Chapter 2&3

Chapter 2&3 - Cash Flows and Fi Financial Analysis...

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Cash Flows and Financial Analysis -- Chapter 2 & 3 Instructor: Yihui Wang Cash Flows and Financial Analysis
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Main Issues • Decipher financial statements Book value vs. market value Accounting income vs. cash flows • Calculate cash flows • Financial Ratio Analysis Cash Flows and Financial Analysis 2
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Financial Statements HE FIRM THE REST RANSACTIONS THE FIRM OF THE WORLD TRANSACTIONS FINANCIAL ACCOUNTING BALANCE SHEET INCOME STATEMENT Cash Flows and Financial Analysis 3
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Key Financial Statements • Balance Sheet Records the value of firms assets “Stock” item – a snapshot at a point in time • Income Statement Accounting creation to measure performance “Flow” measure over a period of time Cash Flows and Financial Analysis 4
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Deciphering Accounting Statement f A t i S t t t • Purpose of Accounting Statements Standardized reporting structure for a very complicated set of information for customers, suppliers, creditors, shareholders, government … Accounting statements follow GAAP • Accounting numbers are generally not enough in i l l i financial analysis Assets and liabilities as reported do not reflect current market values. Timing is different (realization principle) They are historical and do not provide information about future income and cash flows Cash Flows and Financial Analysis 5
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Balance Sheet • Assets are listed in order of liquidity Liquidity: Ease of conversion to cash without significant loss of value Current asset/liability: less than one year • Balance Sheet Identity Assets = Liabilities + Stockholders’ Equity Cash Flows and Financial Analysis 6
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Balance Sheet Cash Flows and Financial Analysis 7
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alance Sheet Balance Sheet Cash Flows and Financial Analysis 8
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alance Sheet Balance Sheet et Working Capital (NWC)=CA L Net Working Capital (NWC)=CA – CL Should it be positive or negative for a healthy firm? Why? •L i quidity Liquid firms are less likely to experience financial distress But liquid assets earn a lower return • Book Value vs. Market Value The balance sheet provides the book value of the assets, liabilities and equity Market value is the price at which the assets, liabilities or equity can actually be bought or sold. arket value and book value are often very different. Which one is more Cash Flows and Financial Analysis Market value and book value are often very different. Which one is more important for us?
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Chapter 2&3 - Cash Flows and Fi Financial Analysis...

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