U.S.Corporation Balance Sheet- Table 2.1 U.S.CORPORATION Balance Sheets as of December 31,2007 and 2008 (in Millions) 2007 2008 2007 2008 Assets Liabilities and Owners'Equity Current assets Current liabilities Cash S104 $160 Accounts payable $232 $266 Accounts receivable 455 688 Notes payable 196 123 Inventory 553 555 Total $428 s389 Total $1,112 $1,403 Fixed assets Net fixed assets $1,644 $1,709 Long-term debt $408 S454 Owners'equity Common stock and paid-in surplus 600 640 Retained earnings 1,320 1,629 Total $1,920 $2,269 Total liabilities and Total assets $2,756 $3,112 owners'equity $2,756 $3,112 5
5 U.S. Corporation Balance Sheet – Table 2.1
Balance Sheet Analysis ■ When analyzing a balance sheet,the Finance Manager should be aware of three concerns: 1.Accounting liquidity 2. Debt versus equity 3.Value versus cost EURO-ZONE BONDS 6
6 Balance Sheet Analysis n When analyzing a balance sheet, the Finance Manager should be aware of three concerns: 1. Accounting liquidity 2. Debt versus equity 3. Value versus cost
Accounting Liquidity 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. ■ Some fixed assets are intangible. 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
7 Accounting Liquidity n Refers to the ease and quickness with which assets can be converted to cash—without a significant loss in value n Current assets are the most liquid. n Some fixed assets are intangible. n The more liquid a firm’s assets, the less likely the firm is to experience problems meeting shortterm obligations. n Liquid assets frequently have lower rates of return than fixed assets
Debt versus Equity Creditors generally receive the first claim on the firm's cash flow. Q Shareholder's equity is the residual difference between assets and liabilities. 8
8 Debt versus Equity n Creditors generally receive the first claim on the firm’s cash flow. n Shareholder’s equity is the residual difference between assets and liabilities
Market vs.Book Value The balance sheet provides the book value of the assets,liabilities,and equity. Historical Cost Principle:Under Generally Accepted Accounting Principles(GAAP), audited financial statements of firms in the U.S. carry assets at cost. Market value is the price at which the assets,liabilities,or equity can actually be bought or sold which is a completely different concept from historical cost. 9
9 Market vs. Book Value n The balance sheet provides the book value of the assets, liabilities, and equity. q Historical Cost Principle: Under Generally Accepted Accounting Principles (GAAP), audited financial statements of firms in the U.S. carry assets at cost. n Market value is the price at which the assets, liabilities, or equity can actually be bought or sold , which is a completely different concept from historical cost