Chapter 2. Financial Statements, Taxes and Cash Flow
What is shown on the left hand side of the balance sheet
assets
balance sheet equation
assets equal liabilies plus stockholders equity
liquidity refers to the ease of changing
assets t cash
Non-cash items do not affect
cash flow
non-cash items do not affect
cash flows
Product costs are usually shown on the income statement under the heading of ____
cost of goods sold
Most important item that can be extracted from financial statements
firms actual cash flows
Costs that do not change in the short run arise because of
fixed commitments
assets can be categorized as
-tangible and intangible assets -current and fixed assets
physical assets are termed ___ assets
tangible
For a mature firm, operating cash flow
-is usually positive -is a sign of trouble over a long period of time
According to GAAP, when is income reported?
-when it is earned or accrued
The price at which willing buyers and sellers would trade is called ____ value
market
according to the originators of the current U.S. corporate tax code, he only rates are:
15 25 34 35
Cash flow to creditors equals
interest paid-net new borrowing
The ____ principle of GAAP states that costs with a good or service should be recorded at the same time as the revenue from selling that good or service
matching
The balance sheet identity shows that stockholders' equity equals assets ____ liabilities
minus
the balance sheet identity shows that stockholders' equity equals assets ___ liabilities
minus
The last item on the income statement is typically the ____
net income
liquidity has two dimensions which are the ability to
quickly convert assets into cash without significant loss in value
financial leverage refers to a firm's
use of debt in its capital structure
current assets ____ exceed current liabilities in a healthy firm
usually
____ costs change as the output of the firm changes
variable
components of cash flow from assets
-capital spending -operating cash flow -change in net working capital
net earnings refers to income earned
-after interest and taxes
Net working capital equals
-current assets minus current liabilities
The more debt a firm has, the greater its
-degree of financial leverage
Marginal tax rates are the most important tax rates because
-financial decisions are usually based on new cash flows -incremental cash flows are taxed at marginal tax rates
Under GAAP, assets are generally carried on a firm's balance sheet at
-historical cost -book value
questions answered on balance sheet
-how much debt is used to finance the firm? -what is the total amount of assets the firm owns?
What should you keep in mind when examining an income statement
-time and costs -cash versus non-cash items -GAAP
According to GAAP when is revenue recognized on an income statement
-when the value of an exchange of goods or services is known or reliably determined -when the earnings process is virtually completed