Key Rule 2 Flashcards
Why do we add back depreciation in the cash flow statement?
No actual cash has changed hands so we have to add it back.
Why does depreciation affect cash balance?
Depreciation is tax-deductible and decreases cash and taxes paid.
Why do we have to look in the CFS for depreciation?
Depreciation is usually embedded in other Income Statement items such as COGS or Opex, CFS is the one which gives the full amount.
What kind of expense is asset impairment?
A non-cash expense.
When an asset breaks down, what 2 categories must you add back?
Asset impairment and depreciation
When an asset breaks down at the end of the year, what do you do with the depreciation?
Gotta depreciate for that year.
Does debt show up on the income statement when initially issued?
No.
Why is the IS unaffected when the debt principal is being repaid?
Debt principal is a liability, not an expense or income.
Is there debt interest in the cash flow statement?
No!!
Does equity ever show up on the income statement?
No.
What does issuing equity do to shares?
Dilutes shares.
What does it mean if shares are diluted?
- less cash per shareholder
- receive less if company sold
Why aren’t common stock dividends on the income statement?
They don’t reduce income to common stockholders.
What is a stock repurchase?
When company repurchases its stock, usually at a premium price
What happens in a stock repurchase?
Share count reduced, outflow of cash
What is treasury stock?
previously outstanding stock that has been bought back from stockholders by the issuing company
What is the effect of treasury stock on the number of shares in the market?
decreases
What does the treasury stock line in the balance sheet do?
It is a contra equity account which minuses the equity section by the amount it holds.
What is preferred stock?
Preferred stock refers to a class of ownership that has a higher claim on assets and earnings than common stock
What is preferred stock’s effect on existing investor ownership?
No effect
What is preferred stock’s effect to income available to common shareholders?
Decreases income available to commo shareholders b/c they get paid first (minus off preferred dividend after NI in IS to get net income in common).
What is the tax treatment of preferred stock?
non tax deductible
Why are preferred stock not used often?
- non tax deductible
- reduce income available to common stockholders
When do companies use preferred stock?
when it can’t issue debt or equity
What is the cost of preferred stock?
More expensive than debt, cheaper than common equity.
What happens when treasury stocks are sold for profit?
profits go into paid-in capital account.
An increase in the treasury stock is shown as
always negative
The number in a treasury stock account is
Either 0 or -ve
What qualifies an expense as a capex?
useful for “the long term” – more than one year
