BA323: Chapter 2 Financial Statements, Taxes and Cash Flow
Liabilities and Owners Equity: The Right hand side
A firm's liabilities are the first thing listed on the right-hand side of the balance sheet. These are either classified as either current or long term. Current liabilities, like current assets, have a life of less than one year (meaning they have to be paid within the year), and they are listed before long term liabilities.
Cash flow to stockholders equals
Dividends paid less new net equity raised.
Long Term Liability
A debt that is not due in the coming year. A loan that the firm will pay off in five years is one such long term debt.
Liquidity
A measure of the ease with which an asset can be converted into money without a significant loss of value.
What are classified as liabilities on a firm's balance sheet A) Long Term Debt B) Accounts recievable C) Marketable Securities D) Accounts Payable
A) Long term debt D) Accounts payable
Rank the ease (easy to hard) of turning the following assets into cash.
Cash Equivalents Accounts recievable Inventory Plant and Equipment
In finance, the value of a firm depends on its ability to generate ______.
Cash flows
Marginal tax rates are the most important tax rates because:
Financial Decisions are usually based on new cash flows. Incremental cash flows are taxed at marginal tax rates.
Which of the following is NOT a component of cash flow from assets.
Financing Expenses
For financial decision-making purposes, the most important tax rate is the _______ tax rate.
Marginal Tax rate
Shareholders Equity =
Assets minus Liabilities
Generally Accepted Accounting Principles
Audited financial statements in the United States generally show assets at historical cost.
On the balance sheets, assets are listed at their _____ value
Book Value
The short run period is when there are ______costs.
Both fixed and variable
What are examples of fixed assets on the balance sheet.
Buildings, Patents, and Trademarks.
Non-cash items do not affect:
Cash flow
The cash flow identity states that cash flow from assets equals cash flows to _____.
Creditors and stockholders
Noncash items
Expenses charged against revenues that do not directly affect cash flow, such as depreciation
Cashflow to Creditors
Interest paid less net new borrowing
Equity
The difference between the amount owed on a home and the home's value.
Shareholders Equity
The difference between the total value of the assets (cuurrent and fixed) and the total value of the liabilities (current and long term) is the shareholders equity. Also called common equity and owners equity. Assets = Liabilities + Stockholders Equity
Individual Retirement Account
A self-funded retirement plan that allows you to contribute a limited yearly sum toward your retirement.
Incomestatement
Measures performance over some period of time, usually a quarter or a year.
What should you keep in mind when examining an income statement?
GAAP, Cash versus, noncash items, and time and costs.
Under GAAP, assets are generally carried on a firm's balance sheet at ______.
Historical cost and book Value
The purpose of an ________is to measure the performance over a set period of time.
Income Statement
Depreciation
The loss of the value of capital equipment that results from normal wear and tear
Financial Leverage
The use of debt in a firm's capital structure.
Current assets _______ exceed current liabilites in a healthy firm.
Usually
What questions can be answered by reviewing a firm's balance sheet?
What is the total ammount of assets the firm owns? How much debt is used to finance the firm.
Which of the following are components of cash flow from assets?
Change in net working capital Operating cash flow Capital Spending
Depreciation is the accountant's estimate of the cost of _____ used in the production process matched with the benefits produced from owning it.
Equipment and Fixed Assets
For a mature firm, operating cash flow:
Is a sign of trouble if negative over a long time. Is usually positive
Net earnings refers to income earned _______.
After interest and taxes.
Assets: The left hand side
Assets are split as either current or fixed. A fixed asset has a long life. Fixed assets can be tangible, such as a truck or intangible, such as a trademark. A current asset has a life of less than one year. The asset would normally convert to cash withing 12 months.
Which of the following are components of cash flow from assets. Net New Equity, Change in Net working capital, Capital spending, Operating cash flow or Net New Borrowing.
Change in Net Working Capital Capital spending Operating Cash flow
Cashflow to Stockholders
Dividends paid less net new equity raised.
EBIT
Earnings before interest & tax; Gross profit - operating expenses (also known as operating income)
The general rule
Is when you recognize revenue when the earnings pricess is virtually complete and the value of an excange of goods er services is knwn or can be reliably determined. This usually means that revenue is recognized at the time of sale, which may not be at the time of collection.
The balance sheet
It's a snapshot of the firm. It is a convenient means of organizing and summarizing what a firm owns ( its assets), what a firm owes (its liabilities, and the difference between the two.
The price at which willing buyers and sellers would trade is called _____
Market Value
The difference between a firm's current assets and its current liabilities is called.
Net Working Capital
Net income
Net income is often expressed on a per-share basis and called earnings per share.
A positive operating cash flow indicates that the firm is generating enough cash to:
Pay operating costs
Liquidity
Refers to the speed and ease which an asset can be converted to cash.
Common stockholders are entitled to the difference between ______ and _____
Residual value: firms total assets - firm's total liabilities.
If you make an extra $1000 in income and your marginal tax rate is 30% while your average tx rate is 20% then you will pay ______ in taxes on this extra income.
$300
Book Value
The difference between the cost of a depreciable asset and its related accumulated depreciation.
Inventory Turnover
the frequency of inventory replacement
Market Value
The price a seller can expect to receive for a product in a competitive marketplace.
According to GAAP, when is income reported?
When it is earned or accrued.
When is revenue recognized on an income statement?
When the earnings process is virtually completed. When the exchange of goods or services is completed.
The greater the debt a firm has the greater its
Financial Leverage