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Chapter_02_upload - CH2. Financial Statements, Taxes, and...

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1 CH2. Financial Statements, Taxes, and Cash Flows
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2 Chapter Outline Know the difference between book value and market value Know the difference between accounting income and cash flow Know how to determine a firm’s cash flow from its financial statements
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3 Chapter Outline The Balance Sheet The Income Statement Cash Flow
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4 Balance Sheet The balance sheet is a snapshot of the firm’s assets and liabilities at a given point in time (stock concept) Assets are listed in order of liquidity Ease of conversion to cash Without significant loss of value Balance Sheet Identity Assets = Liabilities + Stockholders’ Equity
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5 The Balance Sheet - Figure 2.1
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6 Net Working Capital and Liquidity Net Working Capital Current Assets – Current Liabilities Positive when the cash that will be received over the next 12 months exceeds the cash that will be paid out Usually positive in a healthy firm Liquidity Ability to convert to cash quickly without a significant loss in value Liquid firms are less likely to experience financial distress But liquid assets earn a lower return Trade-off to find balance between liquid and illiquid assets
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7 US Corporation Balance Sheet – Table 2.1
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8 Market Vs. Book Value The balance sheet provides the book value of the assets, liabilities and equity: under GAAP audited financial statements of firms in the U.S. carry assets at cost . Market value is the price at which the assets,
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This note was uploaded on 04/08/2011 for the course FINANCE 301 taught by Professor Jimmokim during the Spring '11 term at Rutgers.

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Chapter_02_upload - CH2. Financial Statements, Taxes, and...

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