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The topics discussed in this chapter are financial statements, taxes and cash flow. On completion of this chapter students will: Know the difference between book value and market value, know the difference between accounting income and cash flow, know the difference between average and marginal tax rates, know how to determine a firm’s cash flow from its financial statements. | 2- McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. 2- Key Concepts and Skills Know: The difference between book value and market value The difference between accounting income and cash flow The difference between average and marginal tax rates How to determine a firm’s cash flow from its financial statements 2- Chapter Outline 2.1 The Balance Sheet 2.2 The Income Statement 2.3 Taxes 2.4 Cash Flow 2- The Balance Sheet A snapshot of the firm’s assets and liabilities at a given point in time (“as of ”) Assets Left-hand side (or upper portion) In order of decreasing liquidity Liabilities and Owners’ Equity Right-hand side (or lower portion) In ascending order of when due to be paid Balance Sheet Identity Assets = Liabilities + Stockholders’ Equity 2- The Balance Sheet Figure 2.1 2- The Balance Sheet Net working capital Current Assets minus Current Liabilities Usually positive for a healthy firm Liquidity . | 2- McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. 2- Key Concepts and Skills Know: The difference between book value and market value The difference between accounting income and cash flow The difference between average and marginal tax rates How to determine a firm’s cash flow from its financial statements 2- Chapter Outline 2.1 The Balance Sheet 2.2 The Income Statement 2.3 Taxes 2.4 Cash Flow 2- The Balance Sheet A snapshot of the firm’s assets and liabilities at a given point in time (“as of ”) Assets Left-hand side (or upper portion) In order of decreasing liquidity Liabilities and Owners’ Equity Right-hand side (or lower portion) In ascending order of when due to be paid Balance Sheet Identity Assets = Liabilities + Stockholders’ Equity 2- The Balance Sheet Figure 2.1 2- The Balance Sheet Net working capital Current Assets minus Current Liabilities Usually positive for a healthy firm Liquidity Speed and ease of conversion to cash without significant loss of value Valuable in avoiding financial distress Debt versus Equity Shareholders’ equity = Assets - Liabilities 2- U.S. Corporation Balance Sheet Table 2.1 2- Market vs. Book Value Book value = the balance sheet value of the assets, liabilities, and equity. Market value = true value; the price at which the assets, liabilities, or equity can actually be bought or sold. Market value and book value are often very different. Why? Which is more important to the decision-making process? Return to Quick Quiz 2- Klingon Corporation Example 2.2 KLINGON CORPORATION Balance Sheets Market Value versus Book Value Book Market Book Market Assets Liabilities and Shareholders’ Equity CA $ 400 $ 600 LTD $ 500 $ 500 NFA 700 1,000 Equity 600 1,100 $1,100 $1,600 $1,100 $1,600 2- Income Statement The income statement measures performance over a specified period of time (period, quarter, year). Report revenues first and
