4 Basic Financial System

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4 Basic Financial System

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Lecture Note
University of Texas at Austin
Fin 320f - Foundations of Finance

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Lecture 11 Outline of Current Lecture -Balance Sheet -Income Statement -Statement of Changes in retained earnings -Statement of Changes in cash Current Lecture  4 basic financial statements:  The Balance Sheet (aka Statement of Financial Position)  Assets, Debt, Equity  The Income Statement (aka Statement of Profit & Loss, P&L, statement of Earnings)  Statement of Changes in Retained Earnings  Statement of Changes in Cash (aka Sources and Uses)  Net Working Capital measures a firm’s ability to pay the bills  Total Current Assets is also called “Gross Working Capital”  Total Current Assets minus Total Current Liabilities is called “Net Working Capital”  The more Net Working Capital a firm has, the better the firm is able to pay debts as they come due  Debt ratio measures default risk  The debt ratio equals Total Debt (current, long-term and other) divided by Total Assets  The more debt a firm uses, the greater the firm’s financial (default) risk  Assets = Debt + Equity  Debt = Assets – Equity  Equity = Assets – Debt  Income Statement Details  Sales (aka Revenue): the amount earned from selling goods & services  Costs of Goods Sold (aka COGS or COS): the cost of acquiring the inventory which was subsequently sold  Operating Expenses (aka Opex): All day-to-day costs of running the firm; includes both Depreciation Expense and Selling, General & Administrative Expenses  Interest & Other:  The interest portion of debt payments; both interest received and interest paid  All other non-operating income and expense  Watch out! It could be income or expense  Income Tax Expense (aka Provision for Income Taxes): federal, state & local income tax expense  Profit Margins  Profit margins explain how much of each sales dollar remains after deducting expenses: FIN 320F

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