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財務ch2

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12 views4 pages

財務ch2

Uploaded by

issuejames
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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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財務經濟學基本理論 CH2 B126060028 黃致翔

2-1 The Balance Sheet

The balance sheet offers a snapshot of a company’s financial position at a


given point, presenting its assets on one side and its liabilities along with
stockholders’ equity on the other. It follows the fundamental accounting
equation, where assets equal liabilities plus stockholders' equity. This
document reflects what the company owns and how it is financed.

A crucial aspect of understanding the balance sheet is liquidity, which


refers to how easily and quickly assets can be converted into cash.
Companies balance liquid assets like cash and receivables with less liquid,
fixed assets such as property and equipment. While liquid assets help
meet short-term obligations, they often yield lower returns compared to
fixed assets.

Another key consideration is the balance between debt and equity, which
reflects how a company chooses to finance its operations. Debt involves
fixed repayment obligations, while equity represents the ownership stake
after debts are paid off. The difference between these two forms of
financing affects the company’s risk and financial flexibility.

The value of assets on the balance sheet is typically recorded at historical


cost, which may differ from their actual market value. This distinction
highlights the role of financial managers, who strive to increase the
market value of the firm’s assets, beyond their accounting value.
Furthermore, while efforts are being made to align U.S. accounting
standards with International Financial Reporting Standards , full
convergence remains elusive.

2-2 The Income Statement

The article explains the balance sheet, which provides a snapshot of a


firm's financial status by listing its assets, liabilities, and stockholders'
equity. The balance sheet follows the accounting equation: Assets =
Liabilities + Stockholders' Equity. Stockholders' equity represents the
residual value after liabilities are paid.

The liquidity of assets, which affects the firm's ability to meet short-term
obligations, is a key focus. More liquid assets reduce financial risk but may
offer lower returns. The article also covers the balance between debt and
equity in financing decisions, where debt involves fixed payments, and
equity reflects the ownership claim on residual assets.

It emphasizes that the balance sheet shows the book value of assets,
often different from market value. Managers aim to create value that
exceeds cost. Finally, it discusses the ongoing efforts to align U.S. GAAP
with international accounting standards (IFRS), though full convergence
has not yet been achieved.

2-3 Taxes

The article explains the impact of taxes on corporate and personal


finances, focusing on the distinction between average and marginal tax
rates. Corporate tax rates in the U.S. became a flat 21% after the Tax Cuts
and Jobs Act of 2017, while personal tax rates remain progressive, with
seven brackets. The average tax rate represents the total tax paid as a
percentage of income, while the marginal tax rate is the tax applied to the
next dollar earned. In financial decision-making, the marginal tax rate is
crucial since new cash flows are taxed at that rate, directly affecting a
firm's or individual's tax liability.

2-4 Net Working Capital

The article discusses the concept of net working capital, defined as


current assets minus current liabilities. A positive net working capital
indicates that a company has sufficient cash available to cover its short-
term obligations over the next year. net working capital serves as a crucial
measure of a firm's short-term financial health, ensuring that it can meet
its obligations while supporting growth. The distinction between average
and marginal tax rates further aids individuals and businesses in making
informed financial choices, impacting their overall financial planning.

2-5 Cash Flow of the Firm

The statement of cash flows is crucial for understanding a firm's financial


health, reflecting actual cash inflows and outflows. Unlike net working
capital, which remains unchanged despite inventory purchases that
deplete cash reserves, cash flow from operations reveals the cash
generated from core business activities. Key cash flow types include
operating cash flow, which is calculated as earnings before interest plus
depreciation minus taxes. otal cash flow, often referred to as free cash
flow, represents cash available for distribution to creditors and
shareholders after accounting for necessary investments. Understanding
these distinctions is vital for assessing a firm's financial condition.

2-6 The Accounting Statement of Cash Flows

The statement of cash flows is essential for understanding a firm's


financial health, detailing changes in cash resulting from operating,
investing, and financing activities. For U.S. Composite, the cash flow
change amounted to $41 million in 2022. To determine cash flow from
operating activities, one starts with net income, reported as $86 million,
and then adjusts for noncash expenses and changes in current assets and
liabilities. While the statement provides a comprehensive view of cash
flow, it differs from financial cash flow in its treatment of interest
payments, which are deducted from net income rather than categorized
under financing activities. This distinction is crucial for accurately
assessing a firm's cash flow and overall financial position.

2-7 Cash Flow Management

Cash flow analysis is favored because it is more challenging to manipulate


compared to other financial metrics. This stems from the subjective nature
of GAAP, which can lead to misrepresentations of a company's financial
health. Notably, firms like Tyco and Dynegy have employed tactics to
distort their operating cash flows. Tyco, for instance, misclassified cash
inflows from customer payments as operating cash flows while reporting
related purchases in the financing section. Similarly, Dynegy engaged in
round-trip trades, treating the proceeds from asset sales as operating
cash flow while misclassifying repurchases as investing outflows. Adelphia
Communications capitalized labor costs as fixed assets, inflating its
operating cash flow. While these manipulations can enhance perceived
cash flows, they do not impact the total cash flow of a firm, highlighting
the importance of analyzing total cash flow rather than focusing solely on
operating cash flow.

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