UT FIN 357 - Chapter 2. Accounting value (28 pages)

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Chapter 2. Accounting value



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Chapter 2. Accounting value

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Pages:
28
School:
University of Texas at Austin
Course:
Fin 357 - Business Finance

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Accounting Value Chapter 2 Finance 357 J David Miller 2017 Balance Sheet Balance Sheet Snapshot of accounting value on a specific date Assets on left side Liabilities and Stockholder s equity on right side Assets Liabilities Stockholder s Equity 2 Balance Sheet Financial Concerns Accounting Liquidity quickness with which assets can be converted to cash Current Assets are the most liquid Cash shortterm notes Accounts Receivable is next with payments forthcoming and ability to factor them Inventory is more difficult to convert to cash as it must be sold first Fixed Assets are most difficult to convert to cash as they usually aren t meant to be resold 3 A Typical Balance Sheet Balance Sheet Financial Concerns Debt versus Equity Debt requires fixed payments of interest and principle over time First claim in bankruptcy Equity only has a residual claim on firm assets and does not require any ongoing payments Behind debt holders in bankruptcy Value versus Cost Generally GAAP requires that financial statements carry assets at cost Can be very misleading because market values of assets often vary from their original cost In Finance Value implies market value not cost 5 Income Statement Income Statement measures performance over specific time period Important Income Statement Values Operating Income Earnings before interest and taxes EBIT Earnings per share EPS 6 An Income Statement The operations section of the income statement reports the firm s revenues and expenses from principal operations Total operating revenues Cost of goods sold Selling general and administrative expenses Depreciation Operating income Other income Earnings before interest and taxes Interest expense Pretax income Taxes Current 71 Deferred 13 Net income Addition to retained earnings Dividends 2 262 1 655 327 90 190 29 219 49 170 84 86 43 43 An Income Statement The non operating section of the income statement includes all financing costs such as interest expense Total operating revenues Cost of goods sold Selling general and administrative expenses Depreciation Operating income Other income Earnings before interest and taxes Interest expense Pretax income Taxes Current 71 Deferred 13 Net income Addition to retained earnings Dividends 2 262 1 655 327 90 190 29 219 49 170 84 86 43 43 An Income Statement Net income is the bottom line Total operating revenues Cost of goods sold Selling general and administrative expenses Depreciation Operating income Other income Earnings before interest and taxes Interest expense Pretax income Taxes Current 71 Deferred 13 Net income Retained earnings Dividends 2 262 1 655 327 90 190 29 219 49 170 84 86 43 43 Income Statement Key Facts Important points to remember Income is reported when it is earned not when it is collected Non cash items are included in the income statement Depreciation Deferred Taxes Footnotes to income statement may provide important details not explicitly explained in the statement itself 10 Average Tax Rate Average Tax Rate The



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