Fin 3080 Prof Xin Li Week 2 Notes
Fin 3080 Prof Xin Li Week 2 Notes FIN 3080C
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This 3 page Class Notes was uploaded by Brady Zuver on Thursday September 1, 2016. The Class Notes belongs to FIN 3080C at University of Cincinnati taught by Xin Li in Fall 2016. Since its upload, it has received 11 views. For similar materials see Business Finance in Finance at University of Cincinnati.
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Date Created: 09/01/16
Finance 3080 Professor Xin Li Week 2 Notes Chapter 2 Financial Statements 1. Balance Sheet a. Summary of what the firm owns (assets), what they owe (liabilities), and the difference between the two (equity) i. Left Side Assets 1. Current Assets a. Cash b. Accounts Receivable (Money owed to the firm by customers) c. Inventory 2. Fixed Assets a. Tangible i. Trucks ii. Machinery b. Intangible i. Patent ii. Trademark 3. Liquidity: How easy and fast the asset can be cashed without significant loss of value a. Assets normally listed in order of decreasing liquidity i. Cash Always First (Perfect Liquidity) ii. Fixed assets last (Hardest to transfer to cash) ii. Right Side Liabilities 1. Current Liabilities a. Less than 1 year (must be payed within 12 months) i. Accounts payable (money firm owes suppliers) ii. Notes Payable 2. Long-Term Debt a. Debt not due in the coming year 3. Shareholder’s Equity a. Remaining value after selling assets and paying off all debt. 4. Listed in order relating to life of liability a. Usually placed in increasing life (Needs paid first Needs paid last) iii. Equity (common equity or owner’s equity) 1. The Difference between the total value of the assets and the total value of liabilities 2. If the firm goes bankrupt, it sells its assets to pay debts. a. Then Equity holders are entitled to remaining value 3. Items of Equity a. Common Stock and Paid-in surplus b. Retained Earnings i. Part of net income that is not distributed to shareholders b. Balance Sheet Identity i. Total Assets= Total Liabilities + Owner’s Equity ii. Net Working Capital = Current Assets – Current Liabilities 1. Net working capital greater than 0 is cash that will become available over the next 12 months a. Exceeds the cash that must be paid over the same period 2. Income Statement a. Measures a firm’s performance over a period of time (usually a quarter of a year) i. First thing reported is generally Revenue or Net Sales, followed by Cost and Expense from the firm’s primary operation. b. Earnings before interest and taxes= Revenue-Cost-Depreciation i. Depreciation is a non-cash item ii. Does not directly affect cash-flow c. Taxable income= EBIT-Interest Payment i. EBIT = Earnings Before Interest and Taxes ii. Firms must pay interest to creditors before distributing net income to shareholders through dividends d. Net Income = Taxable Income – Tax Payment i. Tax Payment = Taxable income x Tax Rate ii. Net Income= Taxable income x (1-Tax Rate) e. Net Income= Dividend + Addition to Retained Earnings i. Firms can decide if they want to give dividends to shareholders or retain the earnings to fund investment projects 3. Corporate Taxes a. Size of a company’s tax bill is determined by tax code i. Corporate tax rates are NOT strictly increasing 1. Tax rate increases, then decreases then increases again over different income levels. Table 2.3 on CH 2 Notes b. Average Tax Rate: Tax Bill divided by the taxable income c. Marginal Tax Rate: The rate of the extra tax you have to pay if you earned one more dollar i. Marginal Tax Rate is the tax rate which your taxable income is located 4. Cash Flow a. The difference between the number of dollars that came in and the number that went out i. CF from Assets= CF to creditors (bondholders) + CF to owners (stockholders) b. Cash Flow from Assets i. Operating Cash Flow – Net Capital Spending – Change in Net Working Capital 1. Operating Cash Flow: Cash flow from normal business activities 2. Capital Spending: Net spending on fixed assets 3. Change in Net Working Capital: Net change in current assets to liabilities for the period of interest ii. Operating Cash Flow= EBIT + Depreciation -Taxes 1. Add deprecation back in because it is not a cash outflow 2. Don’t want to include interest because it is a financing expense 3. Include taxes because they are paid in cash (Minus Taxes) Chapter 3 Working with Financial Statements 1. Use and Source of Cash a. Source: Cash Inflow i. Decrease in assets (selling assets) 1. Decreases accounts receivable a. Getting paid for assets (selling goods) ii. Increase Liabilities 1. Increases Notes Payable a. Borrowing money b. Use: Cash Outflow i. Purchasing Assets or Paying off Liabilities 1. Increase in Assets a. Increase Inventory 2. Decrease Liabilities and Equity a. Decreases accounts payable i. Paying off loans or paying suppliers 2. Ratio Analysis a. Financial ratios help compare firms of different sizes b. There is no “best” ratio, the decision on which ratio to use depends on what you care more about c. All ratios are only useful if there is a benchmark to compare to i. Time-trend: Comparing company to itself over time ii. Peer Group: Compared to similar companies or industries
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