FNBU 3221 Chapter 3: Chapter 3

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5 Feb 2017
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Chapter 3
Cash Flow and Financial Statements: A Closer Look
Sources of cash: firm’s activities that generate cash
o Decrease in left-side/increase in right-side accounts
Uses of cash (applications of cash): firm’s activities in which cash is spent
o Increase in left-side/decrease in right-side accounts
Statement of cash flows: firm’s financial statement that summarizes its sources & uses of
cash over specified period
Standardized Financial Statements
Common-size statement: standardized financial statement presenting all items in percentage
terms. Balance sheet items shown as percentage of assets & income statement items as
percentage of sales
Common-base year statement: standardized financial statement presenting all items relative
to certain base year amount
Ratio Analysis
Financial ratios: relationships determined form firm’s financial information & used for
comparison purposes
Ratio analysisanother way of avoiding problems involved in comparing companies of
different sizes
Ratio analysis problemlarge number of possible ratios
Short-term solvency (liquidity) measures
o Primary concern is firm’s ability to pay its bills over short run w/out undue stress
o Pro: book & market values similar
o Con: current assets & liabilities change rapidly so may not be reliable guide for future
o Higher values=greater liquidity, but may also indicate inefficient use of short-term
assets
  

   

  

 

  

Long-term solvency measures
o Addresses long-term ability to meet obligations
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