Analysis for Financial Management (R. Higgins) Chapter 1 Summary

1. Analysis for Financial Management (Introduction)
2. Author Robert C. Higgins, published 2009
3. Part One of the Book (Chapters 1 and 2)
1. devoted to the management of existing resources
2. financial statements
3. ratio analysis
4. company's operating activities
5. company's financial performance
6. financial performance linked to operating strategy
4. Parts Two through Four
1. acquisition and management of new resources
5. Chapter 1 Summary:
1. accounting is a scorecard for business
2. finance interprets accounting numbers for performance assessment and future planning
3. within a company financial analysis is crucial
4. investors, creditors and regulators also rely on financial analysis
5. cash flow is a confusing notion in finance
6. it is difficult to define and measure profits
7. profitability alone doesn't guarantee a business' future
8. operations and finance are crucially linked
9. the way that a company chooses to finance its assets sets the stage for what types of investments it is able to make in the future
10. Assets=Liabilities+Shareholder's Equity 
11. list assets and liabilities on B/S in order of decreasing liquidity
12. liquidity:  speed with which an asset can be converted to cash
13. current liability or asset:  expected to be converted to cash within one year
14. long term:  greater that one year
15. net income = earnings = profits
16. Income statements divided into operating and non-operating segments
17. accrual principle of accounting: revenue recognized when work is complete and a reasonable assurance that payment is on the way
18. This can lead to a lag-time between when revenue is recognized and when cash actually flows into a business
19. "depreciation allocates past expenditures to future time periods to match revenues and expenses" p13 top
20. companies typically keep two sets of records
1. records for tax purposes
2. records for managing the company and reporting progress to shareholders
21. constructing source and use statements:
1. place two balance sheets for different dates side by side.  Note changes in accounts over the period
2. group changes into cash generating and cash consuming
3. companies source cash by:
1. reducing an asset- eg- selling used equipment
2. increasing a liability- eg- bank loan
4. companies use cash by:
1. increasing asset- production of inventory
2. reducing a liability- paying off a bank loan
22. leveraged recapitalization :
23. cash flow statement expands on the source and use statement
1. add back depreciation and amortization to net income
2. add changes in current assets and liabilities ("noncash charges")
3. Net Cash flow = net income + noncash items = "cash earnings"
4. Operating Cash flow = Net Cash flow +/- changes in current assets and liabilities
5. Free Cash flow = OCF-CAPEX (approximately)
6. Discounted Cash flow = money today with the same value as a future stream of cash receipts
24. Value Problem:  Market vs. Book
1. financial statements are transactions based
2. objective valuations of many current assets do not exist
3. the value of intangible assets becomes a factor when a company is bought for more than its book value