Chap002 - U.C Berkeley Extension U.C Chapter 2 Introduction...

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U.C. Berkeley Extension U.C. Berkeley Extension Chapter 2 Introduction to the Financial Statements
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Introduction to the Financial Statements Introduction to the Financial Statements How do accounting rules affect price-to- book ratios and price-earnings ratios?
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What Will You Learn from this Chapter What Will You Learn from this Chapter The broad picture of the firm that is painted by the financial statements The component parts of each financial statement How the financial statements fit together (or “articulate”). How price-to-book ratios are affected by accounting principles The accounting principles that dictate how earnings are measured How price-earnings ratios are affected by accounting principles The difference between market value added and earnings Why fundamental analysts want accountants to enforce the reliability criterion How financial statements anchor investors
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Distinguishing Form from Content in Distinguishing Form from Content in Financial Statements Financial Statements Form is the way in which the statements and their components parts fit together. The form gives the overall story that the statements are telling. Content is the measurement of the line items that are reported within the component parts of financial statements. The content puts numbers into the story.
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The Balance Sheet The Balance Sheet 1. Balance Sheet – What is it? What does it represent? From an equity valuation point of view, the shareholders’ equity is the main summary number on the balance sheet. Shareholders’ equity = Assets - Liabilities
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The Income Statement Income Statement – What is it? What does it represent? Net Income = Revenue – Expenses The income statement groups like expenses in categories to report a number of components of net income. See next slide for components.
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The Form of the Income Statement The Form of the Income Statement Net Revenue – Cost of Goods Sold = Gross Margin Gross Margin – Operating Expenses = Earnings before Interest and Taxes (ebit) Earnings before Interest and Taxes – Interest Expense + Interest Income = Income before Taxes Income before Taxes – Income Taxes = Income after Taxes and before Extraordinary Items Income before Extraordinary Items + Extraordinary Items = Net Income New Income – Preferred Dividends = Net Income Available to Common
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The Cash Flow Statement 1. Cash Flow Statement – What is it? What
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Chap002 - U.C Berkeley Extension U.C Chapter 2 Introduction...

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