Accounting Statements and Cash Flow

Flashcards based on lecture notes about accounting statements, cash flow, and financial statement analysis.

What is the accounting definition presented for the Statement of Financial Position?

Assets = Liabilities + Shareholders’ Equity

What are the three concerns a financial manager should be aware of when analyzing a statement of financial position?

Liquidity, Debt versus equity, Value versus cost

What does liquidity refer to in the context of the statement of financial position?

The ease and speed with which assets can be converted to cash.

What is shareholders’ equity?

The residual difference between assets and liabilities.

What is the difference between the accounting value (or book value) and the market value of a firm's assets?

Accounting value is the carrying value, while market value is the price at which willing buyers and sellers trade the assets.

What is the accounting definition of income?

REVENUE – EXPENSES = INCOME

What does the operations section of the statement of comprehensive income report?

The firm’s revenues and expenses from principal operations

What does the non-operating section of the statement of comprehensive income include?

Other income and all financing costs, including interest expense

What is net income?

The “bottom line” of the Statement of Comprehensive Income.

What are three key things to keep in mind when analyzing the statement of comprehensive income?

The accounting standards used (IFRS), Non-Cash Items, Time and Costs

What is accrual basis of accounting?

Revenues are recognized when earned, and expenses are recognized when the related revenue is reported, regardless of cash flows.

What is NWC and how is it calculated?

Net Working Capital (NWC) = Current Assets – Current Liabilities

What does a positive Net Working Capital (NWC) indicate?

Current assets are greater than current liabilities.

What is the most important item that can be extracted from financial statements?

The actual cash flow of the firm

Why is cash flow important in finance?

The value of the firm depends on its ability to generate financial cash flow.

What is the formula relating cash flows from assets to cash flows to bondholders and shareholders?

CF(A) = CF(B) + CF(S)

What are the major categories of financial ratios used in financial statement analysis?

Short-term solvency, Activity, Financial leverage, Profitability, and Market value

What do liquidity ratios measure?

A firm’s ability to meet recurring financial obligations

What does the Total asset turnover ratio measure?

How effectively the firm’s assets are being managed.

What do financial leverage ratios measure?

The extent to which a firm relies on debt financing.

What do profitability ratios reflect?

The firm’s ability to produce a product or service at a low cost or to sell it at a high price.

What is the DuPont system of financial control?

Firms tend to face a trade-off between turnover and margin. Return on assets = Profit margin × Asset turnover

What does the market-to-book ratio (M/B) compare?

The market value of the firm’s investments to their cost.

List the three categories of cash flows reported on the Statement of Cash Flows.

Cash flow from operating activities, Cash flow from investing activities, Cash flow from financing activities