Chap002 Financial statements and cash flow.pptVIP

Financial Statements and Cash Flow Key Concepts and Skills Understand the information provided by financial statements Differentiate between book and market values Know the difference between average and marginal tax rates Know the difference between accounting income and cash flow Calculate a firm’s cash flow Chapter Outline 2.1 The Balance Sheet 2.2 The Income Statement 2.3 Taxes 2.4 Net Working Capital 2.5 Financial Cash Flow 2.6 The Accounting Statement of Cash Flows 2.7 Cash Flow Management Sources of Information Annual reports Wall Street Journal Internet NYSE () NASDAQ () Textbook () SEC EDGAR 10K 10Q reports 2.1 The Balance Sheet U.S. Composite Corporation Balance Sheet Balance Sheet Analysis When analyzing a balance sheet, the Finance Manager should be aware of three concerns: Liquidity Debt versus equity Value versus cost Liquidity Refers to the ease and quickness with which assets can be converted to cash—without a significant loss in value Current assets are the most liquid. Some fixed assets are intangible. The more liquid a firm’s assets, the less likely the firm is to experience problems meeting short-term obligations. Liquid assets frequently have lower rates of return than fixed assets. Debt versus Equity Creditors generally receive the first claim on the firm’s cash flow. Shareholder’s equity is the residual difference between assets and liabilities. Value versus Cost Under Generally Accepted Accounting Principles (GAAP), audited financial statements of firms in the U.S. carry assets at cost. Market value is the price at which the assets, liabilities, and equity could actually be bought or sold, which is a completely different concept from historical cost. 2.2 The Income Statement Measures financial performance over a specific period of time The accounting definition of income is: Revenue – Expenses ≡ Income U.S.C.C. Income Statement U.S.C.C. Income Statement U.S.C.C. Income Statement U.S.C.C. Income Statement Income Statement Analysis Ther