Foundations of Financial Mgmt: 2-2
Earnings per share =
(net income - preferred dividend) / by number of shares outstanding.
Balance Sheet
A financial statement that indicates what the firm owns & how these assets are financed in the form of liabilities or ownership interest.
Income Statement
A financial statement that measures the profitability of the firm over a period of time.
Current Asset
An item which may be converted to cash within one year or one operating cycle of the firm
Cash Flow From Financing
Cash flow that is generated (or reduced) from the sale or repurchase of securities or the payment of cash dividends
Free Cash Flow
Cash flows from operations minus working capital minus dividend payments.
Statement Of Cash Flows
Changes accrual-based information from income statement and balance sheet to cash based information.
An increase of $20000 in inventory would result in an
Decrease in net cash flow
One of the primary factors evaluated when a company is pursuing a leveraged buyout is
Free cash flow
The backdating of options is
Illegal
Three basic financial statements
Income Statement - Statement of Cash Flows - Balance Sheet
Name three current assets
Marketable securities - Prepaid expenses - Inventory
What would indicate an accurate Statement of Cash Flows?
Net cash flow is equal to the change in the cash balance.
Cash Flows From Operations
Represents the net cash flow that results from a firm's production and sales activities.
Marketable Securities
Represents the net cash flow that results from changes in the amount of a firm's long-term assets.
Notes Payable
Short-term signed obligations to banks or other creditors.
Marketable Securities
Temporary investments of excess cash.
Earnings Per Share
The income available to common stockholders divided by the number of common shares outstanding.
Marginal Corporate Tax Rate
The levy expressed as a percentage that applies to each new dollar of taxable income.
P/E Ratio
The multiplier applied to earnings per share to determine current value.
Liquidity
The relative convertibility of short-term assets into cash.
Stockholders' Equity
The total ownership position of preferred and common stockholders.
Historical Cost Accounting
Traditional method of accounting using original costs minus depreciation.
What would represent a source of funds and - indirectly - an increase in cash balances?
a reduction in accounts receivable
What would represent a use of funds and - indirectly - a reduction in cash balances?
an increase in inventories
Net worth(Book Value) =
assets - liabilities & preferred stock
Preferred stock dividends decrease earnings
available to common stockholders.
The firm's price-earnings (P/E) ratio is influenced by its
capital structure - earnings volatility - sales, profit margins, and earnings.
Free cash flow =
cash flow from operating activities - capital expenditures - dividends.
Free cash flow is equal to:
cash flow from operating activities minus capital expenditures, minus dividends.
The statement of cash flows includes which of the following sections:
cash flows from operating activities - cash flows from investing activities - cash flows from financing activities
What is a primary source of capital to the firm?
common stock - preferred stock - bonds
Reinvested funds from retained earnings theoretically belong to:
common stockholders.
The residual income of the firm belongs to
common stockholders.
What is subtracted out to reach operating income?
cost of goods sold - depreciation - selling and administrative expense
An increase in investments in long-term securities will:
decrease cash flow from investing activities.Depreciation is a source of cash inflow because, it is a tax-deductible non-cash expense.
The best indication of the operational efficiency of management is
earnings before interest and taxes (EBIT).
What factor can cause an increase in the firm's P/E ratio?
falling earnings per share.
In the last decade
free cash flow has been associated with special financial activities such as:, leveraged buyouts.
the orientation of market value per share is
future
The orientation of book value per share is
historical
The major limitation of financial statements is
in their use of historical cost accounting.
Depreciation tends to
increase cash flow and decrease income.
A corporation can increase their earnings per share by
increasing Treasury stock
The primary disadvantage of accrual accounting is that
it does not adequately show the actual cash flow position of the firm.
When a firm's earnings are falling more rapidly than its stock price
its P/E ratio will go up
Asset accounts on the balance sheet are listed in the order of:
liquidity.
Increasing interest expense will have what effect on EBIT?
no effect
Total stockholders' equity consists of
preferred stock - common stock & capital paid in excess of par and retained earnings.
Retained earnings
represents the cumulative earnings of the firm since its formation, minus dividends paid
Gross profit =
sales - cost of goods sold.
What is included in the balance sheet investment account?
stocks of other corporations - long term government bonds - investments in other corporations
One cash outflow is:
the payment of cash dividends
One cash inflow is:
the sale of the firm's bonds
A firm's purchase of plant and equipment would be considered a
use of cash for investment activities.
A statement of cash flows allows a financial analyst to determine
whether a cash dividend is affordable - how increases in asset accounts have been financed - whether long-term assets are being financed with long-term or short-term financing.
