Chapter 4 overview

Chapter 4 overview - REVIEW Chapter 4 Assets are the...

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Unformatted text preview: REVIEW Chapter 4 Assets are the driving forces of profitability for a company. Assets produce revenues that compensate workers, repay lenders, reward owners, and fund growth. Current assets are resources or claims to resources readily convertible to cash. Major current assets include cash and cash equivalents, marketable securities, receivables, derivative financial instruments, inventories, and prepaid expenses. Our analysis of current assets provides us insights into a company's liquidity. Liquidity is the length of time until assets are converted to cash. It is an indicator of a company's ability to meet financial obligations. The less liquid a company, the lower is its financial flexibility to pursue promising investment opportunities and the greater its risk of failure. Noncurrent assets are resources or claims to resources expected to benefit more than the current period. Major noncurrent assets include property, plant, equipment, intangibles, investments, and deferred charges. Our analysis of noncurrent assets provides us insights into a company's solvency and operational capacity. Solvency refers to the ability of a company to meets its long-term (and current) obligations. Operational capacity is the ability of a company to generate future profits. This chapter shows how we use financial statements to better assess liquidity, solvency, and operational capacity using asset values, and to critically evaluate a company's financial performance and prospects. The accounting practices underlying the measurement and reporting of current and noncurrent assets are described. We discuss the accounting for these assets and its implications for analysis of financial statements. Special attention is given to various analytical adjustments helping us better understand current and future prospects. 4-3 a. The two most important questions facing the financial analyst with respect to receivables are: (1) Is the receivable genuine, due, and enforceable?, and (2) Has the probability of collection been properly assessed? While the unqualified opinion of an independent auditor lends some assurance with regard to these questions, the financial analyst must recognize the possibility of an error of judgment as well as the lack of complete...
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This note was uploaded on 02/16/2012 for the course FINA 470 taught by Professor Austin during the Fall '11 term at South Carolina.

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Chapter 4 overview - REVIEW Chapter 4 Assets are the...

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