BUSI 408 Midterm

Balance sheet

Financial statement showing a firm's accounting value on a particular date in time

Income statement

Financial statement summarizing a firm's accounting performance over a period of time

Which is not included in the computation of operating cash flow:

Interest paid. Operating cash flow is equal to earnings before interest plus depreciation minus taxes. Also does not count capital spending or working capital requirements.

Current assets include:

Inventory and Cash, not equipment and accounts payable

The carrying value or book value of assets:

Is determined under GAAP and is based on the cost of the asset

One of the reasons why cash flow analysis is popular is because:

It is difficult to manipulate, or spin cash flows

According to GAAP, costs are:

Matched with revenues

An increase in total assets:

Must be offset by an equal increase in liabilities and shareholders' equity

Earnings per share is equal to:

Net income divided by the total number of shares outstanding

Capital Budgeting

Process of planning and managing a firm's long-term investments

Financial managers should strive to maximize the current value per share of the existing stock because:

The current stockholders are the owners of the corporation

A firm starts its year with a positive net working capital. During the year, the firm acquires more short-term debt than it does short-term assets. This means that:

The ending net working capital can be positive, negative, or equal to zero

Working Capital Management

The management of a firm's short-term assets and liabilities

Capital structure

The mixture of debt and equity used by a firm to finance its operations

Working capital management is concerned with:

The upper portion of the balance sheet

The primary goal of financial management:

To maximize the current value per share of existing stock

Operating cash flow

calculated by adding back noncash expenses to net income and adjusting for changes in current assets and liabilities

Free cash flow

cash that the firm is free to distribute to creditors and stockholders

Under GAAP, a firm's assets are reported at:

cost

Net working capital

current assets minus current liabilities

Noncash items

expenses charged against revenues that do not directly affect cash flow

Accounting profits and cash flows are:

generally not the same because GAAP allows for revenue recognition separate from the receipt of cash flows

Book value:

is based on historical cost

When making a financial decision, the most relevant tax rate is the...

marginal tax rate

The decisions made by financial managers should all be ones which increase the:

market value of the existing owners' equity.

Liquid assets

one which can be quickly converted into cash without a significant loss in value

Cash flow from operating activities

refers to the cash flow that results from the firm's ongoing, normal business activities

Cash flow from investing

refers to the changes in net capital assets

Shareholders equity includes the following accounts:

retained earnings and capital surplus (not interest paid or long-term debt)

Net capital spending is equal to:

the net change in fixed assets

Liquidity:

valuable to a firm even though liquid assets tend to be less profitable to own.

Martha's Enterprises spent $2,400 to purchase equipment three years ago. This equipment is currently valued at $1,800 on today's balance sheet but could actually be sold for $2,000. Net working capital is $200 and long-term debt is $800. Assuming the equipment is the firm's only fixed asset, what is the book value of shareholders' equity?

$1200

A firm has $300 in inventory, $600 in fixed assets, $200 in accounts receivable, $100 in accounts payable, and $50 in cash. How much in current assets?

$550

Brad's Company has equipment with a book value of $500 that could be sold today at a 50% discount. Its inventory is valued at $400 and could be sold to a competitor for that amount. The firm has $50 in cash and customers owe it $300. What is the accounting value of its liquid assets?

$750, do not include the equipment in the calculation

Teddy's Pillows has beginning net fixed assets of $480 and ending net fixed assets of $530. Assets valued at $300 were sold during the year. Depreciation was $40. What is the amount of capital spending?

$90 (difference between ending and beginning fixed assets as well as depreciation)

Working capital management includes decisions concerning these:

Accounts payable, accounts receivable, and inventory. Not long-term debt

The asset that is generally most liquid

Accounts receivable (instead of inventory, buildings, equipment, and patents)

When making financial decisions related to assets, you should:

Always consider market value

The basic equation of the balance sheet:

Assets = Liabilities + Stockholders' Equity

Concerning liquidity:

Balance sheet accounts are listed in order of decreasing liquidity

What are all components of the statement of cash flows?

Cash flow from operating activities, cash flow from investing activities, cash flow from financing activities

The cash flow of the firm must be equal to:

Cash flow to stockholders + cash flow to debtholders

Net working capital is:

Current assets minus current liabilities

Current liabilities include:

Debt payable to a mortgage company in nine months and accounts payable to suppliers. Not a note payable in eighteen months or loan payable in fourteen months: has to be within one year.

An example of a capital budgeting decision:

Deciding whether or not to open a new store

Assets are listed on the balance sheet in order of:

Decreasing Liquidity

An increase in ____ will cause the operating cash flow to increase

Depreciation

As seen on an income statement:

Depreciation reduces both pretax income and net income

To determine cash flow from an income statement

Determine operating cash flow + the change in net working capital - net capital spending

Operating cash flow formula

EBIT (Total sales - costs - depreciation) + taxes + Depreciation