Module 2: Financial Statements and Cash Flows

Question 1

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

Answer 1

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

Question 1

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.

Answer 1

Risk Factors; 10-K

Question 2

What are the 2 main sources to find financial statements?

Answer 2

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

Question 3

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

Answer 3

liabilities and stockholder’s equity

Question 4

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

Answer 4

False; increase

Question 5

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

Answer 5

accounts receivable

Question 6

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

Answer 6

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

Question 7

If net working capital is positive, then…

Answer 7

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

Question 8

If net working capital is negative, then…

Answer 8

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

Question 9

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

Answer 9

True

Question 10

What is the downside to having high net working capital?

Answer 10

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

Question 11

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

Answer 11

fixed assets

Question 12

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

Answer 12

intellectual property

Question 13

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

Answer 13

True

Question 14

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).

Answer 14

accrued expenses

Question 15

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.

Answer 15

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

Question 16

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

Answer 16

Preferred stock + Common stock + Additional Paid-In Capital

Question 17

net income; profit that gets reinvested into the business

Answer 17

accumulated retained earnings

Question 18

How do you calculate retained earnings?

Answer 18

Sales - Costs

Question 19

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

Answer 19

True

Question 20

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

Answer 20

treasury stock

Question 21

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

Answer 21

False; it gets SUBTRACTED

Question 22

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

Answer 22

worth

Question 23

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

Answer 23

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.

Question 24

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

Answer 24

False; much, much LARGER

Question 25

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).

Answer 25

True

Question 26

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

Answer 26

True

Question 27

According to GAAP, when is revenue recognized?

Answer 27

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

Question 28

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

Answer 28

True

Question 29

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

Answer 29

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)

Question 30

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.

Answer 30

using; long-term prospects

Question 31

how much money came into our business

Answer 31

net sales (revenue)

Question 32

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

Answer 32

False; COGS are variable, SGA Expenses are fixed

Question 33

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

Answer 33

Before

Question 34

What is one of the pros of debt?

Answer 34

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

Question 35

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

Answer 35

True

Question 36

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

Answer 36

current assets; current liabilities

Question 37

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

Answer 37

True

Question 38

You want a (negative/positive) cash flow.

Answer 38

positive

Question 39

purchasing assets that keep the company going.

Answer 39

investing activities

Question 40

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.

Answer 40

financing activities

Question 41

How do you calculate Cash Flow From Assets?

Answer 41

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

Question 42

Where can you find net equity issuance?

Answer 42

On the balance sheet

Question 43

Financial statements are (backward/forward) looking.

Answer 43

backward

Question 44

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

Answer 44

accounting; market

Question 45

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

Answer 45

True

Question 46

What are the 2 kinds of tax rates?

Answer 46

1. Average Tax Rate 2. Marginal Tax Rate

Question 47

the average amount of tax over total income.

Answer 47

average tax rate

Question 48

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

Answer 48

marginal tax rate

Question 49

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

Answer 49

True