FinSta - Financial Statements What is a balance sheet? What...

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1 Financial Statements • What is a balance sheet? • What is an income statement? Balance Sheet • A “balance sheet” is a financial “snapshot” of an enterprise taken a a point in time • It explains what is owned . . . • It explains what is owed . . . assets and owners’ equity liabilities Therefore . . . Assets = Liabilities = Assets Owners’ equity = Assets Liabilities + Owners’ equity + Owners’ equity - Liabilities • Can a firm have negative owners’ equity? • What would that mean? Yes Candidate for bankruptcy Typical Balance Sheet Current Assets Fixed Assets Cash Accounts Receivable Less: Bad debt allowance Inventory Prepaid expenses Total Current Assets $200,000 $375,000 $ 25,000 $350,000 $150,000 $ 35,000 $735,000 Land Buildings Less: Accumulated depreciation Equipment Less: Accumulated Depreciation Total Fixed Assets Total Assets $ 80,000 $330,000 $315,000 $235,000 $ 60,000 $350,000 $41,000 $915,000 $1,650,000
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2 Typical Balance Sheet Current Liabilities Long-Term Liabilities Accounts Payable Notes Payable Taxes Payable Interest Payable Total Current Liabilities $150,000 $ 25,000 $ 75,000 $ 50,000 $300,000 Bank Loan Total Liabilities Common Stock Preferred Stock Retained Earnings Total Owners’ Equity Total Liabilities + Owners’ Equity $400,000 $200,000 $750,000 $1,150,000 $1,650,000 $500,000 Owners Equity Balance Sheet Analysis Current Position-Liquidity: How fast can cash be raised? Working Capital = Current Assets – Current Liabilities Current Ratio = Current Assets Current Liabilities Acid Test Ratio = Current Assets (Inventory + Prepaid Expenses) Current Liabilities Balance Sheet Analysis Long-Run Position: How sustainable is the business? Debt/Asset Ratio = Total Liabilities Total Assets Debt/Equity Ratio = Total Liabilities Total Owners Equity Equity/Asset Ratio = Total Owners Equity Total Assets
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3 Income Statement • An “income statement” is a “snapshot” of enterprise operating performance during some time period • It explains what was sold . . .
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FinSta - Financial Statements What is a balance sheet? What...

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