Chapter 2

Question 1

Default

Answer 1

When a company cannot meet its cash obligation to lenders (bond holders), it is in default.

Question 2

Management’s Job

Answer 2

The manager must manage in a way that short term results do not damage the company’s long-term ability to sustain cash generation.

Question 3

Management can better manage cash by

Answer 3

Inventory management and receivables

Question 4

Accounting Equation

Answer 4

Assets = Liabilities + Owner Equity

Question 5

Current Assets

Answer 5

Expected to convert to cash within one year.

Question 6

Fixed Assets

Answer 6

PP&E (property, plant, equipment). Long life – at least 1yr.

Question 7

Net Fixed Assets

Answer 7

Fixed Assets – Accumulated Depreciation

Question 8

Liquidity

Answer 8

How fast they can be converted to cash without loss of value

Question 9

Liabilities

Answer 9

Current Liabilities and Long Term Liabilities

Question 10

Current Liabilities

Answer 10

Payments Due Within One Year

Question 11

Long Term Liabilities

Answer 11

Debt not due in the next year

Question 12

Owners Equity

Answer 12

What remains if the firm sold its assets and used the proceeds to pay off its debts.

Question 13

Working Capital

Answer 13

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.

Question 14

Net Working Capital

Answer 14

Current Assets-Current Liabilities

Question 15

Net Income

Answer 15

Change in Retained Earnings

Question 16

Statement of Cash Flows

Answer 16

Flows measures how much cash moves into and out of the firm over the accounting period

Question 17

Three Categories of Cash Flows

Answer 17

CFs from Operations, CFs from Financing, CFs from Investing

Question 18

CFs from Operations

Answer 18

Changes resulting from the firm’s core business activity (Net Income) and from changes in Working Capital accounts.

Question 19

CFs from Financing

Answer 19

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).

Question 20

CFs from Investing

Answer 20

Cash changes resulting generally from acquiring or selling Fixed Assets (Capital Assets).

Question 21

NFA End of Period

Answer 21

NFA beginning+Capex-depreciation

Question 22

CapEX

Answer 22

NFA End-NFA Beginning+Depreciation

Question 23

Cash Flow from Assets

Answer 23

Operating Cash Flow- CapEX- Change in NWC

Question 24

Operating Cash Flow

Answer 24

EBIT+Depreciation-Taxes

Question 25

Change in NWC

Answer 25

NWC end-NWC beginning