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Chapter 2

FIN 300 Chapter Notes - Chapter 2: European Cooperation In Science And Technology, Matching Principle, Income Statement


Department
Finance
Course Code
FIN 300
Professor
Laleh Samarbakhsh
Chapter
2

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CHAPTER 2: FINANCIAL STATEMENTS, CASH FLOW,
AND TAXES
*Exclude 2.4 & 2.5*
STATEMENT OF FINANCIAL POSITION
Statement of Financial Position (Balance Sheet): nancial
statement showing a rm’s accounting value on a particular
date
oA means of organizing and summarizing what a rms owns
(assets), what a rm owes (liabilities), and the di!erence
between the two (equity) at a given time
Assets
oThe structure of the assets for a particular rm re&ects the
line of business that the rm is in, managerial decisions
about how much cash and inventory to maintain, and
about credit policy and xed asset acquisition
oFixed Asset: has a relatively long life
Tangible (trucks, computers, buildings)
Intangible (trademarks, patents)
Capital assets
oCurrent Asset: has a life of less than one year
The asset will convert to cash within 12 months
Inventory, cash, accounts receivable
Liabilities
oThe structure of the liabilities re&ects managerial decisions
about capital structure and the use of short-term debt
oCurrent Liabilities: have a life of less than one year
Must be paid within the year
Accounts payable
oLong-term Liability: not due in the coming year
Bonds
Owner’s Equity (Shareholder’s Equity): if the rm were to sell all
of its assets and use the money to pay o! its debts, whatever
residual value remained would belong to the shareholders
oAssets = Liabilities + Equity
Net Working Capital: the di!erence between a rm’s current
assets and its current liabilities
oPositive when current assets exceed current liabilities
oThe cash available over the next 12 months exceeds the
cash that must be paid over that same period
Liquidity: the speed and ease with which an asset can be
converted to cash
oA highly liquid asset is one that can be quickly sold without
signicant loss of value
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