Ch.2 financial statements, taxes, and cash

the cash flow identity reflects the fact that

-Cash flow from the firm's assets equals the cash flow paid to suppliers of capital to the firm -a firm generates cash through its various activities -cash is either used to pay creditors or paid out to the owners of the firm

balance sheet

-only shows cost

easiest to hardest of turning assets to cash

1.cash equivalent 2.accounts receivable 3.inventory 4.plant and equipment

balance sheet reflects

accounting value on a specific date

current assets

accounts receivable, inventory

Fixed costs

are costs that will not change due to fixed commitments over a stated period of time

the more debt a firm has the greater its

degree of financial leverage

period costs

general expenses administrative expenses selling costs

marginal tax rates are the most important tax rate because

incremental cash flows are taxed at a marginal tax rate. financial decisions are usually based on new cash flows

Net income

is money earned after interest and taxes

liabilities section of balance sheet

notes payable, long-term bonds

short run for a firm is the period of time during which

output can vary some costs are fixed

Residual value is

the amount left over after paying bondholders, accounts payable, other debt holders, preferred stockholders.

Flat-rate taxes, all income levels are taxed at

the same marginal rate, the same average rate

3 things keep in mind when examining income statement

time and cost GAAP cash vs non-cash items

Stockholders' Equity

a residual claim against the book value of a firms assets. (the book value of the firms assets less the book value of its liabilities)

non-cash items

are expenses that do not directly affect cash flow

Product costs

contain both fixed and variable costs, are reported as costs of goods sold

Financial leverage can

greatly magnify both gains and losses -Increase the potential reward for investors -Increase the chance of financial distress and business failure

Balance sheet can be answered by reviewing

how much debt is used to finance the firm -what is the total amount of assets the firm owns

current assets equals

net working capital plus current liabilities

liquidity

refers to the speed and ease where an asset can be converted into cash

income statement

to measure performance over a set period of time

on a balance sheet, total assets must always equal

total liabilities + shareholders equity