3 Financial Statement Analysis

3 Financial Statement Analysis - Click to edit Master...

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Unformatted text preview: Click to edit Master subtitle style Introduction to Financial Statement Analysis Functions of Financial They provide information to the owners and creditors of the firm about the companys current status and past financial performance l Financial statements provide a convenient way for owners and creditors to set performance targets and to impose restrictions on the managers of the firm. l Financial statements provide convenient 22 The Balance Sheet The balance sheet is a snapshot of the firms assets and liabilities at a given point in time l Assets are listed in order of liquidity, i.e. e ase of conversion to cash without significant loss of value Many countries do the reverse l Liabilities are listed in order of time to maturity 33 Assets Assets are divided into current assets and long-term assets. Current assets are: Cash and marketable securities Accounts receivable Inventories Other current assets, such as prepaid expenses l Long-term assets include net property, plant and equipment (net PP&E). 44 Assets When a firm acquires another firm, it will acquire a set of assets that must be listed on its balance sheet. Often it will pay more for these assets than their book value on the acquired firms balance sheet. l The difference is listed as goodwill. l Trade-marks, patents and other such assets, along with goodwill are called intangible assets. l If their value decreases over time, they will be reduced by an amortization charge. l Amortization, like depreciation is not a cash expense. 55 Liabilities Liabilities are divided into current and long-term liabilities. l Liabilities that will be satisfied within one year are known as current, and include: Accounts payable Notes payable, short-term debt and all repayments of debt that will occur within the year. Taxes Payable Accrued Expense items such as salary that are owed but have not yet been paid. l The difference between current assets and current liabilities is known as (net) working capital. 66 Long-term liabilities Long-term debt is any loan or debt obligation with a maturity of more than one year. l Capital leases are long-term lease contracts that obligate the firm to make regular payments in exchange for the use of an asset. l Deferred taxes are taxes that are owed but not yet paid. Firms keep two sets of books one for financial reporting and one for tax purposes. Deferred tax liabilities arise when the firms book income exceeds its income for tax purposes. If a firm depreciates assets faster for tax purposes than for reporting purposes, its tax paid will be less than tax computed according to reported income. l Over time, the discrepancy will disappear and the tax due will be paid. Hence deferred tax is recorded as a liability....
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This note was uploaded on 04/04/2011 for the course MBA 648 taught by Professor Jake during the Spring '11 term at Pace.

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3 Financial Statement Analysis - Click to edit Master...

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