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FIN 300 (120)
Chapter 2

FIN 300 - Chapter 2 Notes.docx

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Ryerson University
FIN 300
Mike Inglis

FIN 300Chapter 2 Financial Statements Cash FlowTaxesIntroductionCash Flowdifference between the number of dollars that come in and the number that go out o Measured after taxes21 The Balance SheetBalance SheetFinancial statement showing a firms accounting value on a particular date o Snapshot of the firm summarizes what the firm owns assets owes liabilities and the difference between the two equity at a given timeAssets The LeftHand SideClassified as either current or fixed o Fixed Assethas a relatively long life and can either be tangible truck or intangible patenttrademarkAccountants refer to them as capital assets o Current Assethas a life of less than a year and will convert to cash within 12 monthsInventory cash and accounts receivable are current assetsLiabilitiesOwners Equity The RightHand SideLiabilities are listed first thing on the righthand side of the BSLiabilities are classified as either current or longterm o Current Liabilitieshave a life of less than a year they must be paid within a yearListed before longterm liabilities on BSAccounts payable is an example o LongTerm Liabilitya debt that is not due within the coming year is a longterm liabilityDebt and loan are examplesFirms borrow longterm from a variety of sourcesBondsbondholders generically refer to longterm debt and longterm creditors respectivelyShareholders Equitythe difference between the total value of the assets currentfixed and the total value of the liabilities currentlongterm o Also called common equityowners equity o Reflects the fact that if firm sells all of its assets and pays off its debts the residual value would belong to shareholders o The BS always equals because assets equals liabilities plus shareholders equityFormulaAssetsLiabilitiesShareholders EquityNet Working CapitalNet Working CapitalDifference between a firms current assets and current liabilities o Positive when assets exceed liabilitiesCash available over the next 12 months exceeds the cash needed to be paid o FormulaNet Working CapitalCurrent AssetsCurrent LiabilitiesAssets side reflects the line of business of the firm and managerial decisions about cash inventory and credit policy fixed asset acquisition etcLiabilities side reflects managerial decisions about capital structure and use of shortterm debtThree things to keep in mind when examining a BS is liquidity debt versus equity and market value vs book value
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