Chapter 2 Flashcards
Default
When a company cannot meet its cash obligation to lenders (bond holders), it is in default.
Management’s Job
The manager must manage in a way that short term results do not damage the company’s long-term ability to sustain cash generation.
Management can better manage cash by
Inventory management and receivables
Accounting Equation
Assets = Liabilities + Owner Equity
Current Assets
Expected to convert to cash within one year.
Fixed Assets
PP&E (property, plant, equipment). Long life – at least 1yr.
Net Fixed Assets
Fixed Assets – Accumulated Depreciation
Liquidity
How fast they can be converted to cash without loss of value
Liabilities
Current Liabilities and Long Term Liabilities
Current Liabilities
Payments Due Within One Year
Long Term Liabilities
Debt not due in the next year
Owners Equity
What remains if the firm sold its assets and used the proceeds to pay off its debts.
Working Capital
Working capital refers to all of the firm’s short-term balance-sheet accounts.
Current Assets: Cash itself, cash owed to the firm, or items the firm has prepaid in advance of services (such as rent or insurance).
Current Liabilities: Cash the firm owes but is holding onto.
Net Working Capital
Current Assets-Current Liabilities
Net Income
Change in Retained Earnings
Statement of Cash Flows
Flows measures how much cash moves into and out of the firm over the accounting period
Three Categories of Cash Flows
CFs from Operations, CFs from Financing, CFs from Investing
CFs from Operations
Changes resulting from the firm’s core business activity (Net Income) and from changes in Working Capital accounts.
CFs from Financing
Cash changes resulting from anything involving how the firm raises cash to fund its operation, whether from borrowing (a loan or a bond) or from issuing equity (stocks).
CFs from Investing
Cash changes resulting generally from acquiring or selling Fixed Assets (Capital Assets).
NFA End of Period
NFA beginning+Capex-depreciation
CapEX
NFA End-NFA Beginning+Depreciation
Cash Flow from Assets
Operating Cash Flow- CapEX- Change in NWC
Operating Cash Flow
EBIT+Depreciation-Taxes
Change in NWC
NWC end-NWC beginning
