chap02bskim - Chapter 2 Financial Statements, Taxes, and...

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Chapter 2 Financial Statements, Taxes, and Cash Flow
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Key Concepts and Skills Know the difference between book value and market value Know the difference between accounting income and cash flow Know the difference between average and marginal tax rates Know how to determine a firm’s cash flow from its financial statements 2-2
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Chapter Outline The Balance Sheet The Income Statement Taxes Cash Flow 2-3
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Sources of Information Financial abundant and readily accessible. Following are some common sources Annual reports Wall Street Journal Internet NYSE ( www.nyse.com ) NASDAQ ( www.nasdaq.com ) Textbook ( www.mhhe.com/rwj ) Yahoo! Finance ( http://finance.yahoo.com ) SEC EDGAR 10K & 10Q reports
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Balance Sheet The balance sheet is a snapshot of the firm’s assets and liabilities at a given point in time Assets are listed in order of decreasing liquidity Ease of conversion to cash Without significant loss of value Balance Sheet Identity Assets = Liabilities + Stockholders’ Equity 2-5
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The Balance Sheet - Figure 2.1 2-6
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Net Working Capital and Liquidity Net Working Capital = Current Assets – Current Liabilities Positive when the cash that will be received over the next 12 months exceeds the cash that will be paid out Usually positive in a healthy firm Liquidity Ability to convert to cash quickly without a significant loss in value Liquid firms are less likely to experience financial distress But liquid assets typically earn a lower return Trade-off to find balance between liquid and illiquid assets 2-7
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US Corporation Balance Sheet – Table 2.1 Place Table 2.1 (US Corp Balance Sheet) here 2-8
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Market Value vs. Book Value
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chap02bskim - Chapter 2 Financial Statements, Taxes, and...

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