1.2. Introduction to Financial Statements

Question 1

Preparation of Financial Statements according to…

1.
2.

Answer 1

• Generally Accepted Accounting Principles (GAAP)
• International Financial Reporting Standards (IFRS) | issues by the International Accounting Standard Board (IASB)

Question 2

What are the Main Types of Financial Statements?

1.
2.
3.

Answer 2

• Balance Sheet (=Statement of Financial Position)
• Income Statement
• Statement of Cash Flows

Question 3

What is the Balance Sheet Equation?

Answer 3

Assets = Liabilities + Shareholder´s Equity

or

Assets - Liabilities = Shareholder´s Equity

Question 4

Market Value vs. Book Value

Answer 4

Market Value of Equity = Market Capitalization (= Shares outstanding * Market price per Share)

Question 5

Market-to-Book Ratio (Price-to-Book Ratio)

Answer 5

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

Question 6

Enterprise Value

Answer 6

Enterprise Value = Market Value of Equity + Debt - Cash

Question 7

Difference Between Equity Value and Enterprise Value

Answer 7

Equity Value: only Equity part
Enterprise Value: whole Company

Question 8

Current Assets and Current Liabilities in Terms of Volume

Answer 8

Current A should be more than Current L in order to being able to pay L - otherwise threatened by illiquidity

Question 9

Balance Sheet | Statement of financial position

1.
2.

Answer 9

• lists firms assets and liabilities and stockholders equity
• snapshot of the firms position at a given point in time

Question 10

What are Current Assets?

1.
2.
3.
4.
5.

Answer 10

• 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

Question 11

What are long-term assets?

1.
2.

Answer 11

• 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

Question 12

What is

1.depreciation expense?
2. accumulated depreciation?

Answer 12

1. value recorded for equipment each year is deducted by depreciation expense
2. total amount deducted over its life

! not an actual cash expense that the firm pays!

Question 13

What is the book value of an asset?

Answer 13

the value shown in the firms financial statements | equal to its acquisition cost less accumulated depreciation

Question 14

Zusammenhang | tangible assets, goodwill, intangible assets

Answer 14

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

Question 15

Current Liabilities

1.
2.
3.
4.

Answer 15

• 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

Question 16

Difference between current assets and current liabilities

Answer 16

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

Question 17

Long-term liabilities

1.
2.
3.
4.

Answer 17

• 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

Question 18

Stockholders Equity

1.
2.
3.

Answer 18

• 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

Question 19

Why can a firm with positive net income still run out of cash?

1.
2.

Answer 19

• 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