Module 2: Financial Statements and Cash Flows Flashcards
What are the 3 main types of financial statements that companies file?
- Balance Sheet
- Income Statement
- Statement of Cash Flows
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.
Risk Factors; 10-K
What are the 2 main sources to find financial statements?
- EDGAR (the SEC)
- A company’s own page
where the money came from for companies to purchase those assets.
liabilities and stockholder’s equity
T or F: Paying down liabilities makes stockholder’s equity decrease.
False; increase
when we’ve sold something on credit that hasn’t been paid for yet.
accounts receivable
What are the two ways to think about how cash-like (liquid) something is?
- How quickly can you spend it (convert it into cash)?
- How much value do you give up to convert it into cash?
If net working capital is positive, then…
the liquid assets we have are more than enough to cover the debts that will become due in the next year
If net working capital is negative, then…
the liquid assets we have are NOT enough to cover the debts that will become due in the next year
T or F: The more assets you have in your checking account, the safer debtors will feel that you will pay them.
True
What is the downside to having high net working capital?
the money that’s sitting in your checking account isn’t doing anything for you (no interest; no money growing)
assets that are not listed under current assets because the company expects to use them for a long time (ex: property, plant and equipment)
fixed assets
Intangible assets sometimes includes things like purchasing another company. This is called:
intellectual property
T or F: What’s on the left hand side of the balance sheet will ALWAYS equal what is on the right hand side.
True
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).
accrued expenses
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.
- Preferred stock
- Common stock
- Additional paid-in capital
raised
How do we calculate how much we’ve raised in IPO from equity holders to finance the business?
Preferred stock + Common stock + Additional Paid-In Capital
net income; profit that gets reinvested into the business
accumulated retained earnings
How do you calculate retained earnings?
Sales - Costs
T or F: To reinvest profit back into a company is to retain those earnings.
True
If a company buys back stock, this goes into ________ _____.
treasury stock
T or F: Treasury stock gets added to retained earnings.
False; it gets SUBTRACTED
In finance, we care about what the company is actually _______.
worth
Where on the balance sheet can we find the true value of the firm?
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.
T or F: It is common for companies to have market values that are much, much smaller than their book values.
False; much, much LARGER
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).
True
T or F: We need revenue to be higher than expenses long-term. Short-term, we can get away with expenses being higher.
True
According to GAAP, when is revenue recognized?
When sales are made, even if it’s on credit.
T or F: Investors care about when we actually get the cash flow, not when revenue is recognized.
True
According to GAAP, when are expenses recognized? What is this based on?
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)
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.
using; long-term prospects
how much money came into our business
net sales (revenue)
T or F: Cost of goods sold are fixed costs. Selling, general, and administrative expenses are variable costs.
False; COGS are variable, SGA Expenses are fixed
Interest expense is taken out (before/after) taxes.
Before
What is one of the pros of debt?
It will reduce our tax bill ; our taxes are calculated on profits after that.
T or F: We can have negative retained earnings. It is also possible to have negative S.E on the balance sheet.
True
Sources and uses of funds occur from changes in ______ _______ and ______ _______.
current assets; current liabilities
T or F: You can have negative profits and positive cash flows. You can have positive profits and negative cash flows.
True
You want a (negative/positive) cash flow.
positive
purchasing assets that keep the company going.
investing activities
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.
financing activities
How do you calculate Cash Flow From Assets?
EBIT (earnings before interest and taxes) + Depreciation - Taxes - Net Capital Spending - Change in Net Working Capital
Where can you find net equity issuance?
On the balance sheet
Financial statements are (backward/forward) looking.
backward
The balance sheet shows (accounting/market) values, not (accounting/market) values.
accounting; market
T or F: As your income goes up, the amount you have to pay in taxes goes up as well in the U.S.
True
What are the 2 kinds of tax rates?
- Average Tax Rate
- Marginal Tax Rate
the average amount of tax over total income.
average tax rate
the tax rate we would pay on the next dollar of income.
marginal tax rate
T or F: The nice thing about a flat tax rate is that the marginal and average rate is always the same.
True
