Chapter 3

Question 1

Annual Report

Answer 1

• most important report that firms issue to their stockholders and make available to the general public
• divided into three distinct sections: financial tables, corporate public relations, and audited financial statements (balance sheet, income statement, retained earnings, statement of cash flows)

Question 2

balance sheet

Answer 2

reports the firms financial position at a particular point of time

Question 3

income statement

Answer 3

summarizes revenues, expenses, and profitability (or losses) of the firm for some period of time (month, quarter, year)

Question 4

income statement basic equation

Answer 4

revenues - expenses

Question 5

RE statement

Answer 5

changes in retained earnings from one accounting period to the next

Question 6

statement of cash flows

Answer 6

a financial statement that shows a firms cash receipts, cash payments, and investments for a period of time

Question 7

current assets

Answer 7

• assets that can reasonably be expected to be converted into cash within one year
• also includes account receivable and inventory

Question 8

current liabilities

Answer 8

• obligations paid in one year
• typically accounts payable, notes payable and accrued taxes (taxes owed but not payed yet)

Question 9

net working capital

Answer 9

firms ability to meet short term obligations as they come due

Question 10

net working capital equation

Answer 10

total current assets - total current liabilities

Question 11

equity

Answer 11

least informative on balance sheet
* the difference between market values of the assets and liabilities provides a better estimate of the market value of stockholders equity than the difference in the book value

Question 12

treasury stock

Answer 12

represents stock that the firm repurchased from investors

Question 13

market value

Answer 13

• the price at which an item can be sold
• value of a company according to the markets based on current stock price and the number of shares outstanding

Question 14

book value

Answer 14

• the net value of an asset or liability recorded on the financial statement
• normally reflects historical cost
• amount of money shareholders would receive if assets were liquidated and liabilities paid off

Question 15

average tax rate
(basics of impact of taxes on corporations)

Answer 15

total taxes paid / taxable income

Question 16

marginal tax rate
(basics of impact of taxes on corporations)

Answer 16

• the tax rate paid on the next dollar of income earned