chapter 2
what does shareholders equity represent?
a residual claim against the firms total assets
Non cash items do not affect
cash flow
liabilities
on the right-hand side of the balance sheet. current or long term.
Liquidity
speed and ease with which an asset can be converted to cash. gold very liquid
net working capital
the difference between a firm's current assets and its current liabilities
under gaap assets are generally carried on a firms balance sheet at
historical cost book value
net working capital will be negative when current assets are
less than current liabilities
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. bonds/bondholders refer to long-term debt and long-term creditors
Generally Accepted Accounting Principles (GAAP) audited financial statements in the USA generally show assets at
historical cost. In other words, assets are "carried on the books" at what the firm paid for them (minus accumulated depreciation), no matter how long ago they were purchased or how much they are worth today.
if dividends are $100, stock sold is $10, and stock repurchased is $25, what is the cash flow to stockholders?
$115
If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the capital spending on fixed assets during the period is
$50
According to the originators of the current U.S. corporate tax code, the tax rates in effect for 2015 are
15 25 34 35
what is reported on an income statement?
1st: revenue and expenses from the firm's principal operations. financing expenses such as interest paid. Taxes paid are reported separately The last item is net income
What is depreciation?
A systematic expensing of an asset based on the assets estimated life
For financial decision-making purposes, the most important tax rate is
marginal tax rate
what is the purpose of the income statement?
to measure performance over a set period of time
free cash flow is better described as
total distributable cash flow
Which is an example of a non-cash item on an income statement?
Depreciation
with the income statement, the financial manager needs to keep three things in mind:
GAAP, cash versus noncash items, and time and costs.
GAAP
Generally Accepted Accounting Principles
market value
The true value of any asset, the amount of cash we would get if we actually sold it.
Assets
classified as either current or fixed.
product costs are usually shown on the income statement under the heading of
cost of goods sold
What are components of cash flow from assets?
Capital spending change in net working capital operating cash flow
For financial analysis, financial statements and accounting numbers are more important than cash flows
False
income statement equation
Revenues − Expenses = Income
Assets = Liabilities + Shareholders' equity
So, the balance sheet "balances" because the value of the left-hand side always equals the value of the right-hand side.
Which of these questions can be answered by reviewing a firm's balance sheet?
What is the total amount of assets the firm owes? How much debt is used to finance the firm? nothing about net income
According to GAAP, when is income reported?
When it is earned or accrued
if interest paid is $100 and net borrowing is $150, then cash flow to creditors equals:
-$50
The companies in biotechnology industry pay tax at what tax rate?
The lowest average
financial leverage
The use of debt in a firm's capital structure. The more debt a firm has (as a percentage of assets), the greater is its degree of financial leverage.
matching principle
determine revenues as described earlier and then match those revenues with the costs associated with producing them. So, if we manufacture a product and then sell it on credit, the revenue is recognized at the time of sale. The production and other costs associated with the sale of that product would likewise be recognized at that time. doesnt represent actual cash in and outflows
When a firm smooths earnings to please investors, it is called
earnings management
Depreciation is the accountants estimate of the cost of ________________ used in the production process matched with the benefits produced from owning it
equipment and fixed assets
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 is not a component of cash flow from assets?
financing expenses
Costs that do not change in the short run arise because of
fixed commitments
fixed asset
has a relatively long life. Fixed assets can either be tangible, such as a truck or a computer, or intangible, such as a trademark or patent.
cash flow to creditors =
interest paid - net new borrowing
The general rule (the recognition principle)
is to recognize revenue when the earnings process is virtually complete and the value of an exchange of goods or services is known or can be reliably determined. In practice, this principle usually means that revenue is recognized at the time of sale, which need not be the same as the time of collection.
For a mature firm, operating cash flow:
is usually positive is a sign of trouble if negative over a long period of time
An income statement prepared using GAAP will show revenue when
it accrues, not necessarily when the cash comes in
The ____________ principle of GAAP states that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service
matching
income statement
measures performance over some period of time, usually a quarter or a year
Non-cash items are expenses that directly affect
net income
A primary reason that accounting income differs from cash flow is that an income statement contains
noncash items
Net income
often expressed on a per-share basis and called earnings per share (EPS)
balance sheet
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 firm's equity) at a given point in time.
Change in capital spending can be negative if
the firm sold more fixed assets than it purchased
book values
the values shown on the balance sheet for the firm's assets are generally are not what the assets are actually worth.
Cash flows can be derived from financial statements
true
Operating cash outflow does not include depreciation or interest
true
net working capital is usually positive in a healthy firm bc
Net working capital is positive when current assets exceed current liabilities. cash that will become available over the next 12 months exceeds the cash that must be paid over that same period.
A balance sheet reflects a firms
accounting value on a specific date
a customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded un which of Firm A's balance sheet accounts?
accounts receivable
net earnings refers to income earned
after interest and taxes
In the long-run, costs may be considered as
all variable
The cash flow identity states that cash flows rom ________ should equal cash flows to creditors and equity investors
assets
Net capital spending is equal to the change in net fixed assets plus:
depreciation
In finance, the value of a firm depends on its ability to generate
cash flows
what should you keep in mind when examining an income statement
cash versus non-cash items time and costs GAAP
The cash flow identity from assets equals cash flows to
creditors and stockholders
if net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the capital spending on fixed assets during the period is
$50
Non-cash items are _____________, that _____________ cash flows
expenses; do not directly affect
current asset
has a life of less than one year. This means that the asset will normally convert to cash within 12 months. For example, inventory would normally be purchased and sold within a year and is thus classified as a current asset. Obviously, cash itself is a current asset. Accounts receivable (money owed to the firm by its customers) is also a current asset.
Current liabilities
have a life of less than one year (meaning they must be paid within the year), and they are listed before long-term liabilities. Accounts payable (money the firm owes to its suppliers) is one example of a current liability.
The marginal tax rate
tax rate paid on the next dollar of income
equation
the difference between the total value of the assets (current and fixed) and the total value of the liabilities (current and long-term) is the shareholders' equity, also called common equity or owners' equity.