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CHAPTER 1: GETTING STARTED: PRINCIPLES OF FINANCE, CHAPTER 2: FIRMS AND…
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CHAPTER 3: UNDERSTANDING FINANCIAL STATEMENTS, TAXES AND CASH FLOW
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THE INCOME STATEMENT
- Also called a profit and loss statement
- Measure the amount of profits generated by a firm over a given time period (usually a year or a quarter)
- Revenue (or sales) - Expenses = Profits
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Expense is cost of goods sold, interest expenses, SGA (selling, general and administrative) expense, depreciation expense, income tax expense
Profits is gross profit, net operating income (also known as EBIT), earnings before taxes (EBT), and net income
CORPORATE TAXES
- A firm’s income tax liability is calculated using its taxable income and the tax rates on corporate income.
- Marginal tax rate is the tax rate that the company will pay on its next dollar of taxable income.
- Average tax rate is total taxes paid divided by the taxable income.
BALANCE SHEET
- A snapshot of the firm’s financial position on a specific date.
- Total Assets= Total Liabilities + Total Shareholders Equity
Total Assets
- The resources owned by the firm
- Found on the left-hand side of the balance sheet. It includes current assets and fixed assets.
Current Assests
- consists of firm’s cash plus other assets the firm expects to convert to cash within 12 months or less, such as receivables and inventory.
Fixed assets
- assets that the firm does not expect to sell within one year. For example, plant and equipment, land.
Total Liabillities
- The total amount of money the firm owes its creditors
Current liabilities
- represent the amount that the firm owes to creditors that must be repaid within a period of 12 months or less such as accounts payable, notes payable.
Long-term liabilities
- to debt with maturities longer than a year such as bank loans, bonds.
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The stockholder's equity
- The amount the company received from selling stock to investors
- The amount of the firm’s retained earnings
Liquidity
- the speed with which an the asset can be converted to cash without loss of value.
- net working capital = current assets – current liabilities
CASH FLOW
- used by firms to explain changes in their cash balances over a period of time by identifying all of the sources and uses of cash.
- Source of cash is any activity that brings cash into the firm.
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