c2: financial statements + cash flows

• the balance sheet Provides a snapshot of the firm’s financial position at a certain point in time. the assets are on the left or at the top and liabilities & equity (claims against assets) are on the right or at the bottom
• marketable securities that mature very soon are called cash equivalents and are included with cash. marketable securities that take longer to mature are called short-term investments
• Inventory shows the dollars the firm has invested in raw materials, work-in-process, and finished goods available for sale
• Long-term assets can be reported either as their book value and accumulated depreciation OR as the net amount (book value less accumulated depreciation)
• Accruals aka accrued expenses are the amount of taxes and wages the firm has yet to pay in a year
• Long-term bonds reflect a claim held by investors other than shareholders
• Preferred stock is a hybrid of common stock and debt
• The common stock account records the proceeds the firm received from selling shares of stock in the past
• Retained earnings are the cumulative amount of earnings not paid out as dividends
• common stock + retained earnings = common or simple equity. this represents the assets net of the liabilities, or the net worth of shareholders.
• income statements shows a firm’s performance over a period of time, like a quarter or year
• net sales = revenues - discounts & returns
• Depreciation and amortization are periodic charges which reflect the estimated costs of the long-term assets used up in a particular period
• cost of goods sold (cogs) includes labour, raw materials, and all expenses directly related to production
• Net income (aka profit or earnings) = revenues - expenses - taxes - preferred dividends. but before paying common dividends
• earnings per share (EPS) = net income / number of shares outstanding

  AKA "THE BOTTOM LINE"
• The statement of changes in equity reports changes in shareholders’ equity during the accounting period. It results from ploughing the portion of net income not paid out as common dividends back into the business. It shows the beginning equity, any changes, and the end-of-period equity
• retained earning represents a claim against assets, NOT cash itself
• THE STATEMENT OF CASH FLOWS Summarizes the changes in a firm’s cash position resulting from the firm’s operation (activities) during a period of time. THE FIRM'S ACTIVITIES ARE SPLIT INTO 3 CATEGORIES

  1. OPERATING
  2. INVESTING
  3. FINANCING
• Net cash flow ≠ accounting profit, since some revenues and expenses are not received or paid in cash
• Depreciation and amortization (largest), Deferred tax payments AND Revenue not collected in cash ARE ALL EXAMPLES OF NONCASH REVENUES AND CHARGES
• managers focus on free cash flows (FCF) which is the cash flow available for distribution to all investors after making all investments necessary to sustain ongoing operations. 
• Operating current assets (Op CA) are the current assets needed to support operations which include cash, inventory, and receivables. it excludes short-term investments because they are not part of operations
• Operating current liabilities (Op CL) are the current liabilities resulting as a normal part of operations. it includes accounts payable and accruals. it excludes notes payable because they are a source of financing, not a part of operations
• Operating long-term assets include land, buildings, factories, equipment, etc.
• uses of fcf:

  1. pay interest on debt
  2. pay principal back on debt
  3. buy cash dividends
  4. buy back stock
  5. buy non-operating assets (ie. marketable securities)
• A company’s value depends on the present value of its expected future FCF, discounted at the company’s weighted average cost of capital (WACC)
• If FCF is negative because NOPAT is negative, it's bad. There is nothing wrong with a high-growth profitable (positive NOPAT) firm having a negative FCF because it is making large investments in operating assets to support growth.
• return on invested capital (ROIC) is a measure indicating how much NOPAT is generated by each dollar of operating capital. Its a way to show whether growth is profitable
• mva and eva are performance measures that were developed to incorporate stock prices into traditional accounting data and modified data
• MVA measures the effects of managerial actions since the inception of a firm
• EVA is a estimate of a business’s true economic profit for the year and measures the extent that the firm has increased shareholder value. It represents the residual income remaining after the cost of all capital (both debt and equity) has been deducted