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FINANCE > CHAPTER 2/ FINANCIAL STATEMENTS,TAXES, AND CASHFLOW > Flashcards

CHAPTER 2/ FINANCIAL STATEMENTS,TAXES, AND CASHFLOW Flashcards

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1
Q

EXPLAIN WHAT THE CASH FLOW IDENTITY IS ?

A

CASH FLOW FROM ASSETS = CASH FLOW TO CREDITORS PLUS CASH FLOW TO STOCK HOLDERS.

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2
Q

WHAT IS CASH FLOW ?

A

THE DIFFERENCE BETWEEN THE NUMBER OF DOLLARS THAT CAME IN AND THE NUMBER THAT WENT OUT.

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3
Q

WHAT ARE THE COMPONENTS OF OPERATING CASH FLOW ? WHERE CAN THE INFORMATION BE FOUND?

A

EBIT
+ DEPRECIATION
- TAXES
= OPERATING CASH FLOW

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4
Q

WHY IS INTEREST PAID NOT A COMPONENT OF OPERATING CASH FLOW ?

A

THEY ARE NOT OPERATING EXPENSES.

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5
Q

WHAT ARE THE THREE THINGS TO KEEP IN MIND WHEN LOOKING AT AN INCOME STATEMENT?

A
  1. REVENUES AND EXPENSES ON AN INCOME STATEMENT ARE THE RESULT OF GAAP( THE RECOGNITION AND THE MATCHING PRINCIPLE)
  2. INCOME STATEMENTS CONTAIN NON CASH ITEMS THAT DONT DIRECTLY AFFECT CASH FLOW.
  3. IN THE LONG RUN ALL COST ARE VARIABLE. IN THE SHORT RUN SOME ARE FIXED(TAXES) WHILE OTHERS ARE VARIABLE(SALARIES).
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6
Q

EXPLAIN THE DIFFERENCE BETWEEN ACCOUNTING VALUE AND MARKET VALUE ? WHICH IS MORE IMPORTANT TO THE FINANCIAL MANAGER ?

A
  1. THE VALUES SHOWN ON A BALANCE SHEET FOR A FIRMS ASSETS ARE BOOK VALUES( WHAT A FIRM PAID FOR THEM ). THE BOOK VALUE IS THE RESULT OF GAAP ( GENERALLY ACCEPTED ACCOUNTING PRACTICES ).
  2. MARKET VALUE IS MORE IMPORTANT TO A FINANCIAL MANAGER.
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7
Q

WHAT IS THE BALANCE SHEET IDENTITY?

A

ASSETS = LIABILITIES + SHAREHOLDERS EQUITY

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8
Q

WHAT IS LIQUIDITY ? WHY IS IT IMPORTANT?

A

1.THE SPEED AND EASE WITH WHICH AN ASSET CAN BE CONVERTED INTO CASH.

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9
Q

WHAT DO WE MEAN BY FINANCIAL LEVERAGE?

A

THE USE OF DEBT IN A FIRMS CAPITAL STRUCTURE.

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10
Q

WHAT IS BALANCE SHEET?

A

FINANCIAL STATEMENT SHOWING ASSETS ON ONE SIDE, LIABILITIES AND STOCK HOLDERS EQUITY ON THE OTHER.

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11
Q

EXPLAIN THE DIFFERENCE BETWEEN ACCOUNTING VALUE AND MARKET VALUE ? WHICH IS MORE IMPORTANT TO THE FINANCIAL MANAGER ?

A
  1. THE VALUES SHOWN ON A BALANCE SHEET FOR A FIRMS ASSETS ARE BOOK VALUES( WHAT A FIRM PAID FOR THEM ) AND ARE NOT REPRESENTATIVE OF WHAT THEY ARE REALLY WORTH. THE BOOK VALUE IS THE RESULT OF GAAP ( GENERALLY ACCEPTED ACCOUNTING PRACTICES ).
  2. MARKET VALUE IS MORE IMPORTANT TO A FINANCIAL MANAGER.
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12
Q

WHAT ARE THE TWO CLASSIFICATIONS OF LIABILITIES ON BALANCE SHEET?

A

CURRET LIABILITY - ONES THAT HAVE A LIFE OF LESS THAN A YEAR.MEANING THEY MUST BE PAID IN A YEAR.

LONG TERM LIABILITIES - A DEBT THAT IS NOT DUE IN THE COMING YEAR.

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13
Q

WHAT DO WE CALL LONG TERM DEBT AND LONG TERM CREDITORS ON A BALANCE SHEET?

A

BOND AND BOND HOLDERS

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14
Q

ANOTHER NAME FOR SHAREHOLDERS EQUITY IS WHAT ?

