2-18
US Corporation Income Statement – Table 2.2
Insert new Table 2.2 here (US Corp Income Statement)
2-19
Hale Waihona Puke Income Statement Analysis
• There are three things to keep in mind when analyzing an income statement:
2-13
• Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value? A. real estate investment B. good reputation of the company C. equipment owned by the firm D. money due from a customer E. an item held by the firm for future sale
• Which one of the following accounts is the most liquid? A. inventory B. building C. accounts receivable D. equipment E. land
• Which one of the following represents the most liquid asset? A. $100 account receivable that is discounted and collected for $96 today B. $100 of inventory which is sold today on credit for $103 C. $100 of inventory which is discounted and sold for $97 cash today D. $100 of inventory that is sold today for $100 cash E. $100 accounts receivable that will be collected in full next week
US Corporation Balance Sheet – Table 2.1
Place Table 2.1 (US Corp Balance Sheet) here
2-12
Market Value vs. Book Value
• The balance sheet provides the book value of the assets, liabilities, and equity. • Market value is 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 decisionmaking process?
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.
Shareholders' equity:
A. increases in value anytime total assets increases. B. is equal to total assets plus total liabilities. C. decreases whenever new shares of stock are issued. D. includes long-term debt, preferred stock, and common stock E. represents the residual value of a firm.
• Dee Dee's Marina is obligated to pay its creditors $6,400 today. The firm's assets have a current market value of $5,900. What is the current market value of the shareholders' equity? A. -$600 B. -$500 C. $0 D. $500 E. $600
Example 2.2 Klingon Corporation
KLINGON CORPORATION Balance Sheets
Market Value versus Book Value
Book Assets NWC NFA $ 400 700 1,100 Market Book Market
2-2
Chapter Outline
• • • • The Balance Sheet The Income Statement Taxes Cash Flow
2-3
Balance Sheet
• The balance sheet is a snapshot of the firm’s assets and liabilities at a given point in time • Assets are listed in order of decreasing liquidity
• 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
• Liquidity
– Ability to convert to cash quickly without a significant loss in value – Liquid firms are less likely to experience financial distress – But liquid assets typically earn a lower return – Trade-off to find balance between liquid and illiquid assets
2-5
Net Working Capital and Liquidity
• Net Working Capital
– = Current Assets – Current Liabilities – Positive when the cash that will be received over the next 12 months exceeds the cash that will be paid out – Usually positive in a healthy firm
2-6
• Which one of the following will increase the value of a firm's net working capital? A. using cash to pay a supplier B. depreciating an asset C. collecting an accounts receivable D. purchasing inventory on credit E. selling inventory at a profit
– Ease of conversion to cash – Without significant loss of value
• Balance Sheet Identity
– Assets = Liabilities + Stockholders’ Equity
2-4
The Balance Sheet - Figure 2.1
• You recently purchased a grocery store. At the time of the purchase, the store's market value equaled its book value. The purchase included the building, the fixtures, and the inventory. Which one of the following is most apt to cause the market value of this store to be lower than the book value? A. a sudden and unexpected increase in inflation B. the replacement of old inventory items with more desirable products C. improvements to the surrounding area by other store owners D. construction of a new restricted access highway located between the store and the surrounding residential areas E. addition of a stop light at the main entrance to the store's parking lot