Chap 2 - Financial Statements, Taxes, Cash Flow

Question 1

Balance sheet

Answer 1

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

Assets are listed in order of decreasing liquidity.

Liquidity is the ease of conversion to cash without significant loss of value.

Question 2

Stock variable vs. Flow variable = CF

Answer 2

Stock variable = level, balance sheet, time point

Flow variable = change, income statement, period

Question 3

NWC formula

Answer 3

CA - CL

Current asset - current liability

If positive it’s healthy

NWC >0 = CA > CL
The money we will receive in the next year is higher that what will pay

NWC <0 = CA < CL
We will pay more than we receive

Question 4

Liquidity

Answer 4

It’s the ability to convert cash quickly without a significant loss in value.

Liquid firms are less likely to experience financial distress.

But liquid assets typically earn a lower return

Liquid = low risk, low return 
Illiquid = high risk, high return

Question 5

Formulas

CA, CL, E

Answer 5

CA = cash + account receivable + inventory

CL = account payable + notes payables

E = common stock + retained earnings

Question 6

Book value vs. Market value

Answer 6

BV = valeur à l'achat dans le passé 
MV = valeur actuelle 

The balance sheet provides the book value of the assets, liabilities and equity

Market value is the price at which the assets, liabilities or equity can actually be bought or sold TODAY.

BV & MV are very different because of time.
MV is more important in the decision making process but it’s harder to estimate because it is subjective and unstable.

Question 7

Income statement

Answer 7

The IS is a video of the firm’s operations for a specified period of time.

Net income is not a measure of cash flow

Question 8

Taxes 2 rates

Answer 8

Taxes are always changing

Marginal tax rate = % paid on the next dollar earned

Average tax rate = the tax bill / taxable income

Taxable income = sales - COGS - D - exp - int

Question 9

The concept of cash flow

Answer 9

One of the most important piece of information that you can derive from financial statements.

We will look at how the cash is GENERATED from utilizing assets and how it is PAID to those that finance the purchase of the assets

Question 10

Cash flow from assets CFFA

Answer 10

CFFA = CF to creditors + CF to stockholders

CF to creditors = interest paid - net new borrowing

CF to stockholders = dividends paid - net new equity raised

CFFA = OCF - NCS - 🔺NWC

OCF = EBIT + dépréciation - taxes

NCS = ending net fixed assets - (beginning net fixed assets - depreciation)

🔺NWC = ending NWC - beginning NWC