Chapter 2: Financial Statements, Taxes, and Cash Flows Flashcards
balance sheet
a snapshot of the financial health of a firm, or of the firm’s accounting value on a particular date
net working capital
current assets less current liabilities. usually positive for a healthy firm
liquidity
refers to the speed and ease with which an asset can be converted to cash. gold is a relatively liquid asset; a sumo manufacturing facility is not
liquidity really has two dimensions: ease of conversion versus loss of value. any asset can be converted to cash quickly if we cut the price enough. a highly liquid asset, therefore, is one that can be converted to cash without a substantial price reduction
the more liquid a business is…
the less likely it will be effected in times of financial distress
market value
the true value of any asset, which is simply the amount of cash we would get if we actually sold it on the open market
book values
values shown on the balance sheet for the firm’s assets and generally are not what the assets are actually worth
assets are generally carried on the books at historical cost, or what the firm paid for them (minus accumulated depreciation)
income statement
measures performance over some period of time, usually a quarter or a year
GAAP and the income statement
the matching principle reigns supreme: revenues have costs associated with them, and those are presented on the income statement
non cash items
expenses charged against revenues that do not directly affect cash flow, such as depreciation
fixed vs variable costs
fixed costs must be paid no matter what. other costs, such as wages to laborers and payments to suppliers, are still variable
accountants tend to clarify costs as either period costs or product costs
period costs
incurred during a particular time period and might be reported as selling, general, and administrative expenses
product costs
include such things as raw materials, direct labor expense, and manufacturing overhead. these are reported on the income statement as costs of goods sold, but they include both fixed and variable costs
earnings management
the way that firms are required by GAAP to report financial results is supposed to be objective and precise, but in reality, there is plenty of wiggle room, and, as a result, companies have significant discretion over their reported earnings
corporate tax rates
there are only four original corporate rates: 15, 25, 34, and 35 percent
average tax rate
total taxes paid divided by total taxable income
marginal tax rate
amount of tax payable on the net dollar earned
flat tax rate
there is only one tax rate for all incomes, and as it stands now, the US is based on a modified flat tax rate, which becomes a true flat rate for the highest incomes
the average flat tax rate for large corporations is 35%
what is the cash flow identity?
cash flow from assets = cash flow to creditors + cash flow to stockholders
cash flow from assets
total of cash flow to creditors and cash flow to stockholders, consisting of the following three components: 1) operating cash flow 2) capital spending, and 3) change in net working capital
operating cash flow
cash generate from a firm’s normal business activities
to calculate, take revenues and subtract costs (don’t include depreciation and don’t include interest)
earnings before interest and taxes + depreciation - taxes = operating cash flow
this is an important number because it tells us, on a very basic level, whether or not a firm’s cash inflows from its business operations are sufficient to cover its everyday cash outflows
capital spending
spending on fixed assets less money received from the sale of fixed assets
ending fixed assets - beginning fixed assets + depreciation = net investments in fixed assets
this can be negative, which would happen if the firm sold off more assets than it purchased
change in net working capital
difference between the beginning and ending net working capital figures
