Balance Sheet
a firm’s assets and how these assets are financed (debt or equity)
ASSETS = LIABILITIES + STOCKHOLDERS EQUITY
balance of the cash & equivalents
total current assets - accounts receivable - inventories
Company’s assets
represents the sum of its total current assets and net fixed assets.
Net fixed assets = total assets - total current assets
Total Debt Balance
represents the total value of everything a company owes - including long-term debt and current liabilities.
Total current liabilities = accounts payable + accruals + notes payable
Total Liabilities & Equity
the sum of total debt a company owes to its lenders and total equity a company owes to its owners.
common stock & retained earnings
Retained earnings = total common equity - common stock
— accruals are obligations that are owed but have not yet been paid.
Income Statement
presents results of business operations during a specified period of time.
also known as the profit & loss statement provides a snapshot of a company’s financial performance during a specified period of time
gross income, expenses, net income
Statement of Cash Flows
reports the effect of the firm’s activities over a period
- operating
- investing
- financing
examines investment and financing decisions
- uses of cash (investment decision)
- sources of cash (financing decisions)
PURPOSE:
show how the firm’s operations have affected its cash position
ANSWERS: is the firm generating the cash needed to purchase additional fixed assets for growth?
Ratios
- financial ratios are simply accounting numbers (USED TO COMPARE TWO OR MORE AMOUNTS) translated into relative values
- ratios are designed to shows relationships between financial statement accounts within firms and between firms, no matter their sizes.
Why do we use Ratio Analysis?
- provides an idea of how well the company is doing
- standardizes numbers; facilitates comparisons among firms
- used to highlight weaknesses and strengths
PROVIDES AN INDICATION OF THE FUTURE FINANCIAL HEALTH OF THE FIRM**
Five major categories of ratios
LIQUIDITY RATIOS: is the firm able to meet its current obligations?
ASSET MANAGEMENT RATIOS: is the firm effectively managing its assets (investments)?
DEBT MANAGEMENT RATIOS: does the firm have the right mix of debt and equity (financing)? Can the firm handle more debt?
PROFITABILITY RATIOS: how do the combined effects of liquidity, asset, and debt management affect profits?
MARKET VALUE RATIOS: what do investors think about the firm’s future financial prospects?
Liquidity Ratios
Current ratio = current assets/current liabilities
CR tells you how well your current assets can cover your current liabilities.
Quick ratio = liquid assets / current liabilities
TO FIND LIQUID ASSETS = current assets - inventories
Debt Ratio
total liabilities / total assets
Net Cash Flow
net income + depreciation
