Financial Statements, Taxes, and Cash Flow

Income Statement

Measures performance over some period of time, usually a quarter or a year.

Capital Spending

Net spending on fixed assets. Ending Net Fixed Assets-Begginning net fixed assets+Depreciation=Net Investment in fixed assets.

Market Value

The true value of any asset. The amount of cash we would get if we actually sold it.

Financial Leverage

The use of debt in a firm's capital structure.

Book Value

The value of an asset of on the balance sheet and is generally not what the asset is actually worth.

Average Tax Rate

Total taxes paid divided by total taxable income.

Recognition Principle

Under GAAP, the general rule is to recognize revenue when the earnings process is virtually complete and the value of an exchange of goods or service is known or can be reliably determined. In practice, this usually means that revenue is recognized at the time of sale, which need not be the same as the time of collection.

Period Costs

are incurred during a particular time period and might be reported as selling, general, and administrative expenses.

Marginal Tax rate

Amount of tax payable on the next dollar earned.

Shareholders' Equity

Assets-Liabilities

Operating Cash Flow

Cash generated from a firm's normal business activities. EBIT+Depreciation-Taxes=OCF

Net Working Capital (NWC)

Current assets-current liabilities. Is usually a positive number in a healthy firm.

Cash Flow to Stockholders

Dividends paid-Net new equity raised=CFTS

Change in Net Working Capital

Ending NWC-Begginning NWC=Change in NWC

Noncash Items

Expenses charged against revenues that do not directly affect cash flow such as depreciation. A primary reason that accounting income differs from cash flow is that an income statement contains noncash items.

Matching Principle

Expenses show on the income state are based on the matching principle. The basic idea is to determine revenues and then match them with the costs associated with producing them. So if you manufacture a product and then sell it on credit the revenue is recognized at the time of the sale and the production and other costs associated with the sale of that product are also recognized at the time.

Balance Sheet

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

GAAP

Generally Accepted Accounting Principles

Product Costs

Include such things as raw materials, direct labor expense, and manufacturing overhead.

Cash Flow to Creditors

Interest paid-Net new borrowing=CFTC

Liquidity

Refers to the speed and ease with which an asset can be converted to cash. A highly liquid asset is therefore one that can be quickly sold without significant loss of value. An illiquid asset is one that cannot be quickly converted to cash without a substantial price reduction. Inventory is probably the least liquid of current assets. Liquidity is valuable, the more liquid a business is the less likely it is to experience financial distress.

Income Statement Equation

Revenues-Expenses=Income

Cash Flow

The difference between the number of dollars that come in and the number that go out.

Cash Flow From Assets (CFFA)

The total of cash flow to creditors and cash flow to stockholders. CFFA= Operating Cash Flow-Net Capital Spending-Change in Net Working Capital. CFFA=OCF-NCS-Change in NWC