CHAPTER 3: ACCOUNTING AND FINANCE
Understanding financial accounting is essential to understanding corporate finance.
Key Components of the Financials:
The Balance Sheet The Income Statement The Statement of Cash Flows
The Balance Sheet
The Balance Sheet is a financial statement that shows the firm’s assets and liabilities at a particular time.
Why is it useful? Shareholders’ Equity = Total Assets – Total Liabilities
Balance sheet – Financial statement that shows the firm’s assets and liabilities at a particular time.
Assets – Represent the uses of the funds raised by the firm.
• Listed on the left-hand side of the balance sheet.
Liabilities – Represent the sources of a firm’s funding.
• Listed on the right-hand side of the balance sheet.
Shareholders’ Equity – Representative of the difference between a firm’s total assets and total liabilities.
The Balance Sheet
Current Assets Current Liabilities
• Cash & Securities • Payables
• Receivables • Short-term Debt
• Inventories
+
Long-term Liabilities
+
+
Fixed Assets
• Tangible Assets
• Intangible Assets
= Shareholders’ Equity
Total Total Liabilities & Shareholders’ Equity
Assets
Fixed Assets
Tangible Assets – Assets that can be physically seen or touched.
Intangible Assets – Assets that have no physical existence; yet, are still very valuable for a firm.
Goodwill - The difference between actual price paid for the acquisition of a firm and its book value.
• Note: Most of the “intangible assets” on a firm’s balance sheets consist of goodwill.
Fixed Assets: Example
Tangible Assets: Property, Production Facilities, Production Equipment
Intangible Assets: Patents, Trademarks, Copyrights
Liabilities
Liabilities represent the sources of a firm’s funding. (i.e. Liabilities represent what a firm “owes.”)
Current vs. Long-Term Liabilities Current Assets – Current Liabilities = Net Working Capital
, Current Liabilities – Liabilities that are likely to be paid off within the next 12 months.
Examples: accounts payable, debt due for repayment
Long-Term Liabilities – Liabilities that are not likely to be paid off within the next 12 months.
Net Working Capital – The difference between a firm’s current assets and current liabilities.
Liabilities: Example
Which of the following is a current liability?
Bond debt that mature in 3 years
A bank loan that is due in 24 months
An obligation to pay a supplier within 6 months
Net Working Capital: Example
In the balance sheet below, what was the value of net working capital in 2008? 2009?
Book Values vs. Market Values
• GAAP (Generally Accepted Accounting Principles)
• Procedures for preparing financial statements.
• Book Value
• Value of assets or liabilities according to the balance sheet.
• Values recorded at their historical cost adjusted for depreciation.
• Market value
• The values of assets or liabilities were they to be resold in a market.
Note: Market values are usually higher than book values.
Understanding financial accounting is essential to understanding corporate finance.
Key Components of the Financials:
The Balance Sheet The Income Statement The Statement of Cash Flows
The Balance Sheet
The Balance Sheet is a financial statement that shows the firm’s assets and liabilities at a particular time.
Why is it useful? Shareholders’ Equity = Total Assets – Total Liabilities
Balance sheet – Financial statement that shows the firm’s assets and liabilities at a particular time.
Assets – Represent the uses of the funds raised by the firm.
• Listed on the left-hand side of the balance sheet.
Liabilities – Represent the sources of a firm’s funding.
• Listed on the right-hand side of the balance sheet.
Shareholders’ Equity – Representative of the difference between a firm’s total assets and total liabilities.
The Balance Sheet
Current Assets Current Liabilities
• Cash & Securities • Payables
• Receivables • Short-term Debt
• Inventories
+
Long-term Liabilities
+
+
Fixed Assets
• Tangible Assets
• Intangible Assets
= Shareholders’ Equity
Total Total Liabilities & Shareholders’ Equity
Assets
Fixed Assets
Tangible Assets – Assets that can be physically seen or touched.
Intangible Assets – Assets that have no physical existence; yet, are still very valuable for a firm.
Goodwill - The difference between actual price paid for the acquisition of a firm and its book value.
• Note: Most of the “intangible assets” on a firm’s balance sheets consist of goodwill.
Fixed Assets: Example
Tangible Assets: Property, Production Facilities, Production Equipment
Intangible Assets: Patents, Trademarks, Copyrights
Liabilities
Liabilities represent the sources of a firm’s funding. (i.e. Liabilities represent what a firm “owes.”)
Current vs. Long-Term Liabilities Current Assets – Current Liabilities = Net Working Capital
, Current Liabilities – Liabilities that are likely to be paid off within the next 12 months.
Examples: accounts payable, debt due for repayment
Long-Term Liabilities – Liabilities that are not likely to be paid off within the next 12 months.
Net Working Capital – The difference between a firm’s current assets and current liabilities.
Liabilities: Example
Which of the following is a current liability?
Bond debt that mature in 3 years
A bank loan that is due in 24 months
An obligation to pay a supplier within 6 months
Net Working Capital: Example
In the balance sheet below, what was the value of net working capital in 2008? 2009?
Book Values vs. Market Values
• GAAP (Generally Accepted Accounting Principles)
• Procedures for preparing financial statements.
• Book Value
• Value of assets or liabilities according to the balance sheet.
• Values recorded at their historical cost adjusted for depreciation.
• Market value
• The values of assets or liabilities were they to be resold in a market.
Note: Market values are usually higher than book values.
