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393_lecture2 - Financial Statements and Cash Flow Lecture 2 Myung Joo Song ECON 393 Fall 2011 Myung Joo Song(ECON 393 Financial Statements and Cash

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Unformatted text preview: Financial Statements and Cash Flow Lecture 2 Myung Joo Song ECON 393 Fall 2011 Myung Joo Song (ECON 393) Financial Statements and Cash Flow Fall 2011 1 / 27 Balance Sheet Balance Sheet keeps track of What firm owns (Asset) What firm owes (Liability) How much owners invest in the firm (Owners equity) The balance sheet is a snapshot of the firms assets and liabilities at a given point in time. Asset and investment decisions. Liabilities, owners equity and financing decision. Balance sheet is important as it provides information to the public. Example: In the case of IPO, investors need to know Balance Sheet. B/S could be seen as one of health indicators of firms. B/S and financial ratios. Myung Joo Song (ECON 393) Financial Statements and Cash Flow Fall 2011 2 / 27 Asset, Liability and Owner’s Equity How to arrange asset and liability items in balance sheet? Asset: On the left side of Balance Sheet. Short-term (Current Asset) Long-term (Fixed Asset) Liability and Owner’s Equity: On the right side of B/S. Liability (Debt) Short-term (Current Liabilities) Long-term (Long-term Debt) Owner’s Equity Assets are listed in order of decreasing liquidity. Ease of conversion to cash (length of time) Without significant loss of value Liability items are listed in order of payment. Myung Joo Song (ECON 393) Financial Statements and Cash Flow Fall 2011 3 / 27 A Sample Simplified Organizational Chart Figure: Chart1 Myung Joo Song (ECON 393) Financial Statements and Cash Flow Fall 2011 4 / 27 Asset, Liability and Owner’s Equity Current Asset Cash, Account Receivable, Inventory, etc. Fixed Asset Tangible Assets Intangible Assets Current Liability Account Payable, Note Payable, etc. Long-term Debt Owners Equity: What left after paying all debts Balance sheet Identity: Assets = Liabilities + Stockholders Equity Decision made by financial managers and balance sheet Investment decisions: Purchase and Sales of Assets - Left side of B/S Financing decisions: Choices of borrowing money or issuing new shares- Right side of B/S Myung Joo Song (ECON 393) Financial Statements and Cash Flow Fall 2011 5 / 27 Current Asset, Current Liability, and Liquidity In short term, what matters is how much cash firm can generate. Short term or current value of cash is summarized by Net Working Capital (NWC). NWC = Current Asset - Current Liability Positive when the cash that will be received over the next 12 months exceeds the cash that will be paid out....
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This note was uploaded on 10/25/2011 for the course ECON 393 taught by Professor D during the Spring '10 term at Rutgers.

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393_lecture2 - Financial Statements and Cash Flow Lecture 2 Myung Joo Song ECON 393 Fall 2011 Myung Joo Song(ECON 393 Financial Statements and Cash

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