FIL 240: Chapter 2

What is the difference between market value and book value?

Market- true value. Amount of cash you would get if you actually sold an item. Book- value shown on the balance sheet.

What is capital spending?

Money spent of fixed assets less money received on the sale of fixed assets.

Are the cash flows shown on the income statement representative of the actual cash flows during that period? Why?

No. The matching principle matches revenues to the associated costs that could have occurred at a different time.

What is a disadvantage of an asset with high liquidity?

Potential profits are forgone. The most liquid assets sometimes hold no return. Ex: cash

What is a product cost?

Raw materials, direct labor expense, MOH.

Define average tax rate.

Total taxes paid divided by total taxable income.

Define marginal tax rate.

Amount of tax payable on the next dollar earned.

Hat is the average tax rate for a corporation?

Between 15-35%

What is the cash flow identity?

Cash flow form assets= cash flow to creditors + cash flow to stockholders.

Define operating cash flow.

Cash generated from a firm's normal business activity.

What is the equation for cash flow to stockholders?

Dividends paid out less net new equity raised.

What are noncash items?

Expenses charged against revenue that do not directly affect cash flow, such as depreciation.

What does GAAP stand for, and what is it?

Generally Accepted Accounting Principles. The common set of standards and procedures by which audited financial statements are prepared.

Define financial leverage.

He use of debt in a firm's capital structure. The more debt, the greater the degree of leverage.

What is the equation for cash flow to creditors?

Interest payments to creditors less net new borrowings.

What are period costs?

Selling, general, and administrative expenses.

What is the value of shareholder's equity?

The residual portion after liabilities are deducted from the assets.

Define liquidity.

The speed and ease with which an asset can be converted to cash and without significant loss of value.

Define cash flow from assets.

The total of cash flow to creditors and cash flow to stockholders, consisting of the following- operating cash flow, capital spending, and change in net working capital.