FN310 Ch2

The use of debt in a firm's capital structure is called

financial leverage

Assets are normally listed on the balance sheet in order of decreasing liquidity, meaning that the most liquid assets are listed

first

Assets are classified as:

fixed and current

Under Generally Accepted Accounting Principles (GAAP), audited financial statements in the United States mostly show assets at

historical cost

A debt that is not due in the coming year is classified as a

long-term liability

A primary reason that accounting income differs from cash flow is that an income statement contains

non-cash items. The most important of these is depreciation

The short run for a firm is the period of time during which ________.

output can vary, some costs are fixed, some costs are variable

Intangible assets include

patents, trademarks, copyrights, franchises, and goodwill

Similarly, period costs are incurred during a particular time period and might be reported as

selling, general, and administrative

By cash flow, we mean

the difference between the number of dollars that came in and the number of dollars that went out.

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

Operating cash flow is an important number because it tells us, on a very basic level,

whether a firm's cash inflows from its business operations are sufficient to cover its everyday cash outflows. For this reason, a negative operating cash flow is often a sign of trouble

If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the change in capital spending is ______.

$100-$40+$10= $70

Cash flow to stockholders

= dividends paid - net new equity raised

Cash flow to creditors

= interest paid - net new borrowing

Which of these questions can be answered by reviewing a firm's balance sheet?

How much debt is used to finance the firm? What is the total amount of assets the firm owns?

Which of the following are examples of short-run fixed costs?

Rent, Bond Interest

The income statement equation is:

Revenues − Expenses = Income

Balance sheet

a snapshot of the firm's assets and liabilities at a given point in time 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

Fixed assets can be

either tangible or intangible

Cash Flow Identity

Cash flow from assets = Cash flow to creditors + Cash flow to stockholders

What is a primary concern for a bank lending funds to a business for the short-term?

Liquidity

Which of the following will be found on the liabilities section of a firm's balance sheet?

Notes payable, Long-term bonds issued by stock

Equity holders are entitled to only the residual value, the portion left after creditors are paid.

Shareholders' equity = Assets − Liabilities

In the long run,

all costs are variable

Free cash flow

another name for cash flow from assets

A fixed asset

asset with long-term use or value, such as land, buildings, and equipment

A current asset

has a life of less than one year. This means that the asset will convert to cash within 12 months. For example, inventory would normally be purchased and sold within a year and is classified as a current asset. Obviously, cash itself is a current asset. Accounts receivable (money owed to the firm by its customers) are also current assets.

Cash flow from assets

involves three components: operating cash flow, capital spending, and change in net working capital

Tangible assets include

land, land improvements, buildings, equipment, and natural resources

whenever we speak of the value of an asset or the value of the firm, we will normally mean its

market value

Expenses shown on the income statement are based on the

matching principle. The basic idea here is to first determine revenues as described previously 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 realized at the time of sale. The production and other costs associated with the sale of that product will likewise be recognized at that time

The income statement

measures performance over some period of time, usually a quarter or a year.

Capital spending refers to

net spending on fixed assets

the difference between a firm's current assets and its current liabilities is called

net working capital

An income statement reports activity that occurs _ while the balance sheet reflects values _

over a period of time; as of a specific date

Product costs include such things as

raw materials, direct labor expense, and manufacturing overhead. These are reported on the income statement as costs of goods sold, but they include both fixed and variable costs.

Operating Cash Flow

refers to the cash flow that results from the firm's day-to-day activities of producing and selling

Liquidity

refers to the speed and ease with which an asset can be converted to cash

Balance Sheet Identity

Assets = Liabilities + Shareholders' equity

Financial Accounting Standards Board (FASB) is in charge of

U.S. GAAP policies