Chapter 2 - Chapter 2 Accounting Issues The Balance Sheet A...

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Chapter 2 Accounting Issues
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The Balance Sheet A snapshot of firm’s assets and liabilities at a specific point in time Balance sheet reports book values of assets and liabilities (GAAP) Financial managers care primarily about market values - For current assets, current liabilities, and most debt liabilities the distinction is unimportant - For fixed assets and equity, the distinction is often very important
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The Balance Sheet (continued) Examples where book values  market values --Young firms with significant growth prospects --Firms with recently purchased obsolete equipment Basic accounting identity Assets = Liabilities + Stockholder’s equity This identity holds both for book values and for market values
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The Income Statement A statement of profitability of existing assets: Income = Revenue – Costs Revenues and costs are not always cash items Examples: --sell goods for credit rather than cash --depreciation --deferred taxes Asset sales
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