finance_mngmt_chap2 - Chapter 2: Financial Statements,...

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Chapter 2: Financial Statements, Taxes, and Cash Flow 2.1 The Balance Sheet The balance sheet is a snapshot of the firm. It contains: Assets (owns) Current: life < one year; ex. cash, inventory, accounts receivable Fixed: long life; ex. tangible (truck, computer) or intangible (trademark, patent) Liabilities (debt) Current: life < one year / must be paid < one year; ex. accounts payable Long-term: due > one year; ex. bond Owner’s Equity Owner’s Equity = Assets – Liabilities Net working capital is the difference between current assets and current liabilities. NWC is positive when current assets exceed current liabilities. This means that cash that will become available over the next 12 months exceeds the cash that must be paid over the same period. When examining a balance sheet, bear in mind 3 things: 1) Liquidity Is the speed and ease with which an asset can be converted to cash Has two dimensions: ease of conversion vs. loss of value Is valuable since the more liquid a business is, the less likely it is to experience financial distress Therefore, trade-off exists between advantages of liquidity and forgone potential profits
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finance_mngmt_chap2 - Chapter 2: Financial Statements,...

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