liquidity Ease of conversion to cash (lengh of time) Without significant loss of value Liability items are listed in order of payment () Lecture 2 - Financial Statements,Income Statements and Cash Statements 20 JAN 2011 2 / 26
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Balance Sheet Asset,Liability and Owner Equity A Sample Simplified Organizational Chart Figure: () Lecture 2 - Financial Statements,Income Statements and Cash Statements 20 JAN 2011 3 / 26
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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 .... Long-term debt 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 () Lecture 2 - Financial Statements,Income Statements and Cash Statements 20 JAN 2011 4 / 26
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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 liquid assets - lower return (a measure of payoff) iliquid assets- higher return but higher risk
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