Parrino Chpt 3

Parrino Chpt 3 - Session_02_Lecture MGMT640: Session II...

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Session_02_Lecture MGMT640: Session II Financial Statements, Cash Flows, and Taxes Learning Objectives 1. Discuss generally accepted accounting principles (GAAP) and their importance to the economy. 2. Know the balance sheet identity, and explain why a balance sheet must balance. 3. Describe how market-value balance sheets differ from book-value balance sheets. 4. Identify the basic equation for the income statement and the information it provides. 5. Explain the difference between cash flows and accounting income. 6. Explain how the four major financial statements discussed in this chapter are related.
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7. Discuss the difference between average and marginal tax rates. Chapter Outline 3.1 Financial Statements and Accounting Principles A. Annual Reports The annual report is a vehicle by which management communicates with the firm’s shareholders and members of the public. The annual report has three sections—a financial summary related to the past year’s performance; information about the company, its products, and its activities; and audited financial statements, including historical financial data. B. Generally Accepted Accounting Principles (GAAP)
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These are accounting rules and standards that companies need to adhere to when they prepare financial statements and reports. GAAP is prepared by the Financial Accounting Standards Board (FASB) and is authorized by the SEC. C. Fundamental Accounting Principles The Assumption of Arm’s-Length Transaction Two parties involved in an economic transaction arrive at a decision independently and rationally. The Cost Principle Transactions are recorded at the cost at which they occurred. The Realization Principle —Revenue is recognized when transaction is completed, while cash may not be collected until a later time. The Matching Principle —Expenses related to generating any revenue are matched.
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The Going Concern Assumption —It is assumed that a company will continue to operate for the predictable future. D. International GAAP The International Accounting Standards Board promotes uniform accounting rules and procedures. All European Union firms are expected to comply with International Accounting Standards (IAS), since 2007. The SEC does not recognize IAS and requires foreign firms listed on U.S. stock exchanges to use U.S. GAAP. 3.2 The Balance Sheet A. This financial statement identifies all the assets and liabilities of a firm at a point in time.
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The left-hand side of the balance shows all the assets that the firm owns and uses to generate revenues. The right-hand side represents the liabilities of the firm—that is, the money that the firm has borrowed from both creditors and shareholders. In addition to the amount borrowed from
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This note was uploaded on 02/14/2011 for the course MGMT 640 taught by Professor Bathala during the Spring '09 term at UMBC.

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Parrino Chpt 3 - Session_02_Lecture MGMT640: Session II...

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