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A snapshot of the summary - Brigham Managerial Finance
3 Financial Statements, Cash Flow, and Taxes
Who use financial statements? (2)1. Corporate managers, to assess the company's strengths and weaknesses and to measure the expected impact of various proposals.
2. Outsiders, to assess whether they want to buy the company's stock, lend money, or enter into a long term business relationship.
Why is it important that everybody engaged in business has a good working knowledge of accounting?If a manager does not understand financial statements, they will not be able to judge the effects of their actions, which will make it hard for the firm to survive, much less to have a maximum value.
3.1 Financial Statements and Reports
What is an annual report?A report issued annually by a corporation to its stockholders. It contains basic financial statements as well as management's analysis of the firm's past operations and future prospects.
The quantitative an verbal materials are equally important. The firm's financial statements report what has actually happend to its assets, earnings, and dividends over the past few years, whereas management's verbal statements attempt to explain why things turned out the way they did and what might happen in the future.
Why is the annual report of great interest to investors?The information contained in the annual report can be used to help forecast future earnings and dividends.
3.2 The Balance Sheet
What is a balance sheet?A statement of a firm's financial positions (what assets the company owns, and who has claims on those assets) at a specific point in time.
How large the company is
Types of assets it holds
How it finances those assets
Current assets Current Liabilities
Investments Long-term liabilities
Property, plant and equipment
Intangibles Owner's Equity
Total assets Total Liabilities + Owner's Equity
What is stockholder's equity? (2)1. The amount that stockholders paid the company when shares were purchased and the amount of earnings the company has retained since its origination.
= Paid-in capital + Retained earnings
2. Total assets - Total Liabilities
What is the difference between cash and other current assets?The non-cash assets should generate cash over time, but they do not represent cash in hand.
The cash they would bring in if they were sold today could be higher or lower than the values reported on the balance sheet.
What is net operating working capital?Net operating working capital is a financial metric used to measure operational liquidity of a business. This measure is calculated by subtracting all noninterest-bearing current liabilities from current assets required in production. Noninterest-bearing current liabilities include accounts payable and accruals, which are expenses that have accrued but have not been paid. Current assets required in production are essentially working capital.
NOWC = Current assets - (Current liabilities - Notes payable)
What is the difference between total debt and total liabilities?A company's total debt includes both its short-term and long-term interest-bearing liabilities.
Total liabilities equal total debt plus the company's ' free' (non-interest bearing) liabilities.
Total debt = short-term debt + long-term debt
Total liabilities = Total debt + (Accounts payable + Accruals)
3.3 The Income Statement
What is operating income?Earning form operation before interest and taxes (EBIT).
Operating income (EBIT) = Sales revenues - Operating costs