Chapter 3: Accounting and Finance

What are the long-term assets listed in order of liquidity on the balance sheet?

-Tangible assets -Intangible assets

In 2011, Newbie Corp. has assets of $1 B, total CA of $300 M, total shareholder's equity of $700 M, and total CL of $100 M. You are preparing a common size balance sheet for Newbie Corp, which of the following numbers should be recorded for the TL item on the sheet?

30%

Market v. Book Value: The founder of Alchemy Products Inc. discovered a way to turn gold into lead and patented this new technology. He then formed a corporation and invested $200,000 in setting up a production plant. He believes that he could sell his patent for $50 million. a. What are the book value and market value if the firm? b. If there are 2 million shares of stock in the new corporation, what would be the price per share and the book value per share?

Book value equals the $200,000 the founder of the firm has contributed in tangible assets. Market value equals the value of his patent plus the value of the production plant: $50,000,000 + $200,000 = $50,200,000. b.Price per share = $50.2 million/2 million shares = $25.10 Book value per share = $200,000/2 million shares = $0.10

Net working capital

CA- CL measures the company's potential reservoir of cash

What are the current assets listed in order of liquidity on the balance sheet?

Cash and marketable securities, Accounts receivable, Inventories

The bottom-up approach to calculating EBIT

EBIT= interest + taxes + NI

The top-up approach to calculating EBIT

EBIT= total revenue-costs-depreciation

If the balance sheet of a firm indicates that total assets equal current liabilities plus shareholders equity, then the firm has: ____

NO long-term debt TA= CL + E

In general, what is changing as you read down the LEFT hand side of a balance sheet?

The assets are becoming more liquid.

Earlier in the chapter we characterized the balance sheet as providing a snapshot of the firm at one point in time and the income statement as providing a video. What did we mean by this? Is the statement of cash flow more like a snapshot or a video?

The balance sheet shows the position of the firm at one point in time. It shows the amounts of assets and liabilities at that particular time. In this sense it is like a snap shot. The income statement shows the effect of business activities over the entire year. Since it captures events over an extended period, it is more like a video. The statement of cash flow is like the income statement in that it summarizes activity over the full year, so it too is like a video.

What is the income statement?

a financial statement listing revenues, expenses, and net income of the firm in a period of time.

Cash Flows: Will the following actions increase or decrease the firm's cash balance? a. The firm sells some goods from inventory b. The firm sells some machinery to a bank and leases it back for a period of 20 years. c. The firm buys back 1 million shares of stock from existing shareholders.

a.Cash will increase as one current asset (inventory) is exchanged for another (cash). b. Cash will increase. The machine will bring in cash when it is sold, but the lease payments will be made over several years. c. The firm will use cash to buy back the shares from existing shareholders. Cash balance will decrease.

What are current liabilities?

accounts payable represent obligations due beyond one year

Why do we do common size income statements?

comparing financial statements values across firms may be difficult because of size factors, difference in currencies, etc.

What is expected of current assets?

cycle through cash over the next year

How are assets usually listed on the balance sheet?

in descending order of liquidity

What is Earnings Before Interest Taxes (EBIT) and where is it listed?

its operating profit listed on the income statement

What equity show in the balance sheet?

its the difference between the accounting value of the assets and the liabilities which represents the original capital contribution plus the accumulated earnings retained in the business minus the treasury stock

Define Liquidity

the ability to convert an asset to cash without a big loss

What does the balance sheet present?

the accounting value of assets and the source of money (shareholders equity and liabilities) used to purchase those assets at a particular time

Why does the company prepare regular financial statements for all the stakeholders?

to monitor

What does liabilities and equity show in the balance sheet?

what is owed and who provided the funding for the assets

What is expected of long-term assets?

will not be converted to cash but are expected to generate cash over future accounting cycles