AFM 273 Chapter 2: Chapter 2.docx

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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)
oShareholders 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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