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Assets Liabilities (Debt) & Equity

The document provides an overview of key financial concepts including the four main financial statements, balance sheet components, and categories of financial ratios. It defines current assets, fixed assets, other assets, and discusses net working capital and capital structure. Short-term and long-term debt are also defined.

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69 views2 pages

Assets Liabilities (Debt) & Equity

The document provides an overview of key financial concepts including the four main financial statements, balance sheet components, and categories of financial ratios. It defines current assets, fixed assets, other assets, and discusses net working capital and capital structure. Short-term and long-term debt are also defined.

Uploaded by

the learners club5
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FIN 440 LECTURE 3

REVIEW OF BASIC CONCEPTS contd…


CHAPTER REFERENCE – CHP 2 & 3

Q. What is the letter to stockholders?


Q. What are the 4 key financial statements?

INCOME STATEMENT

SALES
- Cost of Goods Sold
GROSS PROFIT OPERATING ACTIVITIES
- Operating Expenses
OPERATING INCOME (EBIT)

- Interest Expense
EARNINGS BEFORE TAXES (EBT)
- Income Taxes
EARNINGS AFTER TAXES (EAT) FINANCING ACTIVITIES
- Preferred Stock Dividends
- NET INCOME AVAILABLE
TO COMMON STOCKHOLDERS

BALANCE SHEET

Assets Liabilities (Debt) & Equity

Current Assets Current Liabilities


Cash Accounts Payable
Marketable Securities Accrued Expenses
Accounts Receivable Short-term notes
Inventories Long-Term Liabilities
Prepaid Expenses Long-term notes
Fixed Assets Mortgages
Machinery & Equipment Equity
Buildings and Land Preferred Stock
Other Assets Common Stock (Par value)
Investments & patents Paid in Capital
Retained Earnings

• Current Assets: assets that are relatively liquid, and are expected to be converted to cash within a year.
- Cash, marketable securities, accounts receivable, inventories, prepaid expenses.
• Fixed Assets: machinery and equipment, buildings, and land.
• Other Assets: any asset that is not a current asset or fixed asset.
- Intangible assets such as patents and copyrights

• Net Working Capital (NWC) = Current Assets – Current Liabilities


• Capital Structure => Liabilities Vs Equity
• Capital Intensity => In general, higher the investment in fixed assets, higher is the risk of the company /
project
• Liquidity: Higher the NWC, higher is the liquidity, lower are the returns at lower risk and vice versa.

• Debt Capital: financing provided by a creditor.


• Short-term debt: borrowed money that must be repaid within the next 12 months.
– Accounts payable, other payables such as interest or taxes payable, accrued expenses, short-term
notes.
• Long-term debt: loans from banks or other sources that lend money for longer than 12 months.
• Equity Capital: shareholders’ investment in the firm.
• Preferred Stockholders: received fixed dividends, and have higher priority than common stockholders in
event of liquidation of the firm.
• Common Stockholders: residual owners of a business. They receive whatever is left after creditors and
preferred stockholders are paid.

Financial Analysis Components

1. Calculations: The interpretation


2. Comparisons: The comparison of the company to its past and comparison of the company to its industry
(Industry average)
3. Decision - Are our decisions maximizing shareholder wealth?

Catagories of Ratios
1. Liquidity

2. Activity

3. Debt

4. Profitability

5. Market

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