Chapter Two Flashcards
What document is a “snapshot” of a business?
Balance Sheet
What is net working capital?
Current Assets-Current Liabilities
What is the difference between the total value of assets and the total value of liabilities?
Shareholders’ equity
What is the speed and easy with which an asset can be coverted to cash?
liquidity
What are the two dimensions of liquidity?
Easy of conversion versus loss of value
What is the use of debt in a firm’s capital structure?
Financial leverage
What are the common set of standards and procedures by which audited financial statements are prepared
Generally Accepted Accounting Principles
Financial managers are concerned with what type of valuation of assets?
Market value
What is the distinction between market value and book value important?
Book value often drastically understates the firms’ assets
What is the formula that gives income?
Revenues-Expenses=Income
What is a financial statement summarizing a firm’s performance over a period of time
Income statement
What are the items of an income statement (in order)
Net sales Cost of Goods Sold Depreciation Earnings before interest and taxes Interest expense Taxable Income Taxes Net Profit Dividends Addition to Retained Earnings
How do we calculate earnings per share?
Net Income/Total shares outstanding
How do we calculate dividends per share?
Total Dividends/total shares outstanding
What are expenses charged against revenues that do not directly affect cash flow, such as depreciation
noncash items
What is earnings management?
Overstating or understating earnings at various times to smooth out dips and surges
What is the average tax rate?
Total taxes paid divided by total taxable income
Amount of tax payable of the next dollar earned
Marginal tax rate
What is meant by cash flow?
the difference between the number of dollars that came in and went out
Cash flow from assets =
Cash flor to creditors + Cash flow to stockholders
Cash flow from assets involve three componenets
operation cash flow, capital spending, change in net working capital
What is operating cash flow?
Cash generated from a firm’s normal business activities
What is the operation cash flow formula?
EBIT+Depreciation-Taxes
What is net capital spending?
money spent of fixed assets less money received from the sale of fixed assets
What is the net capital spending formula
Ending net fixed assets-beginning net fixed assets+depreciation
What is the formula for the cash flow from assets?
Operating cash flow-Net capital spending-Change in NWC
What does a negative cash flow from assets mean?
the firm raised more money by borrowing and selling stock than they paid out to creditors and stockholders
What is cash flow to creditors?
A firm’s interest payments to creditors less net new borrowings
What is the formula for cash flow to creditors?
Interest paid-net new borrowing
What is cash flow to stockholders
dividends paid ot by a firm less net new equity raised
What is the formula for cash flow to stockholders
dividends paid-net new equity raised
What are the two types of equity to be raised?
common stock and paid in surplus
What is the cash flow identity?
Cash flow from assets=cash flow to creditors+cash flow to stockholders
Cash flow from assets =
Operating Cash Flow - Net capital spending - change in NWC
Operating cash flow =
EBIT+Deprec-taxes
Net Capital spending =
Ending net fixed asset-beginning fixed net asset + depreciation
Change in NWC =
Ending NWC- Beginning NWC
Cash flow to creditors =
Interest paid - net new borrowing
Cash flow to stockholders =
Dividends paid - net new equity raised
