Transcription of CHAPTER 3 UNDERSTANDING FINANCIAL STATEMENTS
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CHAPTER 3 UNDERSTANDING FINANCIAL STATEMENTS
11 CHAPTER 3 UNDERSTANDING FINANCIAL STATEMENTSF inancial STATEMENTS provide the fundamental information that we use to analyze andanswer valuation questions. It is important, therefore, that we understand the principlesgoverning these STATEMENTS by looking at four questions: How valuable are the assets of a firm? The assets of a firm can come in several forms assets with long lives such as land and buildings, assets with shorter lives suchinventory, and intangible assets that still produce revenues for the firm such as patentsand trademarks. How did the firm raise the funds to finance these assets? In acquiring these assets, firmscan use the funds of the owners (equity) or borrowed money (debt), and the mix islikely to change as the assets age.
immediate past performance of a firm, whereas valuation is much more forward looking. The Basic Accounting Statements There are three basic accounting statements that summarize information about a firm. The first is the balance sheet , shown in …
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