Time Value of Money
Kinds of Interest Rates
Future Value of an Uneven Cash flow
Security Market Line
Cost of Capital
The Balance Sheet
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The Balance Sheet
The balance sheet is like a flash, a snapshot of the company's financial situation at a given moment.
You must (absolutely must) memorize this equation.
Assets = Liabilities + Equity
||something that is valuable that the company owns
Assets can include...
- Cash you know. Cash is money.
- Accounts Receivable is the money that the customers owe the company.
- Inventory is stuff a company buys and then resells to make a profit.
- Notes Receivable is money owed to a company when the company makes a loan.
Why is the company making loans? Are they a bank? No, but loans are sometimes made to
people like customers or employees. For example if a customer couldn't
pay for something (i.e. didn't pay an invoice on time) the money
could go from being an account receivable to a note receivable.
Another example would be if the company loaned money to an employee
for a down payment on a house or car or something.
- Fixed Assets are when cash is used to buy stuff that you expect will still
be useful one year from now, like land machinery and equipment, furniture buildings.
- Intangibles are when you use cash to buy stuff that may or may not
eventually become profitable. Things like patents, market research,
research and development and organizational expenses. Intangibles are usually amortized
over a period of time because they have a long life.
||money the company owes
- Current Liabilities - money that has to be repaid within 1 year
Non-Current Liabilities - money that doesn't have to be paid within 1 year.
- Notes Payable are loans the company has to pay back within
- Accounts Payable is money the company owes its suppliers and vendors for
raw materials, inventory, that kind of stuff.
- Current Portion of Long-term Debt would be like if you had a 10-year
loan, then money you had to pay during the next 1 year as part of that 10-year loan.
- Accrued Expenses - is basically a labor related category. Wages, salary,
payroll taxes, employee benefits like pension funds go here.
- Non-current Portion of Long Term Debt - remember that 10-year loan we
talked about before? Well, the other 9 years of the 10-year loan would go here.
- Subordinated Officer Loans are kind of tricky. Say an officer of the company or
an owner loans money to the company. OK, now say the company needs more money so it goes to a bank
to get another loan. Well, the bank loan would take a higher priority than the Officer Loan, so the
Officer Loan is said to be subordinated. It means they are kind of put on standby.
Because the owner/officer would be willing to wait
until later to collect the loan, it is non-current, and would go here. Generally, these loans
are considered to be equity, rather than debt, when they are subordinated.
- Contingent Liabilities - are possible liabilities, but aren't usually listed in the
balance sheet itself, and are listed in the footnotes. The company hopes that these
liabilities never actually develop. A good example is ongoing lawsuits. If the company has been sued, or
reasonably expects that it will be sued, but doesn't know how much it will have to pay to settle
the suit (if anything) it will be mentioned here. Another example is if the company acted
as a guarantor on a loan for a third party, there is the possibility that the third party
will default on the loan, and then the company will have to pay, so that would also go here.
||Equity is what is left over, the value the owners have. It's sometimes called Net Worth
or Owner's Equity.
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