A

COMMON EQUITY OR OWNERS EQUITY.

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15
Q
  1. WHAT IS NET WORKING CAPITAL?

2. WHAT DOES A POSITIVE NWC MEAN?

A
  1. CURRENT ASSETS MINUS CURRENT LIABILITY.

2. THE FIRM HAS ENOUGH CURRENT ASSETS TO MEET ITS CURRENT LIABILITIES.

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16
Q

WHAT ORDER ARE THE ASSETS LISTED ON A BALANCE SHEET?

A

BY THE LENGHT OF TIME THAT IT TAKES TO CONVERT THEM TO CASH.

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17
Q

WHAT ORDER ARE THE LIABILITIES LISTED ON A BALANCE SHEET?

A

THE ORDER THEY WILL BE PAID

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18
Q

THERE ARE THREE IMPORTANT THINGS TO KEEP IN MIND WHEN LOOKING AT A BALANCE SHEET. WHAT ARE THEY.

A
  1. LIQUIDITY - THE CURRENT ASSETS ON A BALANCE SHEET ARE RELATIVELY LIQUID WHILE THE FIXED ASSETS ARE RELATIVELY ILLIQUID.
  2. DEBT VS EQUITY. A FIRMS CREDITORS HAVE FIRST CLAIM TO ITS CASHFLOW.
  3. MARKET VALUE VS BOOK VALUE. THE VALUES ON THE BALANCE SHEET ARE BOOK VALUES NOT MARKET VALUES.
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19
Q
  1. WHAT IS LIQUIDITY ?
  2. WHY IS IT IMPORTANT AS FAR AS THE BALANCE SHEET ASSETS ARE CONCERNED?
  3. WHAT ARE THE TWO DEMENSIONS OF IT?
A
  1. THE SPEED AND EASE OF WHICH AN ASSET CAN BE CONVERTED INTO CASH.
  2. A LIQUID ASSET IS ONE THAT CAN BE CONVERTED INTO CASH QUICKLY WITH OUT A BIG LOSS IN VALUE.
  3. EASE OF CONVERSION AND LOSS OF VALUE.
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20
Q

WHAT IS RESIDUAL VALUE?

A

WHAT IS LEFT AFTER CREDITORS ARE PAID.

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21
Q

WHAT POINT WAS THE BOOK MAKING ABOUT DEBT VS EQUITY ON THE BALANCE SHEET?

A

THE CREDITORS HAVE FIRST CLAIM TO THE FIRMS CASH FLOWS.

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22
Q

WHAT IS THE BOOK VALUE ON A BALANCE SHEET THE RESULT OF?

A

THE BOOK VALUE IS THE RESULT OF GAAP ( GENERALLY ACCEPTED ACCOUNTING PRACTICES ).

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23
Q

ARE ALL THE ASSETS THAT A FIRM HAS ON THE BALANCE SHEET?

A

NO. THERE ARE SOME THAT WOULD BE DIFFICULT TO ADD TO A BALANCE SHEET LIKE GOOD MANAGEMENT, REPUTATION,TALENTED EMPLOYEES.

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24
Q

WHAT IS ANOTHER NAME FOR CASH FLOW?

A

FREE CASH FLOW

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25
Q

ARE ALL THE ASSETS THAT A FIRM HAS ON THE BALANCE SHEET?

A

NO. THERE ARE SOME THAT WOULD BE DIFFICULT TO ADD TO A BALANCE SHEET LIKE GOOD MANAGEMENT, REPUTATION,TALENTED EMPLOYEES.

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26
Q
  1. WHAT IS OPERATING CASH FLOW?
  2. HOW IS IT CALCULATED?
  3. WHAT DOES THE RESULT TELL ME ABOUT THE BUSINESS.
  4. WHY IS A NEGATIVE OPERATING CASH FLOW A SIGN OF TROUBLE?
A

1.CASH GENERATED FROM A FIRMS NORMAL BUSINESS ACTIVITY.

  1. EBIT
    +DEPRECIATION
    -TAXES
  2. WHETHER THE CASH INFLOW FROM DAILY OPERATIONS ARE ENOUGH TO COVER THE OUTFLOWS.
  3. IT MEANS THAT A BIZZ MAY HAVE TO BORROW MONEY.
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27
Q

1.WHAT IS NET CAPITAL SPENDING?

A

MONEY SPENT ON FIXED ASSETS MINUS MONEY RECEIVED FROM THE SALE OF FIXED ASSETS.

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28
Q

HOW IS NET CAPITAL SPENDING CALCULATED?

A

ENDING NET FIXED ASSETS
- BEGINNING NET FIXED ASSETS
+ DEPRECIATION

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29
Q

COULD NET CAPITAL SPENDING BE NEGATIVE? EXPLAIN HOW?

A

YES. IF THE FIRM SOLD MORE FIXED ASSETS THAN THEY PURCHASED.

30
Q

DIFFERENCE BETWEEN A EXPENSE AND A LIABILITY?

A

EXPENSES ARE ON A INCOME STATEMENT AND ARE A COST OF A FIRMS OPERATION. LIABILITIES ARE THE DEBTS A COMPANY OWES.

31
Q

T OR F: THE WAY COST ARE REPORTED ON AN INCOME STATEMENT IS NOT A GOOD GUIDE TO USE IN DETERMINING WHETHER A COST IS FIXED OR VARIABLE?

A

TRUE. COST ON AN INCOME STATEMENT ARE IN TWO CATEGORIES; PRODUCT COST AND PERIOD COST. BOTH CATEGORIES CAN CONTAIN FIXED AND VARIABLE COSTS.

32
Q

WHAT IS THE DIFFERENCE BETWEEN A PRODUCT COST AND PERIOD COST?

A

PRODUCT COSTS ARE THOSE DIRECTLY RELATED TO THE PRODUCTION OF A PRODUCT OR SERVICE INTENDED FOR SALE.

PERIOD COSTS ARE ALL OTHER INDIRECT COSTS THAT ARE INCURRED IN PRODUCTION.
OVERHEAD AND SALES & MARKETING EXPENSES ARE COMMON EXAMPLES OF PERIOD COSTS

33
Q

HOW DO ACCOUNTANTS TEND TO CLASSIFY COST ON INCOME STATEMENT?

A

AS PRODUCTION COST OR PERIOD COST.

34
Q

GIVE THE WHOLE FOMULA:

CASH FLOW FROM ASSETS =

A

= OPERATING CASH FLOW

    • NET CAPITAL SPENDING
    • CHANGE IN NET WORKING CAPITAL
35
Q

CHANGE IN NWC=

A

ENDING NET WORKING CAPITAL - BEGINNING NET WORKING CAPITAL

36
Q

CASH FLOW TO CREDITORS =

A

INTEREST PAID - NET NEW BORROWING( LONG TERM DEBT).

37
Q

CASH FLOW TO CREDITORS =

A

DIVIDENDS PAID - NET NEW EQUITY RAISED.

38
Q

CASH FLOW TO CREDITORS IS SOMETIMES CALLED WHAT?

A

CASH FLOW TO BOND HOLDERS.

39
Q

WHAT FORCES RESULTED IN THE TAX CODE; POLITICAL OR ECONOMIC FORCES?

A

POLITICAL FORCES.

40
Q

WHAT IS AVERAGE TAX RATE?

A

TOTAL TAX PAID DIVIDED BY TOTAL TAXABLE INCOME.

41
Q

WHAT IS THE MARGINAL TAX RATE?

GIVE EXAMPLE ?

A
  1. AMOUNT OF TAX PAYABLE ON THE NEXT DOLLAR EARNED.
  2. IF TAXABLE INCOME IS 50,001.00. THE TAX ON THE FIRST 50,000.00 WOULD BE .15 (50,000.00). THE TAX ON THE 1.00 THAT IS LEFT WOULD BE TAXED AT .25 ( 1.00)= .25. TAX ON THE NEXT DOLLAR IS TWENTY FIVE CENTS.
42
Q

1.CALCULATE THE TOTAL TAX BILL, AVERAGE TAX RATE, MARGINAL TAX RATE FOR A CORPORATION THAT HAS A TAXABLE INCOME OF 200,000.00.
NOTE : CORPORATE TAX RATES CAN BE FOUND ON IRS WEBSITE.

A 
.15(50,000.00)= 7,500
.25(75,000.00- 50,000.00)=6,250
.34(100,000.00 -- 75,000.00) =8,500
.39(200,000.00 -- 100,000) =39,000
              total tax = 61,250.000

AVERAGE TAX = 61,250.00 / 200,000.00 =30.625 %

MARGINAL TAX RATE IS 39 CENT.

43
Q

WHAT IS THE GOAL OF A FINANCIAL MANAGER/

A

TO MAXIMIZE THE MARKET VALUE OF THE STOCK.

44
Q

WHAT ARE THE COMPONENTS OF AN INCOME STATEMENT?

A 
NET SALES
-COGS
-DEPRICIATION
=EBIT
- INTEREST
=TAXABLE INCOME
-TAXES
=NET INCOME
DIVIDENDS
RETAINED EARNINGS
45
Q

1.ON THE INCOME STATEMENT, THE DIFFERENCE BETWEEN NET INCOME AND DIVIDENDS IS WHAT?

