Financial Statements, Taxes and Cash Flow

Question 1

Explain Financial leverage

Answer 1

The use of debt in a firm’s capital structure

Question 2

Differentiate between Book and Market Value

Answer 2

Book value show the cost of an asset while Market value is the value of the asset today

typically in regard to shares

Question 2

State the income statement equation

Answer 2

Revenues - Expenses = Income

Question 3

Describe Cash Flow Identity

Answer 3

Cash flow identity says that cash flow from a firm’s assets is equal to cash flow paid to supplliers of capital

Cash flow from assets = Cash flow to creditors + Cash flow to stockholders

Question 4

Differentiate between Marginal and Average Tax rate

Answer 4

Marginal tax rate is the amount of tax payable on the next dollar earned while Average tax rate is the total tax paid divided by the total taxable income.

Question 5

Net working Capital

Answer 5

The difference between a firm’s current assets and current liabilities

Question 6

Operating Cash flow

Answer 6

Calculated as revenues minus costs

Tells us whether a firm’s cash inflows are sufficient to cover everyday cash outflows

Question 7

Net Capital Spending

Answer 7

Money spent on Fixed assets less money received from the sale of fixed assets

Question 8

Change in net working capital

Answer 8

The difference between the beginning and ending NWC figures

measured as the net change in current assets relative to current liabilities for the period being examined and represents the amount spend on net working
capital