Fin 311 Chapter 2

The cash flow identity reflects the fact that:

1) cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders. 2) cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm. 3) a firm generates cash through its various activities.

Assets can....

1) owns by firm 2) generate revenue 3) market value

Marginal Tax Rate (MTR)

Amount of tax payable on the next dollar earned.

Statement of Cash Flows

An official accounting statement that helps to explain the change in cash and cash equivalents

Noncash items

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

income statement

Financial statement summarizing a firm's performance over a period of time

Net Income

Revenues - Expenses. Money earned after interest and taxes

fixed assets

assets that are relatively permanent, such as land, buildings, and equipment

Cash flows can

be derived from financial statements.

operating cash flows

cash flow that results from the firm's day-to-day activities of producing and selling

Net Working Capital

current assets - current liabilities

matching principle

expenses shown on the income statement

balance sheet

financial statement showing a firm's accounting value on a particular date

current assets

has a life of less than one year. accounts receivable are also known as current assets

Current Liabilities

liabilities due within a short time, usually within a year. accounts payable are also known as current liabilities

liquidity

refers to the speed and ease with which an asset can be converted to cash.

financial leverage

the use of debt in a firm's capital structure. increases the potential reward to shareholders and also increases the potential for financial distress and business failure. Also greatly magnifies both gains and losses

True or false: Taxes can be a large cash outflow for a corporation.

true

true or false: financial statements are frequently a key source of information for financial decisions

true

another name for short-term financial management is .....

working capital

Average Tax Rate (ATR)

Total taxes paid divided by total taxable income.

Which of these questions can be answered by reviewing a firm's balance sheet?

What is the total amount of assets the firm owns? How much debt is used to finance the firm?