Session 2- Financial Statements + Financial Stmnt Analysis

Question 1

What is the definition of the balance sheet?

Answer 1

An accountant’s snapshot of the firms accounting value at a specific point in time

Question 2

What is the Accounting Formula?

Answer 2

Assets=Liabilities+Stockholder’s Equity

Question 3

What is Treasury Stock?

Answer 3

Shares that are re-bought by the company itself

Question 4

What are deferred taxes?

Answer 4

Money collected that is not yet paid as taxes to the government

Question 5

What are the three concerns that the financial manager should be aware of when analysing a balance sheet?

Answer 5

1. Liquidity
2. Debt Versus cost
3. Value vs. Cost

Question 6

What is the accounting definition of income (formula)

Answer 6

Rev- Exp= Income

Question 7

What does BS stand for?

Answer 7

Bondholders

Question 8

How is cash flows shared?

Answer 8

Bondholders generally receive first claim on cash flow
Stockholders’ equity is the residual difference between assets and liabilities. As such, stakeholders do not always receive dividends

Question 9

What is liquidity?

Answer 9

Refers to the ease and quickness with which assets can be converted into cash without a significant loss in value

Liquid assets frequently have lower rates of return

Question 10

What type of assets are the most liquid

Answer 10

Current or Short-term assets

Question 11

Are all fixed assets tangible? List some

Answer 11

Brands: A brand sets one business apart from another. It can be in the form of a logo, symbol, or brand name.For instance, Apple’s logo is instantly recognizable.

Goodwill: Goodwill represents the value of a business beyond its tangible assets. It includes factors like customer loyalty, reputation, and relationships with suppliers and employees.

Intellectual Property (IP):
Patents: Exclusive rights granted to inventors for their inventions.Trademarks: Distinctive signs (such as logos or names) used to identify products or services.Copyrights: Protection for original literary, artistic, or musical works.

Question 12

Bondholders definition

Answer 12

A bondholder isan entity that invests in or owns bonds. Bondholders hold debt securities that are typically issued by corporations and governments. They essentially lend money to bond issuers by giving them capital. In return, bond investors receive their principal or initial investment back when the bonds mature

Question 13

Definition of market value

Answer 13

The price at which assets, liabilities and equity could ACTUALLY be bought and sold, which is a completely different concept from historical cost

Question 14

What is historical cost?

Answer 14

The price at which A, L and E were bought at

historical cost is a measure of value used in accounting in which the value of an asset on the balance sheet is recorded at itsoriginal costwhen acquired by the company.

Usually different from market value as items can either depreciate or appreciate with time (useful life and/or time val of money

Question 15

book value definition

Answer 15

The book value is an asset’s historical cost less any depreciation and impairment cost
impairment is a permanent reduction in the value of a company asset. It may be afixed assetor anintangible asset.

Question 16

Three things to note when analysing an income statement

Answer 16

1. Generally Accepted Accounting Principles (GAAP) (Matching principle- revenues must be matched with expenses and therefore revenue must be recorded even b4 cash flow is acquired)
2. Noncash items depreciation and deferred taxes
3. Time and costs- Financial accountants do not distinguish between fixed and variable costs because in the long run all costs are variable. They use period vs. Product costs

Question 17

Formula for NWC

Answer 17

Net Working Capital= CA- CL

Usually grows within the firm

Question 18

What are period costs?

Answer 18

Period costs areany costs a company incurs indirectly related to the production process. Eg. Marketing expense overheads

Question 19

What is Depreciation Tax Shield

Answer 19

When Dep’n a non cash expense decreases taxes but does NOT impact cash flow

Question 20

What are product costs

Answer 20

Production costs refer tothe costs a company incurs from manufacturing a product or providing a service that generates revenue for the company

Question 21

Cash Flow Formula

Answer 21

Cash flow of assets is EQUIVALENT to the cash flows paid to creditors(bonds/liabilities) + cf to stockholders

CF (A) three equal signs CF (B) CF (S)

Question 22

What is debt vs. Equity

Answer 22

How much of our assets is funded by debt (bs) vs funded by equity

If Debt> Equity, assets are mostly funded by debt else mostly funded through equity

Question 23

What does EBIT stand for

Answer 23

Earnings b4 income and taxes

Question 24

What does OCF stand for what what is the formula

Answer 24

Operating Cash Flows- EBIT + Dep’n - Current Taxes

Depreciation is a non-cash expense.No cash was dispensed when we expensed depreciation. However, depreciation did reduce net income. So since we’re interested only in cash on the statement of cash flows, we need to add back the depreciation.

Question 25

Calculation of CFs from operating activities

Answer 25

Net Income + Dep’n- CHANGE in assets and liabilities (other than cash)

Question 26

Cash flows from investing activities

Answer 26

Acquisition of fixed assets- sale of FA

Question 27

How is the Statement of CFs calculated?

Answer 27

Addition of cash flows from operating, financing and investing activities

Question 28

CFs from financing activities

Answer 28

CFs to and from creditors and owners including changing of equity and debt

Question 29

Accounting Income VS Cash Flows

Answer 29

The main difference between accounting income and cash flow is thataccounting income is a measure of profitability, while cash flow is a measure of liquidity. Accounting income includes non-cash items such as depreciation, which reduces taxable income but does not affect cash flow.

Question 30

Avg vs marginal tax rate

Answer 30

Marginal Tax Rate:

The marginal tax rate represents theadditional taxpaid on each additional dollar of income earned.It focuses on the impact of taxes onincentivesto work more, save, invest, or spend.For instance, if you earn an extra $10,000 and pay an additional $3,030 in taxes, your marginal tax rate would be 30.3%[1].

Average Tax Rate:

The average tax rate measures the overalltax burdenon your income.It is calculated by dividing the total taxes paid by the total income.For example, if your total income is $100,000 and you pay $15,000 in taxes, your average tax rate would be 15%

Remember that both rates are relevant for different purposes: average tax rate for overall planning and marginal tax rate for evaluating specific financial decisions.