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

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Flashcards in Chapter 2: Financial Statements, Taxes, and Cash Flows Deck (22):

balance sheet

a snapshot of the financial health of a firm, or of the firm's accounting value on a particular date


net working capital

current assets less current liabilities. usually positive for a healthy firm



refers to the speed and ease with which an asset can be converted to cash. gold is a relatively liquid asset; a sumo manufacturing facility is not

liquidity really has two dimensions: ease of conversion versus loss of value. any asset can be converted to cash quickly if we cut the price enough. a highly liquid asset, therefore, is one that can be converted to cash without a substantial price reduction


the more liquid a business is...

the less likely it will be effected in times of financial distress


market value

the true value of any asset, which is simply the amount of cash we would get if we actually sold it on the open market


book values

values shown on the balance sheet for the firm's assets and generally are not what the assets are actually worth

assets are generally carried on the books at historical cost, or what the firm paid for them (minus accumulated depreciation)


income statement

measures performance over some period of time, usually a quarter or a year


GAAP and the income statement

the matching principle reigns supreme: revenues have costs associated with them, and those are presented on the income statement


non cash items

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


fixed vs variable costs

fixed costs must be paid no matter what. other costs, such as wages to laborers and payments to suppliers, are still variable

accountants tend to clarify costs as either period costs or product costs


period costs

incurred during a particular time period and might be reported as selling, general, and administrative expenses


product costs

include such things as raw materials, direct labor expense, and manufacturing overhead. these are reported on the income statement as costs of goods sold, but they include both fixed and variable costs


earnings management

the way that firms are required by GAAP to report financial results is supposed to be objective and precise, but in reality, there is plenty of wiggle room, and, as a result, companies have significant discretion over their reported earnings


corporate tax rates

there are only four original corporate rates: 15, 25, 34, and 35 percent


average tax rate

total taxes paid divided by total taxable income


marginal tax rate

amount of tax payable on the net dollar earned


flat tax rate

there is only one tax rate for all incomes, and as it stands now, the US is based on a modified flat tax rate, which becomes a true flat rate for the highest incomes

the average flat tax rate for large corporations is 35%


what is the cash flow identity?

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


cash flow from assets

total of cash flow to creditors and cash flow to stockholders, consisting of the following three components: 1) operating cash flow 2) capital spending, and 3) change in net working capital


operating cash flow

cash generate from a firm's normal business activities

to calculate, take revenues and subtract costs (don't include depreciation and don't include interest)

earnings before interest and taxes + depreciation - taxes = operating cash flow

this is an important number because it tells us, on a very basic level, whether or not a firm's cash inflows from its business operations are sufficient to cover its everyday cash outflows


capital spending

spending on fixed assets less money received from the sale of fixed assets

ending fixed assets - beginning fixed assets + depreciation = net investments in fixed assets

this can be negative, which would happen if the firm sold off more assets than it purchased


change in net working capital

difference between the beginning and ending net working capital figures