Ch 2 Flashcards
(21 cards)
What are the four basic financial statements?
- Income Statement, 2. Statement of Retained Earnings, 3. Balance Sheet, 4. Statement of Cash Flows.
What is the purpose of the Income Statement?
To measure the profitability of a firm over a specific period (revenues - expenses = net income).
What does the Balance Sheet show?
It provides a snapshot of a firm’s financial position at a point in time, including assets, liabilities, and equity.
What information does the Statement of Retained Earnings provide?
It tracks changes in retained earnings (profits reinvested or distributed).
What is the purpose of the Statement of Cash Flows?
To measure the cash inflows and outflows from operating, investing, and financing activities.
What are the limitations of the Income Statement in measuring profitability?
It focuses on past data, uses accrual accounting, includes non-cash items, and may be influenced by management decisions.
How does accrual accounting affect the Income Statement?
It matches revenues and expenses regardless of when cash flows occur, which may not reflect actual cash flow.
How does IFRS impact financial analysis?
IFRS standardizes reporting, affects asset valuation (market value vs. historical cost), and improves comparability globally.
What is the impact of IFRS on financial statement transparency?
IFRS promotes transparency by requiring detailed disclosures on financial instruments and liabilities.
What are the limitations of the Balance Sheet as a measure of financial position?
It uses historical cost, may omit intangible assets, provides only a snapshot in time, and lacks cash flow information.
Why is the historical cost basis a limitation in the Balance Sheet?
: It may not reflect the current market value of assets, which could affect financial decision-making.
Why is cash flow important for financial analysis?
Cash flow shows a firm’s ability to meet obligations, invest, and grow, offering a more accurate picture than net income.
What are the three main types of cash flows in the Statement of Cash Flows?
Operating activities, investing activities, and financing activities.
How is the net increase in cash calculated in the Statement of Cash Flows?
Net increase in cash = Operating cash flows + Investing cash flows + Financing cash flows.
How does corporate tax affect after-tax cash flow?
Corporate taxes reduce the amount of cash available, so after-tax cash flow is critical for making financial decisions.
How do tax deductions impact cash flow?
ax-deductible expenses (like interest and depreciation) reduce taxable income and increase after-tax cash flow.
What are the different forms of investment income?
Dividends, interest income, capital gains, and rental income.
How do taxes affect different forms of investment income?
Dividends, interest, capital gains, and rental income are taxed differently, impacting the investor’s overall tax liability.
What are tax savings for companies?
Tax savings include deductions (e.g., interest, depreciation), tax credits, and loss carryforwards, which reduce taxable income.
What is a tax shield?
A tax shield is a reduction in taxable income due to deductible expenses (like interest payments), which lowers the company’s tax liability.
