02_Oheads

02_Oheads - Lecture Notes 2 Accounting statements and cash...

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1 Lecture Notes 2 Accounting statements and cash flows The Balance Sheet • A balance sheet provides a snapshot of the firm’s accounting value at a particular date. Figure 1: Components of the balance sheet i. Fixed assets are those that will last a long time. Some are tan- gible , others are intangible . ii. Current assets have a short life. iii. Current liabilities are debts due within one year. iv. Long-term debt matures in more than one year. Current assets Fixed assets 1. Tangible fixed 2. Intangible fixed assets assets Current liabilities Net Working Capital Long-term debt Shareholders’ equity
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2 v. Net working capital = current assets – current liabilities. vi. Shareholders’ equity is a residual claim defined by: Shareholders’ equity Assets – Liabilities (1) • The assets on the left hand side of the ledger are listed in the or- der of accounting liquidity . • The liabilities and shareholders’ equity are listed in the order in which they must be paid. • The schedule of contracted payments of principal and interest on debts is called the debt service schedule . These payments will put the firm in default if they are not made. • The accounting value of the firm’s assets does not reflect the current market value or economic value of the assets. • Many of the valuable assets do not appear on the balance sheet.
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3 Table 1: Balance Sheet of US Composite Corp. 20X2 and 20X1 ($million) 20X2 20X1 Assets Current assets: Cash and equivalents $140 $107 Accounts receivable 294 270 Inventories 269 280 Other 58 50 Total current assets 761 707 Fixed assets: Property, plant, equipment 1,423 1,274 Less accumulated depreciation (550) (460) Net property, plant, equipment 873 814 Intangible and other assets 245 221 Total fixed assets 1,118 1,035 Total assets $1,879 $1,742 Liabilities and shareholders’ equity Current liabilities: Accounts payable $213 $197 Notes payable 50 53 Accrued expenses 223 205 Total current liabilities 486 455 Long-term liabilities: Deferred taxes 117 104 Long-term debt 471 458 Total long-term liabilities 588 562 Stockholders equity: Preferred stock 39 39 Common stock ($1 par value) 55 32 Capital surplus 347 327 Accumulated retained earnings 390 347 Less treasury stock (26) (20) Total equity 805 725 Total liabilities and stockholders’ equity $1,879 $1,742
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4 The Income Statement • The income statement measures the performance of the firm over a specific period, usually a quarter or a year. • The accounting definition of income is:
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02_Oheads - Lecture Notes 2 Accounting statements and cash...

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