ch 2 (Financial Statements)

ch 2 (Financial Statements) - Balance Sheet Balance Sheet:...

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Chapter 2 Financial Statements, Taxes, and Cash Flows Slide 2 - 1 Balance Sheet ± Balance Sheet: a snapshot of the firm’s assets and liabilities at a given point in time BS Identity: Assets = Liabilities + Stockholders’ equity Slide 2 - 2 ± Liquidity vs. Profitability Assets are listed in order of decreasing liquidity. An asset has a high degree of liquidity if it can be easily converted into cash without significant loss of 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 ± Net Working Capital (NWC) NWC = Current Assets – Current Liabilities NWC is positive when the cash that will be received over the next 12 months exceeds the cash that will be paid out NWC is usually positive in a healthy firm Net Working Capital and Liquidity Slide 2 - 3 ± Debt When a firm borrows, it gives the bondholders first claim on the firm’s cash flow. The use of debt in a firm’s capital structure is called financial leverage. The more debt a firm has, the greater is its degree of financial leverage. ± Equity Shareholder’s equity is the residual difference between assets and liabilities. Shareholders’ equity = Assets – Liabilities Debt versus Equity
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Slide 2 - 4 Market Value vs. Book Value ± The balance sheet provides the book value of the assets, liabilities, and equity, required by the Generally Accepted Accounting Principles (GAAP). ± Market value is the price at which the assets, liabilities, or equity can actually be bought or sold. Market value and book value are often very different. Why? Which is more important to the decision-making process?
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This note was uploaded on 04/18/2011 for the course FINA 1003 taught by Professor Lin during the Fall '11 term at HKU.

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ch 2 (Financial Statements) - Balance Sheet Balance Sheet:...

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