Chapter 3

Question 1

annual report

Answer 1

a report issued annually by a corporation to its stockholders. it contains basic financial statements as well as management’s analysis of the firm’s past operations and future prospects

Question 2

balance sheet

Answer 2

a statement of a firm’s financial position at a specific point in time

Question 3

stockholders’ equity

Answer 3

it represents the amount that stockholders paid the company when shares were purchased and the amount of earnings the company has retained since its origination

Question 4

retained earnings

Answer 4

they represent the cumulative total of all earnings kept by the company during its life

Question 5

working capital

Answer 5

current assets

Question 6

net working capital

Answer 6

current assets minus current liabilities

Question 7

net operating working capital

Answer 7

current assets minus non interest bearing current liabilities

Question 8

income statements

Answer 8

a report summarizing a firm’s revenues, expenses, and profits during a reporting period, generally a quarter or a year

Question 9

operating income

Answer 9

earnings from operations before interest and taxes

Question 10

depreciation

Answer 10

the charge to reflect the cost of assets depleted in the production process. depreciation is not a cash outlay

Question 11

amortization

Answer 11

a noncash charge similar to depreciation except that it represents a decline in value of intangible assets

Question 12

EBITDA

Answer 12

earnings before interest, taxes, depreciation, and amortization

Question 13

statement of cash flows

Answer 13

a report that shows how items that affect the balance sheet and income statement affect the firm’s cash flows

Question 14

statement of stockholders’ equity

Answer 14

a statement that shows by how much a firm’s equity changed during the year and why this change occurred

Question 15

free cash flow

Answer 15

the amount of cash that could be withdrawn without harming a firm’s ability to operate and to produce future cash flows

Question 16

NOPAT/net operating profit after taxes

Answer 16

the profit a company would generate if it had no debt and held only operating assets

Question 17

MVA/market value added

Answer 17

the excess of the market value of equity over its book value

Question 18

EVA/economic value added

Answer 18

excess of NOPAT over capital costs

Question 19

progressive

Answer 19

a tax system where the tax rate is higher on higher incomes

Question 20

marginal tax rate

Answer 20

the tax rate applicable to the last unit of a person’s income

Question 21

average tax rate

Answer 21

taxes paid dividend by taxable income

Question 22

capital gain/loss

Answer 22

the profit/loss from the sale of a capital asset for more/less than its purchase price

Question 23

AMT/alternative minimum tax

Answer 23

created by congress to make it more difficult for wealthy individuals to avoid paying taxes through he use of various deductions

Question 24

carry back/carry forward

Answer 24

ordinary corporate operating losses can be carried backward for 2 years and carried forward for 20 years to offset taxable income in a given year

Question 25

S corporation

Answer 25

a small corporation that elects to be taxed as a proprietorship or a partnership yet retains limited liability and other benefits of a corporate form of organization