FIN CH 2 - 1 Chapter2 Financial Statements PattyRobertson 2...

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Principles of Finance – FIN 3100 Chapter 2  - Financial Statements Patty Robertson 1
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Agenda Discuss the types of financial statements. Understand the difference between net profit and cash  flow. Distinguish between average and marginal tax rates. Discuss how financial statements can be used to project  future cash flows. 2
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Financial Statements Our purpose is not to learn how to prepare  financial statements…rather to use them in  financial analysis. Accounting records history, finance plans for the  future. Financial statements report the performance of a  firm, and include: 1. Balance Sheet 3
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Financial Statements However, financial statements are prepared  according to GAAP, which includes arbitrary and  subjectively interpreted rules. Some firms use aggressive / “creative” accounting  strategies (sometimes it is deceptive or illegal). Finance is concerned with  cash flows;  the  finance manager can use this historical  4
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1. The Balance Sheet The  Balance Sheet  is a snapshot of the financial accounts of a  firm at a fixed point in time. The left-hand side lists the  assets  (what the firm owns). An asset is something that has economic value. The right-hand side lists the  liabilities  (what the firm owes, its  debt or claims against the assets) and  stockholder’s equity  ( the difference between assets and liabilities, or ownership). 5
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Accounting Identity By definition, the difference between assets and liabilities is  Stockholder’s Equity . Assets = Liabilities + Shareholder’s Equity Shareholder’s Equity = Assets - Liabilities Also known as Net Worth, Shareholder’s Equity, Common Equity, and  Owner’s Equity (for sole proprietorships). It is the capital contribution(s) plus the accumulated total of the  undistributed earnings (retained earnings) reinvested in the  business. If the firm were to sell all assets and use the cash to pay all debts,  the difference would belong to the shareholders. 6
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Net Working Capital Working Capital  is the operating liquidity available to  a company. (Net) Working Capital = Current Assets – Current Liabilities Working Capital is positive  in a healthy firm. 7
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Sample Balance Sheet 8
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Sample Balance Sheet 9 1. Cash 2. Working Capital Accounts 3. LT Assets 4. LT Liabilities 5. Ownership accounts
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Sample Balance Sheet 10 1. Cash 2. Working Capital Accounts 3. LT Assets 4. LT Liabilities 5. Ownership accounts
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Sample Balance Sheet 11 1. Cash 2. Working Capital Accounts 3. LT Assets 4. LT Liabilities 5. Ownership accounts
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Sample Balance Sheet 12 1. Cash 2. Working Capital Accounts 3. LT Assets 4. LT Liabilities 5. Ownership accounts
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Sample Balance Sheet 13 1. Cash 2. Working Capital Accounts 3. LT Assets 4. LT Liabilities 5. Ownership accounts
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FIN CH 2 - 1 Chapter2 Financial Statements PattyRobertson 2...

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