Chapter 2 (Balance sheets, income statements, cash flows)

Balance Sheet

A financial statement prepared by a Firm every year that shows a snapshot of its financial situation

Income Statement

A financial statement prepared by a Firm every year that shows its activities during the past 1 year

Equity

Equals Assets − Liabilities

The owner’s or shareholders’ claim on a company’s assets after all debts have been paid.

Current assets

cash, inventory, accounts receivable

Fixed assets

Tangible: buildings, computers

Intangible: patents

Current Liabilities

Accounts payable, Notes payable

Long-term Liabilities

Long-term debt

Financial leverage

The use of debt

Levered firm

Firm with debt in its capital structure

Unlevered firm

Firm without debt in its capital structure

Net Working Capital

Equals Current Assets – Current Liabilities

A measure of a company’s short-term financial health and efficiency

Book Value

What the Balance Sheet shows for assets, liabilities, and equity

Market Value

The price at which the assets, liabilities, or equity can actually be bought or sold today

Income equals…

revenues – expenses

Cash inflow

Cash received in some year

Cash outflow

Cash spent in some year

Cash flow from assets

“free” cash flow