BUSI 408 Midterm
Balance sheet
Financial statement showing a firm's accounting value on a particular date in time
Income statement
Financial statement summarizing a firm's accounting performance over a period of time
Which is not included in the computation of operating cash flow:
Interest paid. Operating cash flow is equal to earnings before interest plus depreciation minus taxes. Also does not count capital spending or working capital requirements.
Current assets include:
Inventory and Cash, not equipment and accounts payable
The carrying value or book value of assets:
Is determined under GAAP and is based on the cost of the asset
One of the reasons why cash flow analysis is popular is because:
It is difficult to manipulate, or spin cash flows
According to GAAP, costs are:
Matched with revenues
An increase in total assets:
Must be offset by an equal increase in liabilities and shareholders' equity
Earnings per share is equal to:
Net income divided by the total number of shares outstanding
Capital Budgeting
Process of planning and managing a firm's long-term investments
Financial managers should strive to maximize the current value per share of the existing stock because:
The current stockholders are the owners of the corporation
A firm starts its year with a positive net working capital. During the year, the firm acquires more short-term debt than it does short-term assets. This means that:
The ending net working capital can be positive, negative, or equal to zero
Working Capital Management
The management of a firm's short-term assets and liabilities
Capital structure
The mixture of debt and equity used by a firm to finance its operations
Working capital management is concerned with:
The upper portion of the balance sheet
The primary goal of financial management:
To maximize the current value per share of existing stock
Operating cash flow
calculated by adding back noncash expenses to net income and adjusting for changes in current assets and liabilities
Free cash flow
cash that the firm is free to distribute to creditors and stockholders
Under GAAP, a firm's assets are reported at:
cost
Net working capital
current assets minus current liabilities
Noncash items
expenses charged against revenues that do not directly affect cash flow
Accounting profits and cash flows are:
generally not the same because GAAP allows for revenue recognition separate from the receipt of cash flows
Book value:
is based on historical cost
When making a financial decision, the most relevant tax rate is the...
marginal tax rate
The decisions made by financial managers should all be ones which increase the:
market value of the existing owners' equity.
Liquid assets
one which can be quickly converted into cash without a significant loss in value
Cash flow from operating activities
refers to the cash flow that results from the firm's ongoing, normal business activities
Cash flow from investing
refers to the changes in net capital assets
Shareholders equity includes the following accounts:
retained earnings and capital surplus (not interest paid or long-term debt)
Net capital spending is equal to:
the net change in fixed assets
Liquidity:
valuable to a firm even though liquid assets tend to be less profitable to own.
Martha's Enterprises spent $2,400 to purchase equipment three years ago. This equipment is currently valued at $1,800 on today's balance sheet but could actually be sold for $2,000. Net working capital is $200 and long-term debt is $800. Assuming the equipment is the firm's only fixed asset, what is the book value of shareholders' equity?
$1200
A firm has $300 in inventory, $600 in fixed assets, $200 in accounts receivable, $100 in accounts payable, and $50 in cash. How much in current assets?
$550
Brad's Company has equipment with a book value of $500 that could be sold today at a 50% discount. Its inventory is valued at $400 and could be sold to a competitor for that amount. The firm has $50 in cash and customers owe it $300. What is the accounting value of its liquid assets?
$750, do not include the equipment in the calculation
Teddy's Pillows has beginning net fixed assets of $480 and ending net fixed assets of $530. Assets valued at $300 were sold during the year. Depreciation was $40. What is the amount of capital spending?
$90 (difference between ending and beginning fixed assets as well as depreciation)
Working capital management includes decisions concerning these:
Accounts payable, accounts receivable, and inventory. Not long-term debt
The asset that is generally most liquid
Accounts receivable (instead of inventory, buildings, equipment, and patents)
When making financial decisions related to assets, you should:
Always consider market value
The basic equation of the balance sheet:
Assets = Liabilities + Stockholders' Equity
Concerning liquidity:
Balance sheet accounts are listed in order of decreasing liquidity
What are all components of the statement of cash flows?
Cash flow from operating activities, cash flow from investing activities, cash flow from financing activities
The cash flow of the firm must be equal to:
Cash flow to stockholders + cash flow to debtholders
Net working capital is:
Current assets minus current liabilities
Current liabilities include:
Debt payable to a mortgage company in nine months and accounts payable to suppliers. Not a note payable in eighteen months or loan payable in fourteen months: has to be within one year.
An example of a capital budgeting decision:
Deciding whether or not to open a new store
Assets are listed on the balance sheet in order of:
Decreasing Liquidity
An increase in ____ will cause the operating cash flow to increase
Depreciation
As seen on an income statement:
Depreciation reduces both pretax income and net income
To determine cash flow from an income statement
Determine operating cash flow + the change in net working capital - net capital spending
Operating cash flow formula
EBIT (Total sales - costs - depreciation) + taxes + Depreciation
