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Business Finance > Module 2: Financial Statements and Cash Flows > Flashcards

Module 2: Financial Statements and Cash Flows Flashcards

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1
Q

What are the 3 main types of financial statements that companies file?

A
  1. Balance Sheet
  2. Income Statement
  3. Statement of Cash Flows
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1
Q

Anything that businesses think could go wrong and materially affect the business will be put under “______ _______” in their Form ______ so that shareholders can’t sue the business.

A

Risk Factors; 10-K

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2
Q

What are the 2 main sources to find financial statements?

A
  1. EDGAR (the SEC)
  2. A company’s own page
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3
Q

where the money came from for companies to purchase those assets.

A

liabilities and stockholder’s equity

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4
Q

T or F: Paying down liabilities makes stockholder’s equity decrease.

A

False; increase

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5
Q

when we’ve sold something on credit that hasn’t been paid for yet.

A

accounts receivable

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6
Q

What are the two ways to think about how cash-like (liquid) something is?

A
  1. How quickly can you spend it (convert it into cash)?
  2. How much value do you give up to convert it into cash?
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7
Q

If net working capital is positive, then…

A

the liquid assets we have are more than enough to cover the debts that will become due in the next year

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8
Q

If net working capital is negative, then…

A

the liquid assets we have are NOT enough to cover the debts that will become due in the next year

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9
Q

T or F: The more assets you have in your checking account, the safer debtors will feel that you will pay them.

A

True

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10
Q

What is the downside to having high net working capital?

A

the money that’s sitting in your checking account isn’t doing anything for you (no interest; no money growing)

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11
Q

assets that are not listed under current assets because the company expects to use them for a long time (ex: property, plant and equipment)

A

fixed assets

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12
Q

Intangible assets sometimes includes things like purchasing another company. This is called:

A

intellectual property

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13
Q

T or F: What’s on the left hand side of the balance sheet will ALWAYS equal what is on the right hand side.

A

True

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14
Q

a current liability; expenses we have incurred (ex: we’ve used up half of this month’s electricity, but we won’t give the bill until the end of the year. The company has to go ahead and already recognize this expense even though we aren’t going to pay it until later).

A

accrued expenses

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15
Q

What are the 3 top categories in the stockholders’ equity section of the balance sheet? These categories have to do with where we’ve _______ money.

A
  1. Preferred stock
  2. Common stock
  3. Additional paid-in capital
    raised
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16
Q

How do we calculate how much we’ve raised in IPO from equity holders to finance the business?

A

Preferred stock + Common stock + Additional Paid-In Capital

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17
Q

net income; profit that gets reinvested into the business

A

accumulated retained earnings

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18
Q

How do you calculate retained earnings?

A

Sales - Costs

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19
Q

T or F: To reinvest profit back into a company is to retain those earnings.

A

True

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20
Q

If a company buys back stock, this goes into ________ _____.

A

treasury stock

21
Q

T or F: Treasury stock gets added to retained earnings.

A

False; it gets SUBTRACTED

22
Q

In finance, we care about what the company is actually _______.

A

worth

23
Q

Where on the balance sheet can we find the true value of the firm?

A

The balance sheet can’t tell us the true value of the firm because that true value is about what investors think is going to happen in the future.

24
Q

T or F: It is common for companies to have market values that are much, much smaller than their book values.

A

False; much, much LARGER

25
Q

T or F: On the income statement, everything will reset at the start of the fiscal year. (sales, profit, costs, they all go back down to 0).

A

True

26
Q

T or F: We need revenue to be higher than expenses long-term. Short-term, we can get away with expenses being higher.

A

True

27
Q

According to GAAP, when is revenue recognized?

A

When sales are made, even if it’s on credit.

28
Q

T or F: Investors care about when we actually get the cash flow, not when revenue is recognized.

A

True

29
Q

According to GAAP, when are expenses recognized? What is this based on?

A

Based on the Matching principle: matched to the revenue; (ex: if we sell a car, we will recognize all the expenses put into producing that car (raw materials, hourly labor)

30
Q

In accounting, we want to spread out the cost of depreciation over the time we’re actually _______ the asset because this is a way of giving investors a better look at what the company’s _____-_____ ______ are.

A

using; long-term prospects

31
Q

how much money came into our business

A

net sales (revenue)

32
Q

T or F: Cost of goods sold are fixed costs. Selling, general, and administrative expenses are variable costs.

A

False; COGS are variable, SGA Expenses are fixed

33
Q

Interest expense is taken out (before/after) taxes.

A

Before

34
Q

What is one of the pros of debt?

A

It will reduce our tax bill ; our taxes are calculated on profits after that.

35
Q

T or F: We can have negative retained earnings. It is also possible to have negative S.E on the balance sheet.

A

True

36
Q

Sources and uses of funds occur from changes in ______ _______ and ______ _______.

A

current assets; current liabilities

37
Q

T or F: You can have negative profits and positive cash flows. You can have positive profits and negative cash flows.

A

True

38
Q

You want a (negative/positive) cash flow.

A

positive

39
Q

purchasing assets that keep the company going.

A

investing activities

40
Q

how we are either raising money from investors or we’re at a more stable, mature portion of the business cycle and now we’re returning cash back to shareholders.

A

financing activities

41
Q

How do you calculate Cash Flow From Assets?

A

EBIT (earnings before interest and taxes) + Depreciation - Taxes - Net Capital Spending - Change in Net Working Capital

42
Q

Where can you find net equity issuance?

A

On the balance sheet

43
Q

Financial statements are (backward/forward) looking.

A

backward

44
Q

The balance sheet shows (accounting/market) values, not (accounting/market) values.

A

accounting; market

45
Q

T or F: As your income goes up, the amount you have to pay in taxes goes up as well in the U.S.

A

True

46
Q

What are the 2 kinds of tax rates?

A
  1. Average Tax Rate
  2. Marginal Tax Rate
47
Q

the average amount of tax over total income.

A

average tax rate

48
Q

the tax rate we would pay on the next dollar of income.

A

marginal tax rate

49
Q

T or F: The nice thing about a flat tax rate is that the marginal and average rate is always the same.

A

True

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