Session 2- Financial Statements + Financial Stmnt Analysis Flashcards
What is the definition of the balance sheet?
An accountant’s snapshot of the firms accounting value at a specific point in time
What is the Accounting Formula?
Assets=Liabilities+Stockholder’s Equity
What is Treasury Stock?
Shares that are re-bought by the company itself
What are deferred taxes?
Money collected that is not yet paid as taxes to the government
What are the three concerns that the financial manager should be aware of when analysing a balance sheet?
- Liquidity
- Debt Versus cost
- Value vs. Cost
What is the accounting definition of income (formula)
Rev- Exp= Income
What does BS stand for?
Bondholders
How is cash flows shared?
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
What is liquidity?
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
What type of assets are the most liquid
Current or Short-term assets
Are all fixed assets tangible? List some
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.
Bondholders definition
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
Definition of market value
The price at which assets, liabilities and equity could ACTUALLY be bought and sold, which is a completely different concept from historical cost
What is historical cost?
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
book value definition
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.
Three things to note when analysing an income statement
- 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)
- Noncash items depreciation and deferred taxes
- 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
Formula for NWC
Net Working Capital= CA- CL
Usually grows within the firm
What are period costs?
Period costs areany costs a company incurs indirectly related to the production process. Eg. Marketing expense overheads
What is Depreciation Tax Shield
When Dep’n a non cash expense decreases taxes but does NOT impact cash flow
What are product costs
Production costs refer tothe costs a company incurs from manufacturing a product or providing a service that generates revenue for the company
Cash Flow Formula
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)
What is debt vs. Equity
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
What does EBIT stand for
Earnings b4 income and taxes
What does OCF stand for what what is the formula
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.
Calculation of CFs from operating activities
Net Income + Dep’n- CHANGE in assets and liabilities (other than cash)
Cash flows from investing activities
Acquisition of fixed assets- sale of FA
How is the Statement of CFs calculated?
Addition of cash flows from operating, financing and investing activities
CFs from financing activities
CFs to and from creditors and owners including changing of equity and debt
Accounting Income VS Cash Flows
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.
Avg vs marginal tax rate
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.
