Financial Management 2 test ch.3-4

balance sheet

represents the financial position of a company at a specific date such as for its year end date (or quarter end); a balance sheet is also prepared internally at each month end

Assets and liabilities are classified as either

current or long term

current assets

expect to be liquidated (become cash) within 12 months of the balance sheet date

LT assets

are not expected to be liquidated within one year; most are assets used in operations (PPE) or intangible assets (trademarks, patents) expected to provide a benefit to the corporation for more than one year from the B/S date

assets

are generally recorded at their “historical cost” but there are many exceptions. If the “market” value is deemed less than the historical cost, the assets must be reduced in value and an unrealized loss is recorded

current liabilities

are debts and obligations due within 12 months of the B/S date

long term liabilities

are due after 12 months from B/S date

book value (B/V)

is recorded amount

the market value of some assets

may be greater than their BV

Many assets (excluding certain types of investment securities)

are not recorded at market value as a market for the asset may not exist and its value cannot be reliably determined

equity or net worth

primarily=paid in capital + retained earnings

treasury stock account

represents the amount paid by the firm to buy back its own stock. a firm may also repurchase stock and directly reduce the amount paid from the RE and paid in capital accounts; if so, then the shares cannot later be resold

equity is left for the shareholders

if the corporation is liquidated at that date; this assumes that the assets can be sold for their book value

book value of equity

not necessarily equal to and often less than a corporation’s market value (MV)

Market value (MV) for a corporation

can be determined fora publicly traded corporation by multiplying the number of common shares outstanding by the current stock price. the method is not possible for privately held corporations not traded

retained earnings

accumulated net income of a firm (from inception) less any dividends declared (then paid)

net working capital (NWC)

current assets less current liabilities

the change in NWC from one period to the next helps

use net income to determine cash flow from operations (to convert accrual based NI to cash flow)

accounts such as Accounts Receivables (from customers) result

from accrual accounting

changes in the balance sheet from the prior to the current year end helps

us determine what happened during the current year; changes in the balance sheet are partly explained by the income statement, stockholders’ equity statement, and the cash flow statement

the change in the cash balance from the prior year to the current year is

shown on the cash flow statement in three categories: from operations, from investing, from financing

cash balance

at the end of the p/y+-, cash balance at the end of calendar year

cash flow from operations

is similar to net income but only shows cash flows and not revenues and expenses recorded using the accrual basis

income statement for the year

revenues for the year less expenses for the year

operating income or EBIT

sales and service revenue- CGS- operating expenses

income before tax (or EBIT)

EBIT-interest expense+ (non operating income)

net income

income before tax-tax expense

cash flow statement

shows cash inflows or outflows from operating during the year, also shows cash outflows for the purchases of long term assets (PPE and investments in securities or long term assets), cash paid for dividends, share repurchases

Free cash flow

cash flow from operations- cash paid for capital expenditures

estimated cash flow from operations

net income + depreciation and amortization expense for the year- increase in NWC or plus a decrease in NWC for the year

how to determine depreciation expense using the PPE balances

net PPE beg. of year balance + PPE purchases- dep. exp. for the year