ch. 2 Flashcards
4 basic statements of annual report
balance sheet, income statement, statement of SH-EQ, and statement of cash flows
Balance sheet
shows assets on left-hand side, while liabilities, equity, and claims AGAINST assets are on right-hand side
income statement
shows the results of operations, and earnings per share as its “bottom line”
statement of SH-EQ
shows change in retained earnings between balance sheet dates. Retained earnings represent a claim against assets, not the assets themselves
statement of cash flows
reports effect of operating, investing, and financing activities on cash flows over an accounting period.
Difference between net cash flow and accounting profit
Accounting profit also includes rev. & expense that has not yet been received. Net cash flow is usually net income plus depreciation, since depreciation is the largest noncash item
operating current assets
current assets used to support operations, like cash, inventory & accounts receivable. DO NOT include short-term investments
operating current liabilities
current liabilities that occur as a natural consequence of operations, such as accounts payable and accruals. DO NOT include notes payable or any other short-term debts that charge interest.
Net operating working capital
difference btwn operating current assets and operating current liabilities. Thus it is the working capital acquired with investor-supplied funds.
Operating long-term assets
long-term assets used to support operations such as net plant and equipment. DO NOT include any long-term investments that pay interest or dividends. (aka land, buildings, factories, equipment, etc)
total net operating capital
aka operating capital or net operating assets. Sum of net operating working capital and operating long-term assets. It is the total amount of capital needed to run the business.
NOPAT
Net operating profit after taxes. It is the after-tax profit a company would have if it had no debt and no investments in nonoperating assets. Because it excludes the effect of financial decisions, it is a better measure of performance than net income
Free cash flow (FCF)
amount of cash flow remaining after a company makes the asset investments necessary to support operations. FCF is amount of cash flow available for distribution to investors, so the value of a company is directly related to its ability to generate FCF. FCF = NOPAT - net investment in operating capital
Market Value Added (MVA)
represents the difference between the total market value of a firm and the total amount of investor-supplied capital. If the market values of debt and preferred stock equal their values as reported on the financial statements, then MVA is the difference btwn the market value of a firm’s stock and the amount of equity its shareholders have supplied.
Economic Value added (EVA
EVA=NOPAT - (WACC) (Capital). The difference btwn after-tax operating profit and the total dollar cost of capital, including the cost of equity capital. An estimate of the value created by management during the year, (difference from accounting profit cuz EVA includes charge for use of equity capital.)