A

RETAINED EARNINGS. THE RETAINED EARNINGS GOES TO THE CUMULATIVE RETAINED EARNINGS ACCOUNT ON THE BALANCE SHEET.

46
Q

WHAT IS THE DIFFERENCE BETWEEN A HIGHLY LIQUID ASSET AND AN ILLIQUID ASSET?

A

HIGHLY LIQUID ASSETS CAN BE CONVERTED INTO CASH WITHOUT MUCH LOSS IN VALUE.

ILLIQUID ASSETS CAN ALSO BE CONVERTED INTO CASH BUT AT A PRICE REDUCTION.

47
Q

EXPLAIN THE TRADEOFF BETWEN HIGH LIQUIDITY AND LOW LIQUIDITY LEVELS? GIVE EXAMPLE?

A

THE MORE LIQUID A FIRM IS THE LESS LIKLY IT WILL EXPERIENCE FINANCIAL DISTRESS ( DIFFICULTY PAYING DEBTS OR BUYING ASSETS). ON THE OTHER HAND , LIQUID ASSETS ARE GENERALLY LESS PROFITABLE TO HOLD.

CASH IS THE MOST LIQUID ASSET BUT HOLDING CASH PRODUCES ALMOST NO RETURN.

48
Q

WHAT IS THE INCOME STATEMENT EQUATION/

A

REVENUE - EXPENSES = NET INCOME.

49
Q

QUESTION 4 FROM PAGE 40 OF BOOK.

IN PREPARING A BALANCE SHEET,WHY DO YOU THINK STANDARD ACCOUNTING PRACTICE FOCUS ON HISTORICAL COST RATHER THAN MARKET VALUE?

A

IT PREVENTS OVERSTATING THE VALUE OF AN ASSET.

50
Q

WHAT IS AN EXPENSE?

A

THE COST OF OPERATIONS THAT A COMPANY INCURS TO GENERATE REVENUE.

51
Q

HOW DO REVENUES CAUSE RETAINED EARNINGS TO INCREASE?

A
  1. REVENUES ARE EARNED BY FIRM ( AN ASSET ACCOUNT SUCH AS ACCT RECEIVABLE WILL BE DEBITED; AN EQUITY ACCOUNT SUCH AS RETAINED EARNINGS WILL BE CREDITED).
  2. THE CREDIT BALANCE IN SERVICE REVENUES WILL EVENTUALLY BE MOVED TO THE SOLE PROPRIETOR’S CAPITAL ACCOUNT OR TO A CORPORATION’S RETAINED EARNINGS ACCOUNT(THEREBY INCREASING THE CREDIT BALANCE IN ONE OF THOSE OWNER’S OR STOCKHOLDERS’ EQUITY ACCOUNTS).
52
Q

DEFINE CURRENT ASSETS FROM THE BALANCE SHEET ?

A

A CURRENT ASSET IS A COMPANY’S CASH AND ITS OTHER ASSETS THAT ARE EXPECTED TO BE CONVERTED TO CASH WITHIN ONE YEAR OF THE DATE APPEARING IN THE HEADING OF THE COMPANY’S BALANCE SHEET

53
Q

DEFINE FIXED ASSETS FROM BALANCE SHEET

A

FIXED ASSETS ARE A COMPANY’S TANGIBLE, NONCURRENT ASSETS THAT ARE USED IN ITS BUSINESS OPERATIONS. THE WORD FIXED INDICATES THAT THESE ASSETS WILL NOT BE USED UP, CONSUMED, OR SOLD IN THE CURRENT ACCOUNTING YEAR.

54
Q

DEFINE CURRENT LIABILITIES FROM BALANCE SHEET ?

A

OBLIGATIONS DUE WITHIN ONE YEAR FROM THE BALANCE SHEET DATE.

55
Q

DEFINE LONG TERM DEBT FROM BALANCE SHEET ?

A

LONG-TERM (OR NONCURRENT) LIABILITIES ARE THE OBLIGATIONS THAT ARE NOT DUE WITHIN ONE YEAR OF THE BALANCE SHEET DATE AND WILL NOT REQUIRE A CASH PAYMENT.

56
Q

DEFINE ACCOUNTS RECEIVABLE FROM BALANCE SHEET?

A

THE AMOUNT OWED TO A COMPANY RESULTING FROM THE COMPANY PROVIDING GOOD AND OR SERVICES ON CREDIT.

57
Q

DEFINE INVENTORY FROM BALANCE SHEET?

A

PRODUCTS AVAILABLE FOR SALE.

58
Q

DEFINE ACCOUNTS PAYABLE FROM BALANCE SHEET?

A

AMOUNTS OWED BY A COMPANY TO ITS SUPPLIERS (VENDORS) FOR GOODS OR SERVICES THE COMPANY RECEIVED ON CREDIT

59
Q

DEFINE NOTES PAYABLE FROM BALANCE SHEET ?

A

A GENERAL LEDGER LIABILITY ACCOUNT IN WHICH A COMPANY RECORDS THE FACE AMOUNTS OF THE PROMISSORY NOTES THAT IT HAS ISSUED.

60
Q

DEFINE OWNERS EQUITY FROM BALANCE SHEET?

A

ON A BALANCE SHEET, THE DIFFERENCE BETWEEN THE TOTAL ASSETS AND TOTAL LIABILITIES.

61
Q

WHAT ARE THE MOST COMMON SHAREHOLDERS EQUITY ACCOUNTS ON THE BALANCE SHEET?

A
  1. COMMON STOCK ACCOUNT
  2. ADDITIONAL PAID IN CAPITAL ON COMMON STOCK.
  3. PREFERRED STOCK
  4. ADDITIONAL PAID IN CAPITAL ON PREFERRED STOCK.
  5. RETAINED EARNINGS
  6. TREASURY STOCK.
62
Q

DEFINE COMMON STOCK ?

A

The common stock account contains that portion of the price paid by investors for a company’s common stock that is attributable to the par value of the stock. If the par value amount per share is minimal (as is usually the case), the balance in this account is quite small. If the stock has no par value, then this account is not used.

63
Q

DEFINE DEPRECIATION FROM BALANCE SHEET ?

A

WHEN THE COST OF A TANGIBLE ASSET IS ALLOCATED OVER ITS USEFUL LIFE.

64
Q

DEFINE PREFERRED STOCK ?

A

The preferred stock account contains the portion of the price paid by investors for a company’s preferred stock that is attributable to the par value of the stock.

65
Q

DEFINE COMMON STOCK ?

A

THE COMMON STOCK ACCOUNT CONTAINS THAT PORTION OF THE PRICE PAID BY INVESTORS FOR A COMPANY’S COMMON STOCK THAT IS ATTRIBUTABLE TO THE PAR VALUE OF THE STOCK. IF THE PAR VALUE AMOUNT PER SHARE IS MINIMAL (AS IS USUALLY THE CASE), THE BALANCE IN THIS ACCOUNT IS QUITE SMALL. IF THE STOCK HAS NO PAR VALUE, THEN THIS ACCOUNT IS NOT USED.

66
Q

ADDITIONAL PAID IN CAPITAL ON COMMON STOCK?

A

THE ADDITIONAL PAID-IN CAPITAL ON COMMON STOCK ACCOUNT CONTAINS THE PORTION OF THE PRICE PAID BY INVESTORS FOR A COMPANY’S COMMON STOCK THAT IS ATTRIBUTABLE TO THE AMOUNT OF THE PAYMENT EXCEEDING THE PAR VALUE OF THE STOCK.

67
Q

DEFINE PREFERRED STOCK ?

A

THE PREFERRED STOCK ACCOUNT CONTAINS THE PORTION OF THE PRICE PAID BY INVESTORS FOR A COMPANY’S PREFERRED STOCK THAT IS ATTRIBUTABLE TO THE PAR VALUE OF THE STOCK.

68
Q

DEFINE ADDITIONAL PAID IN CAPITAL ON PREFERRED STOCK?

A

THE ADDITIONAL PAID-IN CAPITAL ON PREFERRED STOCK ACCOUNT CONTAINS THE PORTION OF THE PRICE PAID BY INVESTORS FOR A COMPANY’S PREFERRED STOCK THAT IS ATTRIBUTABLE TO THE AMOUNT OF THE PAYMENT EXCEEDING THE PAR VALUE OF THE STOCK.

69
Q

DEFINE TREASURY STOCK ?

A

THE TREASURY STOCK ACCOUNT CONTAINS THE AMOUNT PAID BY THE COMPANY TO BUY BACK SHARES FROM INVESTORS. THIS IS A CONTRA ACCOUNT, SO THE BALANCE IN THE ACCOUNT IS USUALLY A DEBIT, AND OFFSETS THE OTHER EQUITY ACCOUNTS.

70
Q

IF THERE IS CONFLICT BETWEEN MARKET DATA AND ACCOUNTING DATA, WHICH DO WE USE ?

A

MARKET DATA SHOULD GET PRIORITY.

FINANCE (3 decks)

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