Chapter 2 financial statements and cash flow

What is depreciation?

A systematic expensing of an asset based on the asset's estimated life

What does CF (A) = CF (B) + CF (S) imply

Cash flow generated from the firms assets must equal must equal the cash output it can distribute to the firms creditors and equity investors

Dividends per share=

Dividends/total shares outstanding

The first step in calculating cash flow from operating activities is to adjust net income for ____.

Non cash items and net working capital changes

Net working capital=

current assets - current liabilities

Earnings per share=

Net income\total shares outstanding

Debt service:

interest payments plus repayments of principal

True or false:the value of a firms assets is always equal To the sum of the firms liabilities and value of equity

true

GAAP requires that income is reported:

when it is accrued, regardless of payment status

Stockholder equity is claim against the firms assets that is ______________

Residual

Accounting _____________________ refers to the speed and ease with which assets can be converted to cash.

Liquidity

What are financing activities?

Net payments to creditors and owners made during the year, this is the last step in computing the statement of cash flows

Income=

Revenue-expenses

Cash flow to stockholders is the amount of cash that a company pays to its stockholders less any cash received from _______.

Issuing new shares of stock

Cash flow paid to creditors =

Interest paid - New new borrowing Interest paid - (Ending long-term debt - beginning long-term debt)

The cash flow identity states that cash flow from assets equals cash flows to ______________.

creditors and stockholders

True or false: Operating cash flow includes capital spending and working capital requirements.

Answer: False Reason: Operating cash flow is the cash flow generated by business activities, excluding financing, capital spending, or changes in net working capital.

Operating cash flow reflects which one of these? -Interest Payments -Tax Payments -Capital Spending -Changes in Net Working Capital

Answer: Tax Payments Reason: Operating cash flow is EBIT + Depreciation - tax payments. Additions to net working capital are subtracted from operating cash flow to compute cash flow to investors in the firm.

What are investing activities?

Changes in capital assets: acquisition of fixed assets and sales of fixed assets (i.e. net capital expenditures)

Operating cash flow:

Earnings before interest and depreciation minus taxes , measures the cash generated from operations not counting capital spending or working capital requirements - this will frequently be positive

The amount of taxes paid on a firm's earnings is determined by the a set of rules known as the ________ _________________

Tax Code

Who owns treasury stock?

The issuer of the stock (aka the company)

Cash flow to stockholders=

dividends paid - Net new equity raised dividends paid - (stock sold - stock repurchased)

The first step in calculating cash flow from operating activities is to adjust net income for ____.

non-cash items and net working capital changes Reason: The first step in calculating cash flow from operating activities is to adjust net income for non-cash items and net working capital changes. The result is cash flow from operating activities.

Cash flow from investing activities includes which of the following -changes in capital assets -acquisition of fixed assets -sale of fixed assets -sales of current assets -acquisition of currents assets

-changes in capital assets -acquisition of fixed assets -sale of fixed assets

Assets are listed on a US firm's balance sheet at _____________

Cost

Stockholders' equity ____________ when retained earnings increase.

Increases

Stockholders' equity ________________________ when retained earnings increase. Multiple choice question. increases

Increases

When a firm pays out fewer dividends, it ______ the accounting value of its retained earnings.

Increases

True or false: accounts receivable is more liquid than inventory

True

Assets =

liabilities + stockholders equity

Capital Spending=

Acquisition of fixed assets - sale of fixed assets

Total distributable cash flow from a firm includes what?

Adjustments for capital spending and additions to net working capital - this will frequently be negative

Cash flow to stockholders equals ____. -net equity raised minus dividends paid -stock repurchased plus dividends paid -dividends paid plus net new equity raised -dividends paid minus net new equity raised

Dividends paid minus net new equity raised

Capital Spending =

Ending Net Fixed Assets - Beginning Net Fixed Assets + Depreciation

Capital Spending =

Ending net fixed assets - Beginning Net Fixed Assets + Depreciation

Non-cash items are _______________ that _______________ cash flow.

Expenses; do not directly affect

True or false: Stockholders' equity appears on the left-hand side of the balance sheet.

False, it appears on the rights side

Cash flows from the acquisition and sale of fixed assets are located in the _______ activities section of the accounting statement of cash flows.

INVESTING

Raw materials, work in process, and finished goods are examples of _______.

Inventory

When is the appreciation on property recognized as a gain?

When the property is sold

The short run is a period when there are _________________________ costs.

both variable and fixed

What is the most important item that can be extracted from financial statements?

The firms actual cash flows

Free cash flow is better described as____________ 1. Total distributable cash flow 2. dividends and interest payments 3. Fixed asset investments 4. non-cash expenses

Total distributable cash flow

The market value of an asset depends on: -Liquidation value and GAAP -Riskiness and cash flows -Accounting rules and cash flows -Gains and losses -GAAP and Losses

Answer: Riskiness and cash flows

Stockholder's equity is the residual difference between ___________________________

Assets and liabilities