Financial Statements

Question 1

What does EBIT stand for

Answer 1

Earnings before interest and taxes

• Amount of money a company has retained before paying taxes and interest on outstanding debt issues.
• Can be found in the income statement

Question 2

On what financial statement can earnings before interest and taxes (EBIT) be found?

Answer 2

Income statement

-This can be found by looking at the income statement for the company.

Question 3

If a company issues debentures at par value, would this affect the current liabilities section of the balance sheet?

Answer 3

No

-Would affect “long-term debt” not “current liabilities”

Question 4

If a company issues $10 million in par value convertible debentures, would this affect the working capital in the balance sheet?

Answer 4

Yes, working capital would increase

• Company now has more cash
• Liability from the debentures would be included in long-term debt, not current liabilities

Question 5

A company decides to call in some of it’s outstanding debentures. Would this affect net worth on the balance sheet? If so, how?

Answer 5

Yes, would decrease net worth

• Assuming the bonds are callable at a price above par
• The compnay would have to pay more $ in cash than is removed from long term debt

Example: Company calls bonds @ 102

• Call price is a premium over par
• That means for each $1,000 long term debt taken off the books, company has to spend $1,020

Question 6

When a company pays a cash dividend, is total liabilities in the balance sheet affected?

Answer 6

Yes

-“Dividends payable” are a current liability

“When a company pays a cash dividend, the dividends payable (a current liability) and the cash account (current assets) are reduced by the same amount.”

Question 7

When a company pays a cash dividend, is working capital affected?

Answer 7

No

-Liabilities and assets are reduced by same amount

“When a company pays a cash dividend, the dividends payable (a current liability) and the cash account (current assets) are reduced by the same amount. Because liabilities and assets are each reduced by the same amount, working capital is not affected”

Question 8

Shareholders equity is another name for _____

Answer 8

Net worth

Question 9

The “net worth” of a company can also be referred to as _____

Answer 9

Shareholders equity

Question 10

Term for the amount of money a company has retained before paying taxes and interest on outstanding debt issues.

Answer 10

earnings before interest and taxes or EBIT