INTRO TO FINANCE
CHAPTER 2 SUMMARY

1. The Balance Sheet
Also known as Statement of Financial Position
Lists the firm’s assets and liabilities

The Balance Sheet Identity:
Assets = Liabilities + Stockholders’ Equity

Current Assets: - Cash or other market securities (short-term low-risk investments that can be easily sold and converted to cash) - Account Receivable (amounts owed to firm by customers who purchased on credit) - Inventories (raw materials, work-in-progress, finished goods) - Other assets (items such as pre-paid expenses like insurance)

Long-term Assets: - Net property, plant and equipment (real estates or machinery that produce tangible benefits for more than one year) shows the book value of these assets (acquisition costs less accumulated depreciation) - Goodwill and Intangible Assets (brand names and trademarks, patents, customer relationships), suffers from amortization or impairment charge (value lost over time) - Others such as property held for sales, investments in long-term securities

Stockholders’ Equity

The difference between the firm’s assets and liabilities
An accounting measure of the firm’s net worth

Book Value is inaccurate as - Assets are mainly valued based on their historical cost rather than their true value today - Many of the firm’s valuable assets are not captured on the balance sheet (such as expertise, customer relationships)

Market Value of Equity (Market capitalization or Market cap)
= Shares Outstanding x Market price per share
Depends on what investors expect those assets to produce in the future
Successful firms are able to borrow in excess of their book values as creditors recognize that the market value of the assets is much higher than the book value

Market-to-Book Ratio