Financial Steatements - Chapter 2 Flashcards
Current assets typically include
Cash
Accounts Receivable
Inventory - raw materials, work in process, and finished goods held for eventual sale
Other expenses - Prepaid expenses are those items paid for in advance
Operating Current Liabilities:
Accounts payable
Credit extended by suppliers to a firm when it purchases inventories
Accrued expenses
Short term liabilities incurred in the firm’s operations but not yet paid for
Excludes Notes Payable because this is a source of financing, not a part of operations
Net Operating Working Capital (equation)
Current assets – current liabilities
Total net operating capital (also called operating capital)
= NOWC + Net fixed assets
What are the five uses of FCF?
- Pay interest on debt.
- Pay back principal on debt.
- Pay dividends.
- Buy back stock.
- Buy nonoperating assets (e.g., marketable securities, investments in other companies, etc.)
Net Operating Profit after Taxes (NOPAT) (equation)
EBIT(1 - Tax rate)
Free Cash Flow (FCF)
FCF = NOPAT - Net investment in
operating capital
Economic Value Added (EVA)
NOPAT- (WACC)(Capital)
Market Value Added (MVA) (equation)
Market Value of the Firm - Book Value of the Firm
Market Value of the Firm
(# shares of stock)(price per share) + Value of debt
Book Value of the Firm
Total common equity + Value of debt
If the market value of debt is close to the book value of debt, then MVA is:
Market value of equity – book value of equity
Cash flow is not affected by
Accelerated depreciation rules
Arbitrary inventory valuation rules
Accrual methods of accounting
Three primary sections of a Cash Flows Statement
- operating activities
- investing activities
- financing activities
Can Depreciation Expense improve a firm’s cash flow?
Depreciation is an example of a non-cash charge
and allows the firm to reduce its tax liability and thus keep more of its cash inflows
