Chapter 2 Textbook Flashcards
The *** is a snapshot of the firm
Balance Sheet
A convenient means of organizing and summarizing what a firm owns (assets), what a firm owes (liabilities), and the difference between two (firm’s equity) at a given point in time is referred to as the
Balance Sheet
A financial statement showing a firm’s accounting value on a particular date is known as
Balance Sheet
A debt that is not due in the coming year is classified as a
Long-term liability
The difference between the total value of the assets and the total value of the liabilities is known as the
Shareholders’ Equity also known as common equity
The difference between a firm’s current assets and its current liabilities is called
Net Working Capital
When is networking capital positive?
When current assets exceed current liabilities
What are the three particularly important things to keep in mind when examining a balance sheet?
- Liquidity
- Debt versus equity
- Market value versus book value
What term refers to the speed and ease with which an asset can be converted to cash
Liquidity
What is the accounting formula?
Assets= Liabilities + Shareholders’ equity
What is the formula to calculate shareholders’ equity?
Shareholders’ equity= Assets - Liabilities
T/F- If the firm sells its assets and pay its debts, whatever cash is left belongs to the shareholders
True
The use of debt in a firm’s capital structure is called
Financial Leverage
T/F- The more debt a firm has (as a percentage of assets), the greater is its degree of financial leverage
True
The amount of cash a firm would get if they actually sold the product is known as
Market Value
The common set of standards and procedures by which audited financial statements are prepared is known as
Generally Accepted Accounting Principles (GAAP)
What the asset can be sold for represents the
Market Value
What the asset was actually bought for represents the
Book Value
What is an example of why a market value and book value could be different?
Historically - bought a house in 1920s for $15k and it has been in the family since well the market value of the house now is 250K
What is the formula for the income statement?
Revenue- Expenses = Net Income
A financial statement summarizing a firm’s performance over a period of time is known as
Income Statement
T/F- Net Income often is expressed on a per-share basis and is called earnings per share
True
What is the primary reason that accounting income differs from cash flow is?
income statement contains non cash items
Expenses charged against revenues that do not directly affect cash flow such as depreciation is an example of
Noncash Items
What is the debt versus equity formula?
Shareholders equity = Assets - Liabilities
slide 8
What is the most important non cash item?
Depreciation
The true value of any asset is known as
Market Value
The amount of cash we would get if we actually sold it is known as
Market Value
The values shown on the balance sheet for the firm’s assets is known as
Book value
T/F- Book values are generally not what the assets are actually work
True
Publicly traded companies must file regular reports with the
Securities and Exchange Commission (SEC)
Where are the SEC reports usually filed electronically and can be searched at the ** public site
EDGAR
The % tax earned on the next dollar earned is known as
Marginal Taxes
The total tax bill divided by the taxable income is known as the
Average Rate Taxes
What is the earnings per share formula?
Net Income DIVIDED BY Total Shares outstanding
What is the dividends per share formula?
Total dividends DIVIDED BY Total Shares Outstanding
T/F- In the long run, all business costs are variable
True
What type of costs include things like raw materials, direct labor expense, and Manu o/h
Product Costs
What type of costs include selling costs, general costs, and admin expenses?
Period Costs
Corporations frequently like to show investors that they have steadily growing earnings. TO do this, they may take steps to overstate or understate earnings at various times to smooth out dips and surges. This is known as
Earnings Management
What is the cash flow from asset formula?
Cash flow from assets = Cash flow to creditors + Cash flow to stockholders
The difference b/w the number of dollars that came in and the number that went out is defined as
Cash Flow
The total cash flow to credits and cash flow to stockholders, consisting of the following: operating cash flow, capital spending, and change in net working capital is known as
Cash flow from assets
What are the three components of cash flow from assets?
Operating Cash Flow
Capital Spending
Change in networking capital
The cash flow that results from the firm’s day-t-day activities of producing and selling is known as
Operating Cash Flow
What term refers to the net spending on fixed assets ( purchases of fixed assets less sales of fixed assets)?
Capital Spending
The amount spent on net working capital that is measured as the c change in net working capital over the period being examined and represents the net increase or decrease in current assets over current liabilities is known as
The change in net working capital
Revenues minus costs NOT counting depreciation is the formula for what cash flow?
Operating Cash FLow
Operating Cash Flow MINUS Net Capital Spending MINUS Changes in Net Working Capital =
Cash Flow from Assets
What is the formula for operating cash flow?
= Earnings before interest and taxes + Depreciation - Taxes
What is the formula for Net Capital Spending?
= Ending net fixed assets - Beginning net fixed assets + Depreciation
What is the formula for change in networking capital?
Ending NWC- Beginning NWC
What is the formula for cash flow to creditors?
= Interest paid - Net new borrowing
What is the formula for cash flow to stockholders?
= Dividends paid - Net new equity raised
