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