Textbook Notes (362,734)
Canada (158,032)
Economics (800)
ECON 2560 (71)
Chapter 3

Chapter 3 -Notes.pdf

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University of Guelph
ECON 2560
Nancy Bower

Chapter 3 – Notes Balance Sheet: Financial Statement that shows the value of the firm's assets and liabilities at a particular time The Main Balance Sheet Items CurrentAssets Current Liabilities  Cash & Securities - Payables  Receivables = - Short-term debt  Inventories + Long-termAssets Long-term liabilities  Tangible assets +  Intangible assets Shareholders equity Shareholder's Equity = TotalAssets – Total Liabilities Generally AcceptedAccounting Principles: Procedures for preparing financial statement Book Value: Net worth of the firm according to the balance sheet Income Statement: Financial statement that shows the revenues, expenses, and net income of a firm over a period of time EBIT (Earnings Before Interest and Taxes) = Sales and other income – Operating expenses – Depreciation and amoritization – Restructuring costs Profits Versus Cash Flow  To calculate the cash produced by the business it is necessary to add back the depreciation charge (which is not a cash payment) and to subtract the expenditure on new capital equipment (which is a cash payment)  The cash that the company receives is equal to the sales shown in the income statement less the increase in unpaid bills ◦ Example: Period 2 3 Sales 100 0 Change in receivables 100 -100 Cash received 0 100  The cash outflow is equal to the cost of goods sold, which is shown in the income statement, plus the change in inventories: Period 2 3 Costs of goods sold 0 60 Change in inventories 60 -60 Cash paid out 60 0 The Statement of Cash Flows: Financial statement that shows the firm's cash receipts and cash payments over a period of time  Contains three sections: ◦ Operation activities, such as the production and sale of a product ◦ Investment activities, such as plant and equipment or the acquisition of new businesses ◦ Financing activities, such as the sale of new debt or shares  Operating Activities: ◦ 1. Net earnings (or net income) ◦ 2.Add: depreciation and amortization because these are not cash flows even though they are treated as expenses in the income statement ◦ 3. Other adjustments such as future taxes and accounting gains or losses on the sale of fixed assets Cash flow provided by operating activities: = Net earnings + depreciation and amortization + cash from (used in) other income statement adjustments + cash from (used in) non-cas
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