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448_02Accounting - Lecture Notes 2 Accounting statements...

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9 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. • The components of the balance sheet can be represented schematically as follows: Definitions of these components are as follows: i. Fixed assets are those that will last a long time. Some, such as buildings and machinery, are tangible . Others, such as patents, trademarks and proprietary information, are intangible . ii. Current assets have a short life, such as accounts receivable or inventory of raw materials, goods in process or finished goods. iii. Current liabilities are short term debts – that is, debts, such as accounts payable to suppliers, that have to be re-paid within one year. iv. Long-term debt has a period to maturity that is longer than one year. v. Net working capital equals current assets minus current liabilities. It represents the cash that will become available over the next year minus the cash that must be paid out in the same period. vi. Shareholders’ equity is defined to be the difference between the assets and liabilities of the firm: 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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10 Shareholders’ equity Assets – Liabilities (1) It is a claim against the firm’s assets that is residual and not fixed. • The assets are listed in the order it normally takes an ongoing firm to convert them into cash. The ease and rapidity with which assets can be converted to cash is referred to as the degree of ac- counting liquidity . Assets that are more liquid are available to meet fluctuations in short-term ob- ligations, but usually earn a lower return than less liquid assets. • 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.
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