BFIN322 Chapter 2

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Free cash flow can also be called what?

total distributable cash flow

Define Average Taxes

total tax bill/taxable income

Market Value

true value; the price @ which the assets, liabilities or equity can be bought or sold

Earnings Management

when a firm smooths earning to please investors

Define Marginal Taxes

% of tax paid on the next dollar earned

Net earnings refers to income earned ________

After interested and taxes

Net Working Capital

Day-to-day activites, usually positive for a healthy firm

Why are Marginal tax rates important?

Financial decisions are usually based on new cash flows Incremental cash flows are taxed @ marginal rates

When examining an income statement you should keep in mind ....

GAAP Time & costs Cash vs Non-Cash Items

GAAP Matching Principle

Recognize revenue when it is fully earned, match expenses required to generate revenue to the period of recognition

Who do publicly traded companies file regular reports with?

Securities and Exchange Commission - usually filed electronically and searched via EDGAR

Book Value:

balance sheet value of assets, liabilities and equity

value of a firm depends on it's ability to generate what?

cash flows

Noncash Items

do not affect cash flow, depreciation is the most important.

Most important item that can be extracted from financial statements

firm's actual cash flows

What is the purpose of cash flows?

how cash is generated from utilizing assets and how it is paid to those who finance the asset purchase

What are the 2 ways accountants usually classify costs?

product and period

Liquidity

speed and ease of conversion t cash without significant loss of value

measured over a speficified period of time

the income statement is measured over____

Time & Costs are important when?

When examining an income statement

Depreciation

a systematic expensing of an asset based on the asset's estimated life


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