Chapter 2: Financial Statements, Cash Flow, and Taxes – Vocabulary Flashcards

Key vocabulary terms and definitions from Chapter 2: Financial Statements, Cash Flow, and Taxes.

Statement of Financial Position

A snapshot of the firm’s assets, liabilities, and stockholders’ equity at a specific date; assets are listed by liquidity; Assets = Liabilities + Stockholders’ Equity.

Assets

Resources controlled by the firm that have future economic benefits; listed on the balance sheet in order of liquidity.

Liabilities

Obligations of the firm arising from past events, settled through the transfer of assets or services.

Stockholders’ Equity

Residual interest in the assets after liabilities are deducted; includes common equity and retained earnings.

Net Working Capital (NWC)

Current Assets minus Current Liabilities; positive NWC indicates liquidity to cover short‑term obligations.

Positive Net Working Capital

Situation where current assets exceed current liabilities, indicating liquidity and financial health.

Liquidity

Ability to convert assets into cash quickly without a significant loss of value; higher liquidity often means lower returns.

Market Value

Price at which an asset can be bought or sold in the market; often different from book value.

Book Value

Accounting value of assets, liabilities, and equity on the balance sheet; based on historical cost and depreciation.

IFRS

International Financial Reporting Standards; allows historical cost or fair value (revaluation) with regular updates across asset classes.

Historical Cost

Original purchase cost of an asset used as the basis for book values.

Revaluation (Fair Value)

Adjusting asset values to reflect current fair values; requires consistent application across asset classes and regular updates.

Statement of Comprehensive Income

Report of a firm’s performance over a period; revenues first, then expenses; based on accrual/matching principles.

Revenue Recognition

Policy for recognizing revenue when it accrues or is earned, aligning with the matching principle.

Matching Principle

Expenses are recognized in the same period as the revenues they help generate.

Cash Flow From Assets (CFFA)

Total cash generated by the firm’s assets; equals CFO minus Net Capital Spending minus Changes in NWC; also equals Cash Flow to creditors plus Cash Flow to shareholders.

Operating Cash Flow (OCF)

Cash flow from operations; OCF = EBIT + Depreciation − Taxes.

Net Capital Spending (NCS)

Net investment in fixed assets; NCS = Ending Net Fixed Assets − Beginning Net Fixed Assets + Depreciation.

Changes in Net Working Capital (Changes in NWC)

Difference in NWC between periods; often Ending NWC − Beginning NWC.

Cash Flow Identity

The concept that Cash Flow From Assets equals the sum of cash flows to creditors and to shareholders.

Dividend Tax Credit

Canadian tax credit against taxes owed on dividend income, reducing the effective tax rate on dividends.

Capital Gains Tax

Tax paid on the increase in value of capital investments when gains are realized.

Capital Cost Allowance (CCA)

Canada’s tax depreciation; deduction before taxes; asset-class dependent; includes accelerated investment rule in year one.

Undepreciated Capital Cost (UCC)

Remaining tax-deductible value of an asset class for CCA calculations.

Asset Class

Groupings of similar assets for CCA purposes; each class has a specific depreciation method and rate.

Accelerated Investment Rule

Tax rule allowing in the first year a deduction of 1.5 times the prescribed CCA rate.

Terminal Loss

When closing an asset class, if the UCC exceeds the adjusted cost, resulting in a terminal loss for tax purposes.

Recaptured CCA

Taxable difference when the adjusted cost exceeds the UCC on disposal, indicating previously claimed CCA exceeded the asset’s true decline in value.

Closing an Asset Class

Ending an asset class after all assets are disposed; can trigger terminal loss or recaptured CCA.