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2.5 Summary and Conclusions

By Ashley Jordan,2014-09-21 12:07
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2.5 Summary and Conclusions

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    Chapter2: FINANCIAL STATEMENTS, TAXES, AND CASH FLOW 2.5 Summary and Conclusions

    This chapter has introduced some of the basics of financial statements, taxes, and cash

    flow:

    1. The book values on an accounting balance

    sheet can be very different from market

    values. The goal of financial management is

    to maximize the market value of the stock,

    not its book value.

    2. Net income as it is computed on the income

    statement is not cash flow. A primary reason

    is that depreciation, a noncash expense, is

    deducted when net income is computed.

    3. Marginal and average tax rates can be

    different, and it is the marginal tax rate that

    is relevant for most financial decisions.

    4. The marginal tax rate paid by the

    corporations with the largest incomes is 35

    percent.

    5. There is a cash flow identity much like the

    balance sheet identity. It says that cash flow

    from assets equals cash flow to creditors

    and stockholders.

    The calculation of cash flow from financial statements isn't difficult. Care must be taken in

    handling noncash expenses, such as depreciation, and not to confuse operating costs

    with financing costs. Most of all, it is important not to confuse book values with market

    values, or accounting income with cash flow.

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