Financial Statements and Cash Flow

Question 1

What is the difference between book value and market value?

Answer 1

The book value is an assets original purchase cost, adjusted for depreciation. Market value is what the asset could be sold for on the open market

Question 2

What is the difference between accounting income and cash flow?

Answer 2

• The difference is that accounting income calculates income with non-cash items that may not have happened yet, such as depreciation, while operating cash flow only adjusts for the cash flow that has actually happened in the period.

Question 3

What is the difference between average and marginal taxes?

Answer 3

• Marginal taxes are the percentage paid on the next dollar earned
• Average taxes are the tax rate / the taxable income
• One should use the marginal tax rate for more accurate expectations of the future

Question 4

How do we determine a firms cash flow? What are the equiations?

Answer 4

• We find the cash flow numbers in the balance sheet and the income statement.
• The equations are:
  1) Cash flow from assets = cash flow from creditors + cash flow from stockholders
  2) Cash flow from assets = Operating Cash Flow – Net capital spending(capex) – Change in net working capital