Foundations of Financial Mgmt: 2-2

Earnings per share =

(net income - preferred dividend) / by number of shares outstanding.

Balance Sheet

A financial statement that indicates what the firm owns & how these assets are financed in the form of liabilities or ownership interest.

Income Statement

A financial statement that measures the profitability of the firm over a period of time.

Current Asset

An item which may be converted to cash within one year or one operating cycle of the firm

Cash Flow From Financing

Cash flow that is generated (or reduced) from the sale or repurchase of securities or the payment of cash dividends

Free Cash Flow

Cash flows from operations minus working capital minus dividend payments.

Statement Of Cash Flows

Changes accrual-based information from income statement and balance sheet to cash based information.

An increase of $20000 in inventory would result in an

Decrease in net cash flow

One of the primary factors evaluated when a company is pursuing a leveraged buyout is

Free cash flow

The backdating of options is

Illegal

Three basic financial statements

Income Statement - Statement of Cash Flows - Balance Sheet

Name three current assets

Marketable securities - Prepaid expenses - Inventory

What would indicate an accurate Statement of Cash Flows?

Net cash flow is equal to the change in the cash balance.

Cash Flows From Operations

Represents the net cash flow that results from a firm's production and sales activities.

Marketable Securities

Represents the net cash flow that results from changes in the amount of a firm's long-term assets.

Notes Payable

Short-term signed obligations to banks or other creditors.

Marketable Securities

Temporary investments of excess cash.

Earnings Per Share

The income available to common stockholders divided by the number of common shares outstanding.

Marginal Corporate Tax Rate

The levy expressed as a percentage that applies to each new dollar of taxable income.

P/E Ratio

The multiplier applied to earnings per share to determine current value.

Liquidity

The relative convertibility of short-term assets into cash.

Stockholders' Equity

The total ownership position of preferred and common stockholders.

Historical Cost Accounting

Traditional method of accounting using original costs minus depreciation.

What would represent a source of funds and - indirectly - an increase in cash balances?

a reduction in accounts receivable

What would represent a use of funds and - indirectly - a reduction in cash balances?

an increase in inventories

Net worth(Book Value) =

assets - liabilities & preferred stock

Preferred stock dividends decrease earnings

available to common stockholders.

The firm's price-earnings (P/E) ratio is influenced by its

capital structure - earnings volatility - sales, profit margins, and earnings.

Free cash flow =

cash flow from operating activities - capital expenditures - dividends.

Free cash flow is equal to:

cash flow from operating activities minus capital expenditures, minus dividends.

The statement of cash flows includes which of the following sections:

cash flows from operating activities - cash flows from investing activities - cash flows from financing activities

What is a primary source of capital to the firm?

common stock - preferred stock - bonds

Reinvested funds from retained earnings theoretically belong to:

common stockholders.

The residual income of the firm belongs to

common stockholders.

What is subtracted out to reach operating income?

cost of goods sold - depreciation - selling and administrative expense

An increase in investments in long-term securities will:

decrease cash flow from investing activities.Depreciation is a source of cash inflow because, it is a tax-deductible non-cash expense.

The best indication of the operational efficiency of management is

earnings before interest and taxes (EBIT).

What factor can cause an increase in the firm's P/E ratio?

falling earnings per share.

In the last decade

free cash flow has been associated with special financial activities such as:, leveraged buyouts.

the orientation of market value per share is

future

The orientation of book value per share is

historical

The major limitation of financial statements is

in their use of historical cost accounting.

Depreciation tends to

increase cash flow and decrease income.

A corporation can increase their earnings per share by

increasing Treasury stock

The primary disadvantage of accrual accounting is that

it does not adequately show the actual cash flow position of the firm.

When a firm's earnings are falling more rapidly than its stock price

its P/E ratio will go up

Asset accounts on the balance sheet are listed in the order of:

liquidity.

Increasing interest expense will have what effect on EBIT?

no effect

Total stockholders' equity consists of

preferred stock - common stock & capital paid in excess of par and retained earnings.

Retained earnings

represents the cumulative earnings of the firm since its formation, minus dividends paid

Gross profit =

sales - cost of goods sold.

What is included in the balance sheet investment account?

stocks of other corporations - long term government bonds - investments in other corporations

One cash outflow is:

the payment of cash dividends

One cash inflow is:

the sale of the firm's bonds

A firm's purchase of plant and equipment would be considered a

use of cash for investment activities.

A statement of cash flows allows a financial analyst to determine

whether a cash dividend is affordable - how increases in asset accounts have been financed - whether long-term assets are being financed with long-term or short-term financing.