Chapter 2
Financial Statements, Taxes, and Cash Flow
By Boundless
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Financial statements report on a company's income, cash flow and equity.
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Financial statements are used to understand key facts about the performance and disposition of a business and may influence decisions.
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Financial statements can be limited by intentional manipulation, differences in accounting methods, and a sole focus on economic measures.
The income statement, or profit and loss statement (P&L), reports a company's revenue, expenses, and net income over a period of time.
Income statements have several limitations stemming from estimation difficulties, reporting error, and fraud.
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GAAP's assumptions, principles, and constraints can affect income statements through temporary (timing) and permanent differences.
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Noncash items, such as depreciation and amortization, will affect differences between the income statement and cash flow statement.
Assets on a balance sheet are classified into current assets and non-current assets. Assets are on the left side of a balance sheet.
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The balance sheet contains details on company liabilities and owner's equity.
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Working capital is a financial metric which represents operating liquidity available to a business, organization and other entity.
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Liquidity, a business's ability to pay obligations, can be assessed using various ratios: current ratio, quick ratio, etc.
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The debt-to-equity ratio (D/E) indicates the relative proportion of shareholder's equity and debt used to finance a company's assets.
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Book value is the price paid for a particular asset, while market value is the price at which you could presently sell the same asset.
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The three limitations to balance sheets are assets being recorded at historical cost, use of estimates, and the omission of valuable non-monetary assets.
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Corporate taxes are levied on the income of various entities, stemming from their business operations.
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A tax deduction is a reduction of the amount of income subject to tax.
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Depreciation is the allocation of expenses associated with assets that contribute to operations over several periods.
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The U.S. federal, state and local governments levy taxes on individuals based on income, property, estate transfers, and/or sales transactions.
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The operating cash flows refers to all cash flows that have to do with the actual operations of the business, such as selling products.
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Cash flow from investing results from activities related to the purchase or sale of assets or investments made by the company.
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Cash flows from financing activities arise from the borrowing, repaying, or raising of money.
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Having positive and large cash flow is a good sign for any business, though does not by itself mean the business will be successful.
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The statement of equity explains the changes of the company's equity throughout the reporting period.
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Depreciation refers to the allocation of the cost of assets to periods in which the assets are used.
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Free cash flow (FCF) is cash flow available for distribution among all the securities holders of an organization.
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MVA = PV (EVAs); MVA is the difference between current market value and investors' capital., and EVA is an estimate of a firm's economic profit.