Chapter 2: Financial Statements, Cash flow, and Taxes Flashcards Preview

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Flashcards in Chapter 2: Financial Statements, Cash flow, and Taxes Deck (39):

Statement of financial position (balance sheets)-->

financial statement showing a firm's accounting value on particular date.


Net Working Capital

• The difference between a firm's current assets and its current liabilities

○ Current assets - current liabilities= net working capital
Means that the cash available



• Refers to the speed and ease with which an asset can be converted into cash.
Ease of conversion vs. loss of value. --> highly liquid asset is one that can be converted into cash without any los of value. An illiquid asset is one that cannot be converted quickly without substantial price reduction.


Financial leverage-

the use of debt in a firm's capital structure. The more debt, the greater the degree of financial leverage.


Carrying value or book value

the accounting value of a firm's assets


Revaluation method

allows companies to revalue assets at specific periods in time


Market value

is the price at which willing buyers and sellers trade the assets.


State of comprehensive income

measures performance over some period of time, usually a year. Also know as the income statement.

Revenues-expenses= income.


EPS(earnings per share)

= Net income/# of shares outstanding


International Financial reporting standard (IFRS)

• Revenue is recognized on the statement when it is probable that any future economic benefit associated with the item of review will flow to the firm and the amount of revenue can be measure, no when cash flow occurred.

--Revenues must match expense-- earned when accrued (even if sold for credit)


Non-cash items-

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


Product costs

include things such as raw materials, direct labour expense, and manufacturing overhead (reported as cost of goods sold on income statement)


Period costs-

costs incurred during a particular time period and are reported as selling, general, and administrative expenses


Cash Flow from assets

Cash-flow from assets = cash flow to bondholders+ cash flow to shareholders

Three Components :

Cash flow from assets= operating cash flow - capital spending - additions to net working capital


Operating cash flow

Refers to the cash flow that results from the firm's day-to-day activities of producing and selling.

=Revenues-expenses ( no depreciation or interest)(include taxes)


Capital spending

--Refers to the net spending on fixed assets (purchases of fixed assets less sales of fixed assets


Additions to net working capital

Is the amount spent on net working capital. It is measured as the change in net working capital over the period being examined and represents the net increase in current assets over current liabilities.


Free cash flow (another name for cash flow from assets)

refers to cash that the firm is free to distribute to credits and shareholders because it is not needed for working capital or fixed asset investment.

=cash flow - any reinvestment required to maintain the competitive advantage


Cash flow to creditors

a firms interest payments to creditors less net new borrowings


Cash flow to shareholders-->

dividends paid out by a firm less net new equity



Determined through tax laws and regulations in the annual budgets of the federal government and provincial government.


Ideal tax system has three features

a. Distribute the tax burden equitably-- "fair share"
b. Should not change the efficient allocation of resources by markers
c. Should be easy to administer.


Average tax rate

is you tax bill divided by your taxable income; the percentage of you income that goes to taxes


Marginal Tax Rate

is the extra tax you would pay if you earned one more dollar.


Progressive taxation

> with higher incomes, there are higher tax rates


Flat rate tax-

there is only one taxes rate, and this rate is the same for all income levels


Dividend tax credit

tax formula that reduces the effective tax rate on dividends.


Capital gains

the increase in value of an investment over its purchase price.


Realized capital gains

the increase in value of an investment when converted to cash


loss-carry back

Using a year's capital losses to offset capital gains of previous years.


Loss carry-forward

Using a year's capital losses to offset capital gains of future years.


N.W.C. Equation

= CA – CL


Capital Structure Equation

D+E = 1


Cash Flow from Assets Equation

= (+) Operating Cash Flow - Net Capital Spending - Net Working Capital

Cash Flow from Assets = Cash Flow to Bondholders + Cash Flow to Shareholders


.) Operating Cash Flow Equation

= EBIT + Depreciation, Amort, Dep. – Taxes


Net Capital Spending Equation

= Ending Fixed Assets – Beginning Fixed Assets + Depreciation, Amort, Dep.


Change in Net Working Capital Equation

= End N.W.C – Beginning N.W.C
= End (C.A – C.L) – Begin (C.A – C.L)


Cash Flow to Bondholders

= Interest – Net new borrowing (End L.T Debt – Begin L.T.D)


Cash Flow to Shareholders

= Dividends – Net new equity ((Beg – End)Com Stock + Pref. Stock)