Professional Documents
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2015 2014 The assets are listed in2015 order by
2014
Current assets: Current Liabilities:
Cash and equivalents $140 $107 the length
Accounts payable of time to convert
$486 $455
Accounts receivable 294 270
Inventories 269 280
them into cash.
Other 58 50 Total current liabilities $486 $455
Total current assets $761 $707 Clearly, cash is much more
Long-term liabilities:
Fixed assets: liquid than property, plant,
Deferred taxes $117 and
$104
Property, plant, and equipment $1,423 $1,274 Long-term debt 471 458
Less accumulated depreciation (550) (460) equipment.
Total long-term liabilities $588 $562
Net property, plant, and equipment 873 814
Intangible assets and other 245 221 Stockholder's equity:
Total fixed assets $1,118 $1,035 Preferred stock $39 $39
Common stock ($1 par value) 55 32
Capital surplus 347 327
Accumulated retained earnings 390 347
Less treasury stock 26 20
Total equity $805 $725
Total assets $1,879 $1,742 Total liabilities and stockholder's equity $1,879 $1,742
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Refers to the ease and quickness with which assets
can be converted to cash—without a significant loss
in value
Current assets are the most liquid.
The more liquid a firm’s assets, the less likely the
firm is to experience problems meeting short-term
obligations.
Liquid assets frequently have lower rates of return
than fixed assets.
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Creditors generally receive the first claim on the
firm’s cash flow.
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Under Generally Accepted Accounting Principles
(GAAP), audited financial statements of firms in the
U.S. carry assets at cost.
Historical cost principle: record assets and liabilities at
the price paid to buy them (Historical cost), which is usually not
the price the asset could be sold for today.
Market value is the price at which the assets,
liabilities, and equity could actually be bought or
sold, which is a completely different concept from
historical cost. Market value is the price at which
willing buyers and sellers would trade the assets.
Copyright © 2016 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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An income statement provides the following
information for a specific period of time (for example,
a full year or a quarter, or month):
Revenue earned
Expenses incurred, and
Profit generated.
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In finance, the most important item that can be
extracted from financial statements is the actual
cash flow of the firm.
Since there is no magic in finance, it must be the
case that the cash flow received from the firm’s
assets must equal the cash flows to the firm’s
creditors and stockholders.
CF(A)≡ CF(B) + CF(S)
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There is an official accounting statement called the
statement of cash flows.
This helps explain the change in accounting cash,
which for U.S. Composite is $33 million in 2010.
The three components of the statement of cash
flows are:
◦ Cash flow from operating activities
◦ Cash flow from investing activities
◦ Cash flow from financing activities
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