Financial Statements, Taxes, and Cash Flow

Accounting Value vs Market Value

• Accounting value (book value) is based on historical costs of assets.
• Market value reflects the current worth based on market conditions.

Accounting Income vs Cash Flow

• Accounting income includes noncash items (like depreciation) while cash flow focuses solely on real cash inflows/outflows.

Average vs Marginal Tax Rates

• Average tax rate: Total taxes paid / Total taxable income.
• Marginal tax rate: Tax rate applicable to the next dollar earned.

Cash Flow from Financial Statements

• Cash flow represents the net amount of cash moving in and out of a business.

Balance Sheet Overview

• Reflects a firm's financial position at a specific date, showing assets, liabilities, and equity.
• Assets are categorized as current (e.g., cash, inventory) or fixed (e.g., property, equipment).
• Equation: ext{Assets} = ext{Liabilities} + ext{Shareholders’ Equity}

Shareholders Equity

• Difference between total assets and total liabilities, indicating ownership interest.

Net Working Capital

• Difference between current assets and current liabilities, indicating short-term financial health.

Liquidity

• Refers to how quickly and easily assets can be converted to cash without losing value.

Income Statement Overview

• Reports firm performance over a period; includes revenues, expenses, and net income (bottom line).

Components of Cash Flow

• Operating Cash Flow: Cash generated from regular business operations.
• Capital Spending: Net spending on fixed assets.
• Change in Net Working Capital: Change in current assets minus current liabilities.
• Cash flow to creditors: Interest payments - net new borrowing.
• Cash flow to stockholders: Dividends paid - net new equity raised.