Finance Chapter 2

Non cash items____

A primary reason that accounting income differs from cash flow is that an income statement contains ________________

Shareholders' equity

Assets-liabilities

Operating cash flow-net capital spending- change in NWC

Cash flow from assets equation

Ending NWC-Beginning NWC

Change in Net Working Capital equation

liquid

Current assets are relatively ____________ and include cash and assets.

Non cash items

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

Matching principle__

Expenses on the income statement are based on the _____________ ______________.

Matching principle

First determine revenues as described previously and then match those revenues with the costs associated with producing them.

illiquid

Fixed assets are ___________. These consist of tangible things such as buildings and equipment as well as intangible like trademarks.

Variable

In the long run, all business costs are variable. Given sufficient time, assets can be sold, debts can be paid and so on.

Ending Net fixed assets- beginning net fixed assets + depreciation

Net capital spending equation

marginal tax rate_____

Normally the ________ _____ ______ is relevant for financial decision making. The reason is that any new cash flows will be taxed at that rate. Because financial decisions usually involve new cash flows or changes in existing ones.

Earnings before interest and taxes + depreciation-taxes

Operating cash flow equation

Generally Accepted Accounting Principles

The common set of standards and procedures by which audited financial statements are prepared.

shareholders equity, common equity or owners equity

The difference between the total value of the assets(current and fixed) and the total value of the liabilities (current and long term)

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. Cash flow to creditors + cash flow to stockholders

Average tax rate

Total taxes paid divided by total taxable income.

GAAP, cash vs non cash items, and time and costs

When looking at an income statement, the financial manager needs to keep three things in mind:

financial leverage

__________________ the use of debt in a firm's capital structure. the more debt a firm has, the greater is its degree of ___________________

Accrues

an income statement prepared using GAAP will show revenue when it ___________.

Free cash flow

another name for cash flow from assets. The name refers to cash the firm is free to distribute to creditors and stockholders bc it is not needed for working capital or fixed asset investments.

Period costs

are incurred during a particular time period and might be reported as SGA expenses. May be fixed and other may be variable.

Liabilities

are the first thing listed on the right side of the balance sheet. Are classified as either current or long term.

Taxes

can be one of the largest cash outflows a fir experiences.

Current asset

has a life of less than one year. This means that the asset will convert to cash within 12 months.

Current liabilities,

have a life of less than one year (meaning they must be paid within one year) and are listed before long term.

Product costs

include such things as raw materials, direct labor expense, and manufacturing overhead. Reported on income statement as cogs, but they include both fixed and variable costs.

Balance Sheet

is a snapshot of the firm. It is a convenient means of organizing and summarizing what a firm own (its assets), what a firm owes (its liabilities), and the difference between the two (the firm's equity) at a given point in time.

Cash flow to stockholders

is dividends paid minus net new equity raised.

Cash flow to crediters

is interest paid minus net new borrowing.

Net working capital

is measured as the net change in current assets relative to current liabilities for the period being examined and represents the amount spent

illiquid asset

is on that cannot be quickly converted to cash without a substantial price reduction.

Fixed asset

is on that has a relatively long life. Can be tangible such as a truck or a computer or intangible such as a trademark or patent.

marginal tax rate

is the rate of the extra tax you would pay if you earned one more dollar.

Liquidity

is valuable. the more liquid a business is, the less likely it is to experience financial distress.

Assets.

listed on the left side of balance sheet and are classified as either current or fixed.

Income statement

measures performance over some period of time, usually a quarter or a year. A video recording covering the period between before and after pics. revenue-expenses=_____________

Highly liquid asset

one that can be quickly sold without significant loss of value.

bond and bondholders

referred to as long term debt and long term creditors.

operating cash flow

refers to the cash flow that results from the firm's day to day activities of producing and selling. Expenses are not included bc they are not operating expenses.

Capital spending

refers to the net spending on fixed assets (purchases of fixed assets - sales of fixed assets)

Liquidity

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

networking capital

the difference between a firm's current assets and its current liabilities.

Cash flow

the difference between the number of dollars that came in and the number that went out.

market value

the value of an asset or the value of the firm

flat rate tax

there is only one tax rate, so the rate is the same for all income levels. The marginal tax rate is always the same as the average tax rate.