Chapter 2 Concepts

What are the components of cash flow from assets? (3)

1. Operating cash flow, 2. Capital spending, 3. Additions to net working capital

Why is accounting income not the same as cash flow? (2)

Accounting income contains non-cash items, and it does not take into account the distinction between fixed and variable costs

What is another name for cash flow from assets?

Free cash flow

How is cash flow from assets calculated?

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

What is the balance sheet identity?

Assets = Liabilities + Owners Equity

What is the difference between capital cost allowance and GAAP depreciation?

CCA is dependent on political and economic reasons not accounting standards

How is cash flow to shareholders calculated?

Dividends paid - net new equity

How is change in networking capital calculated?

Ending NWC - Beginning NWC

How is capital spending calculated?

Ending fixed assets - beginning fixed assets + depreciation

Why do governments sometimes increase CCA rates?

Governments sometimes increase CCA rates to encourage investment and as a tax incentive to corporations

What is the income statement equation?

Income - expenses = Revenue

Why is interest paid not a component of operating cash flow?

Interest is not a component of operating cash flow because it is considered a financing expense, not an operating expense

How is cash flow to creditors calculated?

Interest paid - net new borrowing

What is liquidity and why is it important?

Liquidity is the ability to convert assets to cash quickly, which allows a company to pay it's debt's quickly if they are called

Explain the difference between accounting value and market value. Which is more important to the financial manager and why?

The accounting or book value is the cost at which the item was purchased. The market value is the price that could potentially be realized if the item was sold today.

What do we mean by financial leverage?

The ration of a company's debt to equity