Chapter 2. Financial Statements, Taxes and Cash Flow

What is shown on the left hand side of the balance sheet

assets

balance sheet equation

assets equal liabilies plus stockholders equity

liquidity refers to the ease of changing

assets t cash

Non-cash items do not affect

cash flow

non-cash items do not affect

cash flows

Product costs are usually shown on the income statement under the heading of ____

cost of goods sold

Most important item that can be extracted from financial statements

firms actual cash flows

Costs that do not change in the short run arise because of

fixed commitments

assets can be categorized as

-tangible and intangible assets -current and fixed assets

physical assets are termed ___ assets

tangible

For a mature firm, operating cash flow

-is usually positive -is a sign of trouble over a long period of time

According to GAAP, when is income reported?

-when it is earned or accrued

The price at which willing buyers and sellers would trade is called ____ value

market

according to the originators of the current U.S. corporate tax code, he only rates are:

15 25 34 35

Cash flow to creditors equals

interest paid-net new borrowing

The ____ principle of GAAP states that costs with a good or service should be recorded at the same time as the revenue from selling that good or service

matching

The balance sheet identity shows that stockholders' equity equals assets ____ liabilities

minus

the balance sheet identity shows that stockholders' equity equals assets ___ liabilities

minus

The last item on the income statement is typically the ____

net income

liquidity has two dimensions which are the ability to

quickly convert assets into cash without significant loss in value

financial leverage refers to a firm's

use of debt in its capital structure

current assets ____ exceed current liabilities in a healthy firm

usually

____ costs change as the output of the firm changes

variable

components of cash flow from assets

-capital spending -operating cash flow -change in net working capital

net earnings refers to income earned

-after interest and taxes

Net working capital equals

-current assets minus current liabilities

The more debt a firm has, the greater its

-degree of financial leverage

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

Under GAAP, assets are generally carried on a firm's balance sheet at

-historical cost -book value

questions answered on balance sheet

-how much debt is used to finance the firm? -what is the total amount of assets the firm owns?

What should you keep in mind when examining an income statement

-time and costs -cash versus non-cash items -GAAP

According to GAAP when is revenue recognized on an income statement

-when the value of an exchange of goods or services is known or reliably determined -when the earnings process is virtually completed