Chapter 2 Notes

Chapter 2 Notes - Chapter 2 Financial Statements Taxes and Cash Flow The Balance Sheet Balance sheet financial statement showing a firms accounting

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Chapter 2: Financial Statements, Taxes, and Cash Flow The Balance Sheet - Balance sheet - financial statement showing a firm’s accounting value on a particular date - Snapshot of the firm - Convenient means of organizing and summarizing what a firm owns (its assets), what a firm owes (its liabilities), and the difference between the two (the firm’s equity) at a given point in time - Figure 1.2 Assets: The Left Side - Classified as current or fixed - Fixed asset - one that has a relatively long life and can either be tangible or intangible - Current asset - has a life of one year-means asset will be converted to cash within 1 year o Cash and accounts receivable Liabilities and Owners’ Equity: The Right Side - Liabilities o First thing listed on the right side o Classified as either current or long-term o Current liabilities - have a life of less than one year and are listed before long-term liabilities o Accounts payable are listed as a current liability o A debt not due in the current year is classified at a long-term liability o Tend to use the terms bond and bondholders generically to refer to long-term debt and long-term creditors - Owners’ Equity
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o Owners’ Equity - difference between the total value of assets and the total value of liabilities o If the firm were to sell all its assets and pay off all debt, owners’ equity is what would be left o Assets = Liabilities + Stockholders’ Equity Net Working Capital - Net working capital - the difference between current assets and current liabilities - The cash that will become available over the next 12 months - Current assets are listed by liquidity; current liabilities by which you pay first - Structure of assets for a particular firm reflects the line of business the firm is in and also managerial decisions about how much cash and inventory to have and about credit policy, fixed asset acquisition, and so on. - Liabilities side primarily reflects managerial decisions about capital structure and the use of short-term debt - 3 important things to remember when examining a balance sheet: 1) Liquidity 2) Debt versus Equity 3) Market Value versus Book Value Liquidity - Liquidity - the speed and ease with which an asset can be converted to cash - 2 dimensions: o Ease of Conversion versus Loss of Value - A highly liquid asset can be quickly sold without significant loss of value - An illiquid asset is one that cannot bet quickly converted to cash without a substantial price reduction - Assets are usually listed in decreasing liquidity - Inventory is most likely the least liquid of current assets - Fixed assets are relatively illiquid ~ 2 ~
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Chapter 2 Notes - Chapter 2 Financial Statements Taxes and Cash Flow The Balance Sheet Balance sheet financial statement showing a firms accounting

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