Financial Statements, Cash Flow, and Taxes

A manager’s primary goal is to maximize the value of his or her firm’s stock, and value is based on the firm’s future cash flows. But how do managers decide which actions are most likely to increase those flows, and how do investors estimate future cash flows? The answers to both questions lie in a study of financial statements that publicly traded firms must provide to investors.  Here investors include both institutions (banks, insurance companies, pension funds, and the like) and individuals like you.

The annual report is the most important report that corporations issue to stock-holders, and it contains two types of information.  First, there is a verbal section, often presented as a letter from the chairperson, which describes the firm’s operating results during the past year and discusses new developments that will affect future operations. Second, the report provides these four basic financial statements:

  1. The balance sheet, which shows what assets the company owns and who has claims on those assets as of a given date—for example, December 31, 2013.
  2. The income statement, which shows the firm’s sales and costs (and thus profits) during some past period—for example, 2013.
  3. The statement of cash flows, which shows how much cash the firm began the year with, how much cash it ended up with, and what it did to increase or decrease its cash.
  4. The statement of stockholders’ equity, which shows the amount of equity the stockholders had at the start of the year, the items that increased or decreased equity, and the equity at the end of the year.

Slide: Pertemuan 5 MK

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