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Ch.2 Financial Statements and the Annual Report

Ch.2 Financial Statements and the Annual Report. Prof. Jamie Wang. What Financial Statements Tell about a Business. B/S: How much of the assets was borrowed, and how much provided by its shareholders

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Ch.2 Financial Statements and the Annual Report

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  1. Ch.2 Financial Statements and the Annual Report Prof. Jamie Wang

  2. What Financial Statements Tell about a Business • B/S: • How much of the assets was borrowed, and how much provided by its shareholders • What obligations will be due in the near future and what assets will be available to satisfy them • I/S: • Revenues and expenses for the period • Statement of Cash Flows: • Where cash came from and how it was used

  3. Objective of financial reporting:Provide useful information • To be useful, the information must be: • Relevant • Reliable • Understandable • Comparable across companies • Consistent over time

  4. Classified Balance Sheet • Classification of assets: • Current assets: expected to be realized in cash or sold or consumed in one year (or an operating cycle if longer) • Noncurrent assets • Investments • Property, plant, and equipment • Intangible assets

  5. Classified Balance Sheet • Classification of liabilities and shareholders’ equity: • Liabilities: • Current liabilities: obligations that will be satisfied within one year (or one operating cycle if longer) • Long term liabilities • Shareholders’ equity • Contributed capital • Retained earnings

  6. Use of classified balance sheet • Working capital: Working capital = Current assets – current liabilities • Current ratio: Current ratio = (current assets) ÷ (current liabilities)

  7. Income Statement • What appears on the I/S? • Revenues • Expenses • Objective of I/S users: predict future performance • One time/incidental events v. events related to continuing operations

  8. Multiple v. Single Step • Single step I/S • P.72 • Multiple step I/S • P.73

  9. Major ratios for evaluating a company’s operating performance and financial condition • Operating performance: • Return on shareholders’ equity (ROE) • Liquidity: ability to pay short-term obligations • Current ratio • Solvency: ability to pay all the debts • Total Liability to total assets ratio

  10. Financial Statement Analysis • Comparing ratios of the company being analyzed with those of its competitors, with industry average, and with past performances

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