ch 2 financial statement, taxes, and cash flows

Question 1

statement of financial position (balance sheet)

Answer 1

a snapshot of the firm’s assets and liabilities at a given point in time

Question 2

net working capital

Answer 2

the difference btw a firm’s current assets and its current liabilities
ca - cl

Question 3

liquidity

Answer 3

ability to convert to cash quickly without a significant loss in value

Question 4

book value

Answer 4

the accounting value of a firm’s assets

Question 5

market value

Answer 5

the price at which willing buyers and sellers trade the assets

Question 6

is book or market value more important to the decision-making process

Answer 6

market

Question 7

international financial reporting standards (IFRS)

Answer 7

allows companies to use the historical costs method which allows revaluation

Question 8

financial leverage

Answer 8

the use of debt in a firm’s capital structure

Question 9

statement of comprehensive income

Answer 9

a video of the firm’s operations for a specified period of time

Question 10

matching principle

Answer 10

IFRS says to show revenue when it accrues and match the expenses required to generate the revenue

Question 11

three components of cash flow from assets

Answer 11

operating cash flow, capital spending, and additions to net working capital

Question 12

cash flow from assets equation

Answer 12

cash flow from assets = operating cash flow - net capital spending - changes in net working capital

Question 13

operating cash flow

Answer 13

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

Question 14

operating cash flow eqation

Answer 14

operating cash flow = earning before interest and taxes (EBIT) + depreciation - taxes

Question 15

net capital spending equation

Answer 15

net capital spending = ending net fixed assets - beginning net fixed assets + depreciation

Question 16

free cash flow

Answer 16

cash flow from assets
cash that the firm is free to distribute to creditors and shareholders

Question 17

cash flow to creditors equation

Answer 17

interest paid - net new borrowing

Question 18

cash flow to shareholders equation

Answer 18

dividends paid - net new equity raised

Question 19

average tax rate

Answer 19

you tax bill divided by your taxable income

Question 20

marginal tax rate

Answer 20

the extra tax you would pay if you earned one more dollar

Question 21

dividend tax credit

Answer 21

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

Question 22

capital gain tax

Answer 22

paid on the investment’s increase in value over its purchase price

Question 23

taxable income tax advantage

Answer 23

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

Question 24

capital cost allowance

Answer 24

depreciation for tax purposes

Question 25

accelerated investment incentive

Answer 25

allows us to figure CCA at one-and-a-half times the prescribed rate in the first year only

Question 26

adjusted cost of disposal

Answer 26

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

Question 27

net acquisitions rule

Answer 27

the total installed cost of capital acquisitions less the adjusted cost of any disposals in a given asset pool

Question 28

terminal loss

Answer 28

positive UCC remains after pool is close. this loss is deductible from the year’s income

Question 29

recaptured depreciation

Answer 29

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