Exam 1 Review (Chapter 2,3,5,6)
Current Assets
account receivable, convert to cash within 12 months
cash flow identity states
cash flows from assets should equal cash flows to creditors and equity investors
more debt a firm has, the greater its
degree of financial leverage
short run
is an imprecise period of time
flat rate tax
marginal tax rate = average tax rate
Negative net capital spending
means firm sold off more assets than it purchased
two classifications of cost used by financial accountants
period and product costs
Product cost
raw materials, direct labor expense, manu. overhead. reported on the I/S as COGS
liquidity
refers to the speed and ease with which an asset can be converted to cash
Income statement
reflects activity that occurs over a period time Keep in mind... GAAP time and costs cash vs non cash items
Balance sheet
reflects values as of a specific date
period cost
selling, general, and administrative expenses
Fixed asset
tangible (truck or computer) intangible (trademark or patent)
cash flow from assets components
1. operating cash flow 2. capital spending 3. change in NWC
shareholder's equity
= assets - liabilities
Receivables turnover
=sales/Receivables
Increasing its no-cash assets will enable a firm to do what?
Increase its ability to meet short term obligations and increase its ability to avoid financial distress
cash flow from assets
= CF to creditors + CF to stockholders OR = operating cash flow - Net capital spending - Chg in NWC
Net Working Capital (Current ratio)
= Current Assets - Current Liabilities
Assets
= Liabilities + Shareholders' equity
Net capital spending
= change in net fixed assets(ending - beginning net fixed assets) + depreciation
cash flow to stockholders
= dividends paid - net new equity raised (common stock and paid in surplus)
Cash flow to stockholders
= dividends paid less net new equity raised
Balance Sheet
= firm's equity (assets - liabilities)
Cash flow to creditors
= interest paid less net borrowing
average income tax rate
= total tax bill / total taxable income
cash flow to creditors (bondholders)
=interest paid - net new borrowing (long term debt diff)
operating cash flow
CF that results from the firm's day to day activities of producing and selling (revenues - cost), does not include depreciation
What doesn't affect cash flow?
Depreciation
non cash items?
Depreciation
capital spending
Net spending on fixed assets (purchases of fixed assets - sales of fixed assets + depreciation)
change in NWC
beg nwc- ending nwc
matching principle
expenses shown on the I/S
selling a firm's plant and equipment results in a change in
fixed assets
changes in capital spending can be negative when the acquisition of fixed assets is
less than the sale of fixed assets
