FIN 300 Chapter : FIN300 ch 2

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Snapshot of the firm s assets and liabilities at a given point in time. Assets can be categorized as: current assets (life <1 year, tangible fixed assets (truck, computer, etc. ) Balance sheet identity: assets = liabilities + stockholders equity. Net working capital = current assets current liabilities. Positive when the cash that will be received over the next 12 months exceeds the cash that will be paid out, usually positive in a healthy firm. Liquidity - ability to convert to cash quickly without a significant loss in value. Liquid firms are less likely to experience financial distress. However, liquid assets earn a lower return tradeoff between liquid and illiquid assets. If a firm would sell all the assets and pay all the liabilities, then the remainder is the stockholder s equity. Financial leverage is the use of debt. Book value of an asset is the historical cost. Balance sheet provides the book value of the assets, liabilities and equity.

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