Chapter 3: Financial Statements, Cash Flow, and Taxes

Question 1

What is an annual report?

Answer 1

• Annual report
• From corporations -> stockholders
• Financial Statements
• Management analysis of past events and future prospects

Question 2

What four financial statements found in annual report?

Answer 2

• Balance sheet
• Income statement
• Cashflow statements
• Stockholders’ equity statements

Question 3

What is a balance sheet?

Answer 3

• Financial standing

- Specific point in time

Question 4

What is stockholders’ equity?

Answer 4

• Original capital invested by stockholders

- Earnings retained by company

Question 5

What is retained earnings?

Answer 5

• Cumulative total earnings held by company

Question 6

What is working capital?

Answer 6

• Current assets

Question 7

What is net working capital?

Answer 7

Current assets - current liabilities

Question 8

What is net operating working capital?

Answer 8

Current assets - non interest bearing current liabilities

Question 9

What is income statement?

Answer 9

• Summarises revenues, expenses and profit

Question 10

What is operating income?

Answer 10

• Earnings before interests and taxes

Question 11

What is depreciation?

Answer 11

• Charge of assets depletion during production

Question 12

What is amortisation?

Answer 12

• Similar to depreciation

- Charge of non-tangible assets E.g Patents, copyrights

Question 13

What is EBITDA?

Answer 13

• Earnings before interests, taxes, depreciation and amortization.

Question 14

What is statement of cash flows?

Answer 14

-Shows how items affect balance sheet and income statement affect firm’s cash flows

Question 15

What is the statement of stockholder’s equity?

Answer 15

Describes how the company’s equity had changed and why did it happen.

Question 16

What is free cash flow?

Answer 16

• Ability of company to use cash without harming is ability to operate and produce future cash flows.

Question 17

What is Net Operating Profit After Taxes (NOPAT)?

Answer 17

• Profit company generates
• No debts
• Only operating assets

Question 18

What is Market Value Added? (MVA)

Answer 18

The difference in the market value of equity over its book value (historical cost).

Question 19

What is Economic Value Added (EVA)

Answer 19

• Excess of NOPAT over capital costs

- True profit after removing capital costs from NOPAT

Question 20

What is progressive tax?

Answer 20

-Higher tax rate for higher tax income.

Question 21

What is marginal tax rate?

Answer 21

• Calculated from the base amount of the tax bracket.

Question 22

What is average tax rate?

Answer 22

Taxes paid divided by taxable income.