ch2 financial statements

ch2 financial statements - Financial Statement Objectives...

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Unformatted text preview: Financial Statement Objectives of this notes 1. Reading financial statement. What is the firm current state (assets, capital structure, and value) 2. Reading income statement. Evaluate firms earnings this year 3. Construct cash flows and evaluate how the earnings are distributed to buy new assets and change the capital structure Balance sheet is a snapshot of the firm ( stock variable, [ state ]). Measures current financial state of the firm. Total value of assets Total value of the firm to investors Current assets Fixed assets 1 . tangible fixed assets 2 . intangible fixed assets Current liabilities Long term debt Shareholders equity Shareholders equity = assets - liabilities; Assets Fixed (long-life) Current ( < year) 1. tangible (trucks, computers) 2. intangible (trademark, patent) inventory, cash, accounts receivable capital assets 1 Liabilities Long-term debt Current (account payable) Firm value = summationdisplay assets = summationdisplay liabilities + equity current asset (cash available for the next month) - current liabilities (cash that must be paid in the next month) = net working capital ( NWC ). NWC measures liquidity of the firm, its ability to finance current operations (NWC is positive if cash received within next 12 month exceeds cash paid within next 12 month). Long-term debt comes from a variety of sources and the creditors are called bondholders (long-term debt [firm] = bond [creditor]). Assets def = Liabilities + Equity Canadian Enterprizes Limited 1997 1998 1997 1998 Assets Liabilities and owners equity Current assets Current Cash 114 160 accounts payable 232 266 account receivable 445 688 notes payable 196 183 Inventory 553 555 Total 1,112 1,403 Total 428 389 Long-term debt 408 454 Fixed Owners equity Net, plant and equip- ment 1,644 1,709 common shares 600 640 retained earnings 1,320 1,629 Total 2,920 2,269 Total 2,756 3,112 Total liabilities and owners equity 2,756 3,112 2 In 1998: debt bracehtipupleft bracehtipdownrightbracehtipdownleft bracehtipupright 454 + equity bracehtipupleft bracehtipdownrightbracehtipdownleft bracehtipupright 2 , 269 = 2 , 723 (long-term financing); debt financing is 16.67% Asset side reflects managerial decision about how much liquidity to have and how much to hold in fixed assets. The liability side reflects the managerial decision about the capital structure of the firm (financial leverage = use more...
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This note was uploaded on 03/06/2011 for the course FN 361 taught by Professor Larson during the Spring '11 term at Clarkson University .

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ch2 financial statements - Financial Statement Objectives...

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