ch%202%20(Financial%20Statements)[1]

ch%202%20(Financial%20Statements)[1] - 2 Financial...

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Unformatted text preview: 2 Financial Statements, Taxes, and Cash Flows Slide 2 - 1 Balance Sheet ¡ The balance sheet is a snapshot of the firm’s assets and liabilities at a given point in time ● Balance Sheet Identity Assets = Liabilities + Stockholders’ Equity ● 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 Slide 2 - 2 Balance Sheet Slide 2 - 3 Net Working Capital and Liquidity ¡ 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 ¡ Liquidity vs. Profitability ● 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 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? Slide 2 - 5 ¡ Example Your firm has equity worth $6 billion, debt worth $4 billion, assets worth $10 billion. The market values your firm’s 100 million shares at $75 per share and the debt at $4 billion....
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This note was uploaded on 07/30/2011 for the course STAT 3801 taught by Professor Kc during the Fall '11 term at HKU.

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ch%202%20(Financial%20Statements)[1] - 2 Financial...

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