Chapter 3 - Why Increase Your Financial Intelligence Flashcards
Goodwill
Goodwill comes into play when one company acquires another company. It is the difference between the net assets acquired (that is, the fair market value of the assets less the assumed liabilities) and the amount of money the acquiring company pays for them. For example, if a company’s net assets are valued at $1 million and the acquirer pays $3 million, then goodwill of $2 million goes onto the acquirer’s balance sheet. That $2 million reflects all the value that is not reflected in the acquiree’s tangible assets—for example, its name, reputation, and so on.
Berman, Karen; Knight, Joe. Financial Intelligence, Revised Edition: A Manager’s Guide to Knowing What the Numbers Really Mean (p. 19). Harvard Business Review Press. Kindle Edition.
Balance Sheet
The balance sheet reflects the assets, liabilities, and owners’ equity at a point in time. In other words, it shows, on a specific day, what the company owned, what it owed, and how much it was worth. The balance sheet is called such because it balances—assets always must equal liabilities plus owners’ equity. A financially savvy manager knows that all the financial statements ultimately flow to the balance sheet. We’ll explain all these notions in part 3.
Berman, Karen; Knight, Joe. Financial Intelligence, Revised Edition: A Manager’s Guide to Knowing What the Numbers Really Mean (p. 20). Harvard Business Review Press. Kindle Edition.
Cash
Cash as presented on the balance sheet means the money a company has in the bank, plus anything else (like stocks and bonds) that can readily be turned into cash. Really, it’s that simple. Later we’ll discuss measures of cash flow. For now, just know that when companies talk about cash, it really is the cold, hard stuff.
Berman, Karen; Knight, Joe. Financial Intelligence, Revised Edition: A Manager’s Guide to Knowing What the Numbers Really Mean (p. 23). Harvard Business Review Press. Kindle Edition.
What is the difference between cash and profit?
Profit is based on revenue. Revenue is recognized when a product or service is delivered, not when the bill is paid.
