Chapter2nt[1] - Reviewing Financial Statements Chapter 2 1...

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1 Reviewing Financial Statements Chapter 2
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2 Chapter 2 Learning Goals LG1: Recall the major financial statements that firms must prepare and provide to the public LG2: Differentiate between book (or accounting) value and market value LG3: xplain how taxes influence corporate managers’ and investors’ decisions LG4: Differentiate between accounting income and cash flows LG5: Demonstrate how to use a firm's financial statement to calculate its cash flows LG6: bserve cautions that should be taken when examining external financial statements
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3 Introduction Corporate managers must issue many reports to the public. The most attention is paid to the annual report , which contains Balance sheet Income statement Statement of cash flows Statement of retained earnings These four statements present an accounting-based picture of the firm’s financial position.
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4 While accountants focus on reporting what happened in the past, financial managers use financial statements to draw inferences about the future Firms must follow Generally Accepted Accounting Principles (GAAP) when creating these statements, but they still have substantial discretion
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5 Balance Sheet The balance sheet reports a firm’s assets, liabilities, and equity at a particular point in time. Assets = Liabilities + Equity The left side of a balance sheet lists the assets of the firm in order of liquidity The right side of the balance sheet lists the liabilities in order of maturity. Equity, which never matures, is listed last
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6 Assets Assets fit into two major categories: current assets and fixed assets Current Assets Will normally convert into cash within a year Cash (and marketable securities) Accounts receivable Inventory Fixed Assets Have a useful life exceeding one year Net plant and equipment (Gross plant and equipment less accumulated depreciation) Less tangible assets, such as patents and trademarks
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7 Liabilities Lenders provide funds, which become liabilities to the firm. Current liabilities Obligations due within a year Accruals (accrued wages and accrued taxes) Accounts payable Notes payable Long-term debt Long-term loans and bonds with maturities of more than one year
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8 Equity The difference between total assets and total liabilities is the stockholders’ (or owners’) equity. Types of Equity Preferred Stock Appears as the cash proceeds when the firm sells preferred stock Common Stock and Paid-in-Surplus Also appear as cash proceeds when common stock is issued Retained Earnings When managers reinvest earnings rather than pay them out as dividends, these will be recorded as retained earnings. The retained earnings account on the balance sheet represents the cumulative amount retained over the years.
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9 Managing the Balance Sheet Managers must monitor a number of issues related to the firm’s balance sheet, including: The accounting method used for fixed asset
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This note was uploaded on 10/20/2011 for the course FIN 500 taught by Professor Yi during the Spring '10 term at CSU Dominguez Hills.

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Chapter2nt[1] - Reviewing Financial Statements Chapter 2 1...

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