Chapter 2 Financial Statements

Chapter 2 Financial Statements - Chapter 2 Financial...

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Unformatted text preview: Chapter 2 Financial Statements. Taxes. and Cash Flow CORPORATE FINANCE l mafia-Mm. (x..qu c m p. n. Vh’m-udml rm“... r.‘ All a“: nutle Chapter Outline - The Balance Sheet - The Income Statement - Taxes - Cash Flow The Balance Sheet - The balance sheet is a snapshot of the firm's assets and liabilities at a given point in time - Assets are listed in order of decreasing liquidity - Ease of conversion to cash without significant loss of value - Balance Sheet Identity - Assets = Liabilities + Stockholders' Equity 3 Figure 2.1 Yolal Value 0! Assets Tel-I Value 0! Linbllitiel and Sharaholder!‘ Emmy Not Working Capital t Long-0am debt Shareholderf eqan Market vs. Book 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. - Market value and book value are oflen very different. Why? - Which is more important to the decision- making process? Income Statement - The income statement is more like a video of the firm's operations for a specified period of time - You generally report revenues first and then deduct any expenses for the period - Matching principle — GAAP says to recognize revenue when it is fully earned and match expenses required to generate revenue to the period of recognition Taxes - The one thing about taxes we can rely on is that they will always be changing - Marginal vs. average tax rates — Marginal — the percentage paid on the next dollar earned - Average - the tax bill / taxable income - Other taxes — Property taxes - Foreign taxes 6% 2. Example: Marginal vs. Average Rates - Suppose your firm earns 54 million in taxable income. - What is the firm's tax liability? — What is the average tax rate? — What is the marginal tax rate? - If you are considering a project that will increase the firm's taxable income by $1 million, what tax rate should you use in your analysis? The Concept of Cash Flow - Cash flow is one of the most important pieces of information that a financial manager can derive from financial statements - The statement of cash flows does not provide us with the same information that we are looking at here - We will look at how cash is generated from utilizing assets and how it is paid to those who finance the purchase of the assets Table 2.5 l VN n» no- minty :- cur- nu- ucmm wow-r mm.“ - mi my.“ MW“. “.1 .W N- 7-... w u N c-mno-‘onimma-nio-mi ‘aH-hw‘v-flalhmkv. L:—.-....M...i "1’!K‘(-.,r‘y‘lv)4'! if: ...
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This note was uploaded on 04/05/2011 for the course FIN 350 taught by Professor Debruinne during the Winter '11 term at Grand Valley State.

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Chapter 2 Financial Statements - Chapter 2 Financial...

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