Chapter 2 Financial Statements, Taxes, and Cash Flow

Flashcards for reviewing financial statements, taxes, and cash flow concepts.

What is a balance sheet?

A financial statement showing a firm’s accounting value on a particular date.

What is the balance sheet identity or equation?

Assets = Liabilities + Stockholders’ Equity

What is net working capital?

The difference between a firm’s current assets and its current liabilities.

What is liquidity?

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

What is financial leverage?

The use of debt in a firm’s capital structure.

How are assets valued under GAAP?

Assets are shown at historical cost, or what the firm paid for them.

What is the income statement?

A financial statement summarizing a firm’s performance over a period of time.

What is the income statement equation?

Revenues − Expenses = Income

What are noncash items?

Expenses charged against revenues that do not directly affect cash flow, such as depreciation.

What do product costs include?

Raw materials, direct labor expense, and manufacturing overhead.

What are period costs?

Incurred during a particular time period and might be reported as selling, general, and administrative expenses.

What is the average tax rate?

Total taxes paid divided by total taxable income.

What is the marginal tax rate?

The amount of tax payable on the next dollar earned.

What is the cash flow identity?

Cash flow from assets = Cash flow to creditors + Cash flow to stockholders

What is operating cash flow?

Cash generated from a firm’s normal business activities.

What is Capital spending?

The net spending on fixed assets (purchases of fixed assets less sales of fixed assets).

What is Change in net working capital?

The net change in current assets relative to current liabilities for the period being examined.

How is operating cash flow calculated?

Revenues minus costs, not including depreciation or interest.

What is net capital spending?

Money spent on fixed assets less money received from the sale of fixed assets.

How is cash flow to creditors calculated?

Interest payments to creditors less net new borrowing.

How is cash flow to stockholders calculated?

Dividends paid out by a firm less net new equity raised.

What are the two types of Assets?