Ch 2- Class Notes

Question 1

Types of Liabilities

Answer 1

Debt
Payable
Other, like pensions

Question 2

Book Value of Equity

Answer 2

Assets - Liabilities

Question 3

Where can you get market value

Answer 3

NOT FROM FINANCIAL STATEMENTS, you need market data

Question 4

Marginal Tax Rate

Answer 4

What you pay in the top tax bracket (this is what you think about for companies)

Question 5

For the CCA rule we use what>

Answer 5

the one and a half times rule

Question 6

How are Assets organized

Answer 6

most to least liquid

c
t
a
n
i
s
p

Question 7

Current Assets- Current Liabilities= ?

Answer 7

Net Working Capital

Question 8

What is Net Working Capital

Answer 8

The money you will have to keep the business running (the money in the till)

Formula: Current Assets- Current Liabilities
-Positive: you will recieve more cash than the amount of cash that will be paid out (healthy firm)

Question 9

What are Current Assets

Answer 9

They will be turned into cash within the next year

Question 10

What are Fiixed Assets

Answer 10

1. tangible fixed assets
2. Intangible fixed assets

Fixed assets are not there to be sold, but there to be used to make money

Question 11

Do very large firms have lots of net working capital

Answer 11

NO! they can run with little to no net working capital! (they borrow money as needed)

when big firms need money they dont reach into cash pools they just borrow from banks

Question 12

What is a problem with liquidity?

Answer 12

Liquid assets earn a lower return! Hard to make more money on cash (low returns on cash)

You need a good amount of liquidity, but you dont want a lot of this asset that doesnt create a large return

Question 13

Book Value of an asset

Answer 13

Value according to the balance sheet

Question 14

Market Value of An asset

Answer 14

this is WHAT WE CARE MORE ABOUT !!

Question 15

IFRS

Answer 15

This uses the histroical method (the cost of the purchase) but also sometimes uses the revaluation method (fair value in certain cases)

Question 16

When can we use the revaluation method in IFRS

Answer 16

when you can prove that an asset calss should ve revalued

Revaluation shoul dbe performed regularly to ensure carryign amount is not materially different from fair value

Question 17

is net fixed asset a current asset or non current asset

Answer 17

non current asset

Question 18

Matching principle- IFRS

Answer 18

IFRS says to show revenue when it accrues and match the expenses required to generat ethe revenue

Question 19

When do you report revenues and expenses

Answer 19

when they OCCUR, you record accruals & then as recievables

Question 20

Is interest taken out first or taxes from EBIT

Answer 20

INTEREST!!! even before taxes

Question 21

Earnings per share formula

Answer 21

Net income- dividends for shareholders/ average # of weighted outstanding shares

Earnings/Share

Question 22

CFFA

Answer 22

Cash flow from assets= Cash Flow to Bondholders (CREDITORS) + Cash Flow to Shareholders (OWNERS)

or

CFFA= Operating Cash Flow- Net Capital Spending- Changes in NWC

these are the same thing!!

Question 23

EXPLORING CFFA FORMULA

Where can operating Cash flow go?
1. if the firm doesn’t want to expand or reinvest it
2. if they want to reinvest it back to the firm?
3. if the funds aren’t needed by investors and you don’t have any fixed assets you need to purchase?

Answer 23

1. back to investors (bondholders, shareholders)
2. Net Capital Spending (the money goes back into the firm)
3. Net additions to working capital

Question 24

What is the formula for operating cash flow

Answer 24

EBIT (Operating Income) + Depreciation - Taxes

Question 25

What is the formula for Net Capital Spending

Answer 25

Ending net fixed assets - beginning net fixed assets + Depreciation

Question 26

What are net fixed assets

Answer 26

only property, planet and equipment AND ALSO contracts(INTANGIBLE ASSETS)

Question 27

What are the changes in NWC formula

Answer 27

Ending NWC- Beginning NWC

New

Question 28

What are marginal taxes

Answer 28

the tax you are charged as a percent on the next dollar earned

Question 29

What are the average taxes

Answer 29

the percentage of your income that goes to pay taxes

Question 30

What are the two types of taxes on investments

Answer 30

dividend tax credit
capital gain tax

Question 31

Dividend tax credit

Answer 31

amount that a canadian resident applies against own tax liability on the grossed up portion of dividends recieved from canadian corporations

-> reduces the effective tax rate on dividends

Question 32

Capital gain tax

Answer 32

paid on the investments increase in value over its purchase price

Question 33

Capital Cost Allowance

Answer 33

depreciation for tax purposes

THAT APPLIES FOR THE COMPANY (CORPORATION) separate from owners

Question 34

What do we do with CCA

Answer 34

we deduct before we tax the income

Question 35

What is accelerated investment rule

Answer 35

in the 1st year, 1 and 1/2 times the prescribed rate can be used for CCA purpose

(so they pay less in taxes)

Question 36

why do companies use CCA

Answer 36

because it is a “Tax shield” this is a specific amount of money that is shielded from taxation

Question 37

can individuals use CCA

Answer 37

we cant or we can write off personal items like cars homes etc

Question 38

What are different CCA classes for

Answer 38

different types of items!!!

Question 39

How to do CCA question

Answer 39

1. Find beginning year amount= current
   2.CCA= Current amount x CCA% x 1.5

Because of the 1.5 times rule

3. Calculate ending fixed assets= beginning-CCA
4. IN THE NEXT YEAR START WITH THE LAST YEARS ENDING FIXED ASSETS & do not apply the 1.5 times rule again!!

Note: you only apply the 1.5 times rule one time; the first year will give a huge write off that the second and thirsd years wont give

Question 40

What is closing an asset class

Answer 40

when the last asset in an asset class is sold, the asset class is terminated- is either a termanal loss or recaptured cca

Question 41

Terminal Loss

Answer 41

Underpreciated capital cost- adjusted cost

when UCC is greater

-> This can be written off from taxes

Question 42

Recpatured CCA

Answer 42

adjusted cost- underpreciated capital cost

when UCC is smaller

-> You will pay tax on this