ch03 - Chapter 3 Financial Statements, Cash Flows, and...

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Chapter 3 Financial Statements, Cash Flows, and Taxes Learning Objectives 1. Discuss generally accepted accounting principles (GAAP) and their importance to the economy. 2. Explain the balance sheet identity and why a balance sheet must balance. 3. Describe how market-value balance sheets differ from book-value balance sheets. 4. Identify the basic equation for the income statement and the information it provides. 5. Understand the calculation of cash flows from operating, investing, and financing activities required in the statement of cash flows. 6. Explain how the four major financial statements discussed in this chapter are related. 7. Identify the cash flow to a firm’s investors using its financial statements. 8. Discuss the difference between average and marginal tax rates. I. Chapter Outline 3.1 Financial Statements and Accounting Principles A. Annual Reports The annual report is a vehicle by which management communicates with the firm’s shareholders and the general public. Page 1 of 16
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The annual report has three sections—a financial summary related to the past year’s performance; information about the company, its products, and its activities; and audited financial statements, including historical financial data. B. Generally Accepted Accounting Principles (GAAP) The GAAP is accounting rules and standards that companies need to adhere to when they prepare financial statements and reports. GAAP is prepared by the Financial Accounting Standards Board (FASB) and is authorized by the SEC. C. Fundamental Accounting Principles The Assumption of Arm’s-Length Transaction Two parties involved in an economic transaction arrive at a decision independently and rationally. The Cost Principle The value of an asset that is recorded on a company’s books reflects its historical cost. The Realization Principle —Revenue is recognized when transaction is completed, while cash may not be collected until a later time. The Matching Principle —Expenses related to generating any revenue are matched. The Going Concern Assumption —It is assumed that a company will continue to operate for the foreseeable future. D. International GAAP The SEC is reviewing proposals for U.S. corporations to adopt IASB for financial reporting by as early as 2015. Page 2 of 16
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3.2 The Balance Sheet A. The balance sheet identifies all the assets and liabilities of a firm at a point in time. The left-hand side of the balance sheet shows all the assets that the firm owns and uses to generate revenues. The right-hand side represents the liabilities of the firm. In addition to the amount borrowed from suppliers and other creditors, the balance sheet also lists the capital raised from its shareholders.
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This note was uploaded on 04/01/2012 for the course BUSINESS 100 taught by Professor Bens during the Spring '12 term at FIU.

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ch03 - Chapter 3 Financial Statements, Cash Flows, and...

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