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Business Finance > Chapter Two > Flashcards

Chapter Two Flashcards

1
Q

What document is a “snapshot” of a business?

A

Balance Sheet

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2
Q

What is net working capital?

A

Current Assets-Current Liabilities

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3
Q

What is the difference between the total value of assets and the total value of liabilities?

A

Shareholders’ equity

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4
Q

What is the speed and easy with which an asset can be coverted to cash?

A

liquidity

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5
Q

What are the two dimensions of liquidity?

A

Easy of conversion versus loss of value

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6
Q

What is the use of debt in a firm’s capital structure?

A

Financial leverage

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7
Q

What are the common set of standards and procedures by which audited financial statements are prepared

A

Generally Accepted Accounting Principles

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8
Q

Financial managers are concerned with what type of valuation of assets?

A

Market value

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9
Q

What is the distinction between market value and book value important?

A

Book value often drastically understates the firms’ assets

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10
Q

What is the formula that gives income?

A

Revenues-Expenses=Income

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11
Q

What is a financial statement summarizing a firm’s performance over a period of time

A

Income statement

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12
Q

What are the items of an income statement (in order)

A 
Net sales
Cost of Goods Sold
Depreciation
Earnings before interest and taxes
Interest expense
Taxable Income
Taxes
Net Profit
Dividends
Addition to Retained Earnings
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13
Q

How do we calculate earnings per share?

A

Net Income/Total shares outstanding

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14
Q

How do we calculate dividends per share?

A

Total Dividends/total shares outstanding

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15
Q

What are expenses charged against revenues that do not directly affect cash flow, such as depreciation

A

noncash items

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16
Q

What is earnings management?

A

Overstating or understating earnings at various times to smooth out dips and surges

17
Q

What is the average tax rate?

A

Total taxes paid divided by total taxable income

18
Q

Amount of tax payable of the next dollar earned

A

Marginal tax rate

19
Q

What is meant by cash flow?

A

the difference between the number of dollars that came in and went out

20
Q

Cash flow from assets =

A

Cash flor to creditors + Cash flow to stockholders

21
Q

Cash flow from assets involve three componenets

A

operation cash flow, capital spending, change in net working capital

22
Q

What is operating cash flow?

A

Cash generated from a firm’s normal business activities

23
Q

What is the operation cash flow formula?

A

EBIT+Depreciation-Taxes

24
Q

What is net capital spending?

A

money spent of fixed assets less money received from the sale of fixed assets

25
Q

What is the net capital spending formula

A

Ending net fixed assets-beginning net fixed assets+depreciation

26
Q

What is the formula for the cash flow from assets?

A

Operating cash flow-Net capital spending-Change in NWC

27
Q

What does a negative cash flow from assets mean?

A

the firm raised more money by borrowing and selling stock than they paid out to creditors and stockholders

28
Q

What is cash flow to creditors?

A

A firm’s interest payments to creditors less net new borrowings

29
Q

What is the formula for cash flow to creditors?

A

Interest paid-net new borrowing

30
Q

What is cash flow to stockholders

A

dividends paid ot by a firm less net new equity raised

31
Q

What is the formula for cash flow to stockholders

A

dividends paid-net new equity raised

32
Q

What are the two types of equity to be raised?

A

common stock and paid in surplus

33
Q

What is the cash flow identity?

A

Cash flow from assets=cash flow to creditors+cash flow to stockholders

34
Q

Cash flow from assets =

A

Operating Cash Flow - Net capital spending - change in NWC

35
Q

Operating cash flow =

A

EBIT+Deprec-taxes

36
Q

Net Capital spending =

A

Ending net fixed asset-beginning fixed net asset + depreciation

37
Q

Change in NWC =

A

Ending NWC- Beginning NWC

38
Q

Cash flow to creditors =

A

Interest paid - net new borrowing

39
Q

Cash flow to stockholders =

A

Dividends paid - net new equity raised

Business Finance (3 decks)

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