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Chap002(WW-FIN357)NT(Fall 2011) (1)

Chap002(WW-FIN357)NT(Fall 2011) (1) - Chapter2...

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Chapter 2 Financial Statements and Cash Flow
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Chapter Outline 2.1 The Balance Sheet 2.2 The Income Statement 2.3 Taxes 2.4 Net Working Capital 2.4 Financial Cash Flow 2.5 The Statement of Cash Flows
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Key Concepts and Skills Understand the information provided by financial statements Differentiate between book and market values Know the difference between average and marginal tax rates Know the difference between accounting income and cash flow Calculate a firm’s cash flow
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Sources of Information Annual reports Wall Street Journal Internet NYSE (www.nyse.com) Nasdaq (www.nasdaq.com) Text ( www.mhhe.com ) Yahoo finance (http://finance.yahoo.com) SEC EDGAR 10K & 10Q reports
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2.1 The Balance Sheet Snapshot of the firm’s accounting (i.e., book) value as of a specific date. Balance sheet identity: Assets ≡ Liabilities + Stockholders’ Equity
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Balance Sheet View: Equality Assets = Uses of funds Value Resources Investing = Tangible assets Financial assets Intangible assets Liabilities + Equity Sources of funds Claims on value Loaned or owned Financing Debt securities Preferred stock Common stock
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Balance Sheet View: Liquidation BV Assets – BV Liabilities = BV Equity What a firm “owns” less what it “owes” is its net worth , just like an individual. Stockholders’ equity is the residual value of the firm (what the “owners” own) Book values versus market values
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Balance Sheet View: Market Value MV Assets – MV Liabilities = MV Equity The market value of stockholder’s equity divided by the number of shares outstanding equals stock price. The goal of the firm is to maximize the market value of the firm and its stock price!
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U.S.C.C. Balance Sheet (in $ millions) 20X2 and 20X1 Balance Sheet U.S. COMPOSITE CORPORATION Liabilities (Debt) Assets 20X2 20X1 and Stockholder's Equity 20X2 20X1 Current assets: Current Liabilities: Cash and equivalents $140 $107 Accounts payable $213 $197 Accounts receivable 294 270 Notes payable 50 53 Inventories 269 280 Accrued expenses 223 205 Other 58 50 Total current liabilities $486 $455 Total current assets $761 $707 Long-term liabilities: Fixed assets: Deferred taxes $117 $104 Property, plant, and equipment $1,423 $1,274 Long-term debt 471 458 Less accumulated depreciation -550 -460 Total long-term liabilities $588 $562 Net property, plant, and equipment 873 814 Intangible assets and other 245 221 Stockholder's equity: Total fixed assets $1,118 $1,035 Preferred stock $39 $39 Common stock ($1 per value) 55 32 Capital surplus 347 327 Accumulated retained earnings 390 347 Less treasury stock -26 -20 Total equity $805 $725 Total assets $1,879 $1,742 Total liabilities and stockholder's equity $1,879 $1,742
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Balance Sheet Analysis Three concerns when analyzing a balance sheet: 1. Accounting liquidity 2. Debt versus equity 3. Value versus cost
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Accounting Liquidity  Refers to the ease and quickness with which assets can be converted to cash.
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