AFM 273 Chapter 2: Chapter 2.docx

School

Department

Accounting & Financial Management

Course Code

AFM273

Professor

Garvin Blair

Chapter

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Chapter 2:

Financial Statements are firm issued accounting reports with past performance information. The

reporting process is centralized nationally through System for Electronic Document Analysis and

Retrieval (SEDAR)

•It is filed with provincial securities commission for interim (quarterly) financial statements

or annual reports

•Financial statements must meet standards of GAAP

•Company must have an auditor to check a firm’s financial statements

•Every publically traded company is required to produce 5 types of financial statements

Types of Financial Statements

•Balance Sheet shows firm’s financial position at a point in time

oAssets = Liabilities + Shareholder’s Equity

oAssets are what the company owns

Current Assets are cash or expected to be turned into cash in the next

year (Cash, marketable securities, A/R, inventories, prepaid expenses)

Long-term assets (Net property, plant & equipment [book value,

depreciation], goodwill [amortization]

oLiabilities are what the company owes

Current liabilities are due to be paid within the next year (A/P, notes

payable/short-term debt, current maturities of long-term debt, taxes

payable, wages payable)

Long-term liabilities (long-term debt, capital leases, deferred taxes)

oShareholder’s equity is the difference b/w firm’s assets and liabilities

oWorking Capital = Current Assets – Current Liabilities

oBook Value of Equity = Book Value of Assets – Book Value of Liabilities

oMarket Value of Equity = Market Price per Share x # of Shares Outstanding (aka

Market Capitalization)

oMarket value to book value ratio shows how much investors are willing to pay

more or less for a company’s shares

oLiquidation value is the value of the firm if all assets were paid and all liabilities

were paid

oMarket-to-Book Ratio = Market Value of Equity/ Book Value of Equity

oValue Stocks have low M/B ratios

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