1.2. Introduction to Financial Statements Flashcards
Preparation of Financial Statements according to…
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- Generally Accepted Accounting Principles (GAAP)
- International Financial Reporting Standards (IFRS) | issues by the International Accounting Standard Board (IASB)
What are the Main Types of Financial Statements?
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- Balance Sheet (=Statement of Financial Position)
- Income Statement
- Statement of Cash Flows
What is the Balance Sheet Equation?
Assets = Liabilities + Shareholder´s Equity
or
Assets - Liabilities = Shareholder´s Equity
Market Value vs. Book Value
Market Value of Equity = Market Capitalization (= Shares outstanding * Market price per Share)
Market-to-Book Ratio (Price-to-Book Ratio)
Market-to-Book Ratio = Market Value of Equity / Book Value of Equity (=Price-to-Book (P/B) Ratio)
if the Ratio is <1, the company is not going well in the future
which in turn would be a bargain chance for investors (buying shares)
OR could be a bad idea to invest bc company wont be doing well in future
Enterprise Value
Enterprise Value = Market Value of Equity + Debt - Cash
Difference Between Equity Value and Enterprise Value
Equity Value: only Equity part
Enterprise Value: whole Company
Current Assets and Current Liabilities in Terms of Volume
Current A should be more than Current L in order to being able to pay L - otherwise threatened by illiquidity
Balance Sheet | Statement of financial position
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- lists firms assets and liabilities and stockholders equity
- snapshot of the firms position at a given point in time
What are Current Assets?
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- either cash or assets that could be converted into cash within one year
- cash and other marketable securitires which are short-term and low-risk investments
- accounts receivable | amounts owed to the firm by customers who have purchased goods or services on credit
- inventories | composed of raw material and work-in-progress and finished goods
- other current assets, e.g. pre-paid expenses such as rent or insurance paid in advance
What are long-term assets?
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- first category: net property, plant, equipment (real estate or machinery that produce tangible benefits for more than a year)
- ! equipment tends to wear out: so the value recorded for e.g. 2 mio. in equpment will be reduced by deducting a depreciation expense
What is
1.depreciation expense?
2. accumulated depreciation?
- value recorded for equipment each year is deducted by depreciation expense
- total amount deducted over its life
! not an actual cash expense that the firm pays!
What is the book value of an asset?
the value shown in the firms financial statements | equal to its acquisition cost less accumulated depreciation
Zusammenhang | tangible assets, goodwill, intangible assets
when a firm acquires another company, it acquires a set of tangible assets (inventory, plant, …) which will be included on the balance sheet
in many cases, the firm may pay more for the company than the total book value of the assets it acquires -> so the difference between price paid and the book value assigned to its tangible assets is recorded seperately as goodwill and intangible assets
e.g.: paying 25 mio. for company whose tangible assets had book value of 5 mio. -> remaining 20 mio. appears as goodwill and intangible assets
Current Liabilities
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- liabilities that will be satisfied within one year
- accounts payable, the amounts owed to suppliers for products or services purchsed with credit
- short-term debt / notes payable and current maturities of long-term debt, which are repayments of debt that will occur within the next year
- salary or taxes that are owed but have not been paid yet | deferred or unearned revenue, which is revenue hat has been received for products that have not been yet delivered
Difference between current assets and current liabilities
the firm´s net working capital, the capital available in the short term to run the business
57 mio in current assets - 48 mio. in current liabilitties = 9 mio. net working capital
if NWC low or negatice, form might face a shortage of funds unless they generate sufficient cash from their ongoing activities
Long-term liabilities
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- liabilitties that extend bexond one year
- long-term debt | any loan or debt obligation with a maturity of more than one year | when a firm needs to raise funds to purchase an asset or make an investment, it may borrow those funds through a long-term loan
- capital leases | long term lease contracts that obligate the firm to make regular lease payments in exchange for use of an asset | allows firm to gain use of an asset by leasing it from the assets owner (e.g. leaseing a building to serve as its corporate headquarters)
- deferred taxes | taxes owed but have not yet been paid | usually arise when firms financial income exceeds its income for tax purposes
Stockholders Equity
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- difference between the firms assets and liabilities
- also called book value of equity
- accounting measure of the net worth of the firm
- ideally, BS provides accurate assessment of the true value of the firms equity
Why can a firm with positive net income still run out of cash?
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- e.g. company wants to expand and spends more on investment activities than it generates from operating and financing activities -> net cash flow for that period will be negative, although the net income is positive
- another example: spending a lot on financing activities, perhaps by paying off other maturing LT-debt, repurchasing shares or dividends
