ch 2 financial statement, taxes, and cash flows Flashcards
statement of financial position (balance sheet)
a snapshot of the firm’s assets and liabilities at a given point in time
net working capital
the difference btw a firm’s current assets and its current liabilities
ca - cl
liquidity
ability to convert to cash quickly without a significant loss in value
book value
the accounting value of a firm’s assets
market value
the price at which willing buyers and sellers trade the assets
is book or market value more important to the decision-making process
market
international financial reporting standards (IFRS)
allows companies to use the historical costs method which allows revaluation
financial leverage
the use of debt in a firm’s capital structure
statement of comprehensive income
a video of the firm’s operations for a specified period of time
matching principle
IFRS says to show revenue when it accrues and match the expenses required to generate the revenue
three components of cash flow from assets
operating cash flow, capital spending, and additions to net working capital
cash flow from assets equation
cash flow from assets = operating cash flow - net capital spending - changes in net working capital
operating cash flow
the cash flow that results from the firm’s day to day activities of producing and selling
operating cash flow eqation
operating cash flow = earning before interest and taxes (EBIT) + depreciation - taxes
net capital spending equation
net capital spending = ending net fixed assets - beginning net fixed assets + depreciation
free cash flow
cash flow from assets
cash that the firm is free to distribute to creditors and shareholders
cash flow to creditors equation
interest paid - net new borrowing
cash flow to shareholders equation
dividends paid - net new equity raised
average tax rate
you tax bill divided by your taxable income
marginal tax rate
the extra tax you would pay if you earned one more dollar
dividend tax credit
the amount that a Canadian resident applies against his or her tax liability on the grossed-up portion of dividends received from Canadian corporations
- encourages Canadian investors to invest in Canadian firms
capital gain tax
paid on the investment’s increase in value over its purchase price
taxable income tax advantage
there is a tax advantage to firms which offer interest instead of dividends on common stock as interest is tax deductible
however, these tables are turned when the firm earns interest and dividends - there is a tax advantage to dividends
capital cost allowance
depreciation for tax purposes
accelerated investment incentive
allows us to figure CCA at one-and-a-half times the prescribed rate in the first year only
adjusted cost of disposal
when an asset is sold, the undepreciated capital cost of the asset class is lowered by the realized price of the asset of its original price, whichever is lower
net acquisitions rule
the total installed cost of capital acquisitions less the adjusted cost of any disposals in a given asset pool
terminal loss
positive UCC remains after pool is close. this loss is deductible from the year’s income
recaptured depreciation
when a negative UCC remains after the pool is closed
a firm must make up this difference to the CRA and it is treated as fully taxable income
