Chapter 2 Key Terms

Long-Term Liabilities

a debt that is not due in the coming year. A loan that the firm will pay off in five years is one such long-term debt.

Cash Flows to Creditors

a firm's interest payments to creditors less net new borrowings.

Marginal Tax Rate

amount of tax payable on the next dollar earned. (The extra tax you would pay of you earned one more dollar)

Free Cash Flow

another name for cash flow from assets

Assets

classified as either current or fixed.

Earnings Management

corporations frequently like to show investors that they have steadily growing earnings. To do this, they might take steps to overstate or understate earnings at various times to smooth out dips and surges. (Controversial practice)

Cash Flow to Stockholders

dividends paid out by a firm less net new equity raised.

Noncash Items

expenses charged against revenues that do not directly affect cash flow, such as depreciation.

Balance Sheet

financial statement showing a firm's accounting value on a particular date.

Income Statement

financial statement summarizing a firm's performance over a period of time.

Current Assets

has a life that of less than one year. Would convert to cash within 12 months. For example, inventory and accounts receivable are current assets.

Current Liabilities

have a life of less than one year (meaning they must be paid within the year), and they are listed before long-term liabilities. For example, accounts payable (money the firm owes to its suppliers) is a current liability.

Highly Liquid Asset

one that can be quickly sold without significant loss of value. (Current assets)

Illiquid Asset

one that cannot be quickly converted to cash without a substantial price reduction. (Fixed assets)

Fixed Assets

one that has relatively long life. Fixed assets an either is tangible, such as a truck or a computer, or intangible, such as a trademark or a patent

Equity Holders

only entitled to the residual value, the portion left after creditors are paid.

Capital Spending

refers to the net spending on fixed assets (purchases of fixed assets less sales of fixed assets)

Liquidity

refers to the speed and ease with which an asset can be converted to cash.

Change in Net Working Capital

the amount spent on net working capital

Generally Accepted Accounting Principles (GAAP)

the common set of standards and procedures by which audited financial statements are prepared.

Cash Flow

the difference between the number of dollars that came in and the number that went out.

Shareholders' Equity

the difference between the total value of the assets (current and fixed) and the total value of liabilities (current and long-term). Also called the common equity or owners' equity.

Liabilities

the first thing listed on the right-hand of the balance sheet. Classified as either current or long-term.

Net Income

the last item (the so-called bottom line); often expressed on a per-share basis and called earnings per share (EPS).

Statement of Cash Flows

the standard financial accounting statement

Cash Flow from Assets

the total of cash flow to creditors and cash flow to stockholders, consisting of the following: operating cash flow, capital spending, and change in new working capital.

Market Value

the true value of any asset, which is simply the amount of cash we would get if we actually sold it.

Financial Leverage

the use of debt in a firm's capital structure. The more debt a firm has (as a percentage of assets), the greater is its degree of financial leverage

Book Value

the values shown on the balance sheet for the firm's assets and generally are not what the assets are actually worth

Flat-Rate Tax

there is only one tax rate, and this rate is the same for all income levels.

Average Tax Rate

total taxes paid divided by total taxable income. (Percentage of your income that goes to pay taxes)

Operating Cash Flow

- cash generated from a firm's normal business activities'.

Cash Flow from Assets Formula

= (Cash flow to creditors + Cash flow to Stockholders)