BU FE 101 - FIRMS’ DISCLOSURE OF FINANCIAL INFORMATION

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Zara MahmoodRobertsFE101Introduction to Financial Statement AnalysisFIRMS’ DISCLOSURE OF FINANCIAL INFORMATIONFinancial Statements – Accounting reports issued by a firm quarterly/annually that present past performance information and a snapshot of the firm’s assets and the financing of those assets- Public companies are required to file with SEC on quarterly (10Q) or annual (10K) basis- Must also send annual report with financial statements to their shareholders each yearAnnual Report – The yearly summary of business, accompanying or including financial statements, sent by US public companies to their stockholders- Investors/outside parties obtain information about the corporation- Source of information for corporate financial decisionsPreparation of Financial StatementsUS FASB establishes Generally Accepted Accounting Principles (GAAP)- Common set of rules and standard format for company reportso Makes is easier to compare financial results of firmsInvestors need assurance that the statements are prepared accurately- Corporations are required to hire a auditor to check annual statementsAuditor – A neutral third party that corporations hire to check a firm’s annual financial statements to ensure they are prepared according to GAAP, and provides evidence to support the reliability of the informationTypes of Financial StatementsEvery public company I required to produce 4 financial statements- Balance sheet- Income statement- Statement of cash flows- Statement of stockholders’ equityo Provide investors and creditors with overview of firm’s financial performanceTHE BALANCE SHEETBalance Sheet – A list of a firm’s assets and liabilities that provides a snapshot of the firm’s financial position at a given point in time- Divided into two parts  assets on left and liabilities on rightAssets – Cash, inventory, property, plant and equipment, and other investments a company has madeLiabilities – A firm’s obligations to its creditors- Also shown with liabilities is shareholder equityZara MahmoodRobertsFE101Shareholders’ equity – An accounting measure of a firm’s net worth that represents the difference between the firm’s assets and its liabilitiesBalance Sheet IdentityAssets = Liabilities + Stockholders’ EquityCommon Stock and Paid in Surplus – The amount that stockholders have directly invested in the firm through purchasing stock from the companyRetained Earnings – Profits made by the firm, but retained within the firm and reinvested in assets or held as cashAssetsAssets can be divided into current and long-term assetsCurrent AssetsCurrent Assets – Cash or assets that could be converted into cash within one year- Cash and Marketable Securities – Short-term, low-risk investments that can be easily sold and converted to cash- Accounts Receivable – Amounts owed to a firm by customers who have purchased goods or services on credit- Inventories – A firm’s raw material as well as its work-in-progress and finished goods- Other assetso Catch-all category that includes items such as prepaid expensesLong-Term AssetsLong-Term Assets – Assets that produce tangible benefits for more than one year- Real estate or machinery- Asset depreciated yearly as its value tends to wear out (depreciation)Depreciation – A yearly deduction a firm makes for the value of its fixed assets (other than land) over time, according to a depreciation schedule that depends on a asset’s life span- Done on a schedule that depends on assets life spanBook Value – The acquisition cost of an asset minus its accumulated depreciationLiabilitiesLiabilities can be divided into current and long-term liabilitiesCurrent LiabilitiesCurrent Liability – Liabilities that will be satisfied within one year- Accounts payable – the amounts owed to suppliers for products or services purchased with credit- Notes payable/short-term debt – loans that must be repaid in the next yearo Any repayment of long-term debt that will occur within the next year would also be listed here as current maturities of long-term debt- Accrual items (salary, taxes) that are owed but have not yet been paid. And deferred or unearned revenue, which is revenue that has been received for products that have not yet been deliveredZara MahmoodRobertsFE101Net working capital – The difference between a firm’s current assets and current liabilities that represents the capital available in the short term to run the business- Notes payable/sort term debt  financing decisions of the firm- Accounts payable/accrual items  operating decisions of the firmNet Working Capital = Current Assets – Current LiabilitiesLong-Term LiabilitiesLiabilities that extend beyond one year- When a firm needs to raise funds it can borrow through a long-term loano Would appear as a long-term debtLong-Term Debt – Any loan or debt obligation with a maturity of more than a yearStockholders’ EquitySum of current liabilities and long-term liabilities in total liabilities- Difference between assets and liabilities is stockholders’ equity (book value of equity)Book Value of Equity – The difference between the book value of a firm’s assets and its liabilities- Represents the net worth of a firm from an accounting perspectiveo Common stock and paid-in surpluso Retained earning- Inaccurate assessment of the actual value of a firm’s equityo Assets listed are valued from historical prices rather than current priceso Employees, reputation, management is not considered in assets listing- Amount investors are willing to pay can differ substantially from book value- Can be negativeo Not necessarily an indication of poor performanceo Creditors recognize the market value of the assets is far higherMarket Capitalization – The total market value of equity; equals the market price per share times the number of shares- Depends on what investors expect assets to produce in the future, not historical costsTHE INCOME STATEMENTIncome Statement – A list of a firm’s revenues and expenses over a period of time- Bottom line shows firm net incomeNet Income – The last of “bottom” line of a firm’s income statement that is a measureof the firm’s income over a given period of timeEarnings CalculationsIncome statement shows the flow of revenues and expenses generated by those assets and liabilities between two datesGross ProfitZara MahmoodRobertsFE101First two lines list revenues from sales of products and cost incurred to


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BU FE 101 - FIRMS’ DISCLOSURE OF FINANCIAL INFORMATION

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