FINA 3330 - Chapter 2 (Financial Statements, Taxes, and Cash Flow)

I. The Balance Sheet

A. Book Value
B. Market Value
II. The Income Statement
A. Net Income
B. Taxes

I. Balance Sheet
The balance sheet is a financial statement showing a firm’s accounting value on a particular date.
The balance sheet identity states that Assets = Liabilities + Equity. The balance sheet reflects
the book value, not the actual market value of a firm’s assets, liabilities, and equity.

A. Book Value
Number of Shares Outstanding (NSO) = Common Stock at Par / Par Value

Net Worth (or Book Value of Common Equity) = Common Stock at Par
+ Capital in Excess of Par
+ Retained Earnings

Book Value per Share = Book Value / NSO

B. Market Value
The market value (price) of equity cannot be calculated from financial statements. Rather, the
stock price is determined based on expectations of future financial cash flows.

II. Income Statement

The income statement is a financial statement summarizing a firm’s performance over a period of
time.

A. Net Income
Net Income = Dividends Paid + Additions to Retained Earnings
Dividends Paid = Dividends per share x NSO

B. Taxes
The marginal tax rate is the tax paid on the next dollar of income earned.

Average Tax Rate = Taxes Paid / Taxable Income