Financial Statement Analysis and Financing Operations

Flashcards covering strategies for financing operations, tax planning implications, and principles of segmental analysis within a firm.

Working Capital

A certain amount of funds firms need to finance ongoing operations, take advantage of unexpected opportunities, and fulfill longer-run strategic plans.

Operating Earnings

Net income from the sale of products or services after payment of taxes, which is added to retained earnings.

Sale of Operating Assets

The disposal of items like plant and equipment which may help the business unless the asset's absence decreases value-added.

Sale of Investments

The disposal of assets such as stock, bonds, or raw land, which are income tax favored throughout the world.

Short-term Borrowing

A source of cash flows that is not taxable, although the subsequent interest payments on the debt are normally tax deductible.

Accelerating, Factoring, and Selling Receivables

Selling accounts receivable to a buyer or institution for less than the actual amount, which results in recognizing a tax loss if revenue was already accrued.

Decrease in Dividends

A method to increase internal cash flows by reducing the amount of payments made to shareholders.

Stock Dividends

An alternative to cash dividends that allows a firm to retain cash while incurring only the transaction cost of printing additional shares.

Stock Buybacks

Purchases of a firm's own shares by the firm or management to reduce dividend payouts, which have no tax consequences for the firm.

Employee Stock Option Plans (ESOPs)

A firm-sponsored scheme where shares of the firm are owned by employees through a fiduciary.

ESOP Dividends

Dividends paid to employees via an Employee Stock Option Plan that are deductible as compensation expense.

Mature Firm Decision Making

Process involving an interplay between financial accounting information and taxes.

Segmental Analysis

The evaluation of distinct operational sectors, products, or regions to determine each component's contribution to the bottom line.

Diversification

A strategy involving various distinct sectors or products; the more a firm uses this, the higher its chances for survival.

Purpose of Segmental Analysis

To determine each component's contribution to the company's bottom line, ideally to EBITDA or at least to the gross profit level.

Retain or Discontinue Decision

A choice that depends largely on whether a segment has a profit after factoring out noncontrollable costs.

Preventative Tool

The use of segmental analysis to show the first signs of developing problems before the entire business organism shows signs of illness.

Net Operating Losses

One of the specific tax aspects that must be considered during a segmental analysis.

SAVANT Framework

A set of considerations for segmental decisions including Strategy, Anticipation, Value-Adding, and Negotiating.

Strategy (SAVANT)

Considering if a segment has an important strategic presence impact despite having a negative financial-statement or cash-flow impact.

Anticipation (SAVANT)

The consideration of whether a currently underperforming or 'loser' segment could potentially turn around.

Value-Adding (SAVANT)

Assessing segment risk, the necessity of discounting returns, and the impact of significant legal, accounting, or severance fees.

Negotiating (SAVANT)

Discussing tax reductions with local authorities based on the threat of a segment moving or going out of business.

Retained Earnings

The category to which net income from operating earnings is added after the payment of taxes.

Shareholder Capital Gain or Loss

The difference between the redemption price and the tax basis in shares, recognized by shareholders during a stock buyback.

Noncontrollable Costs

Expenses that are factored out when determining if a particular segment should be retained or discontinued.

Distressed Areas

Specific segments identified by segmental analysis when the entire business organism shows signs of some illness.

Internal Cash Flows

Funds within the firm that can be increased by decreasing dividend payments or paying stock dividends instead of cash dividends.

Receipt of Dividends from Subsidiaries

A source of cash flow where decisions involve an interaction of financial accounting, value-adding, and management incentives.

EBITDA

The preferred bottom-line level used to determine a component's contribution in a sophisticated segmental analysis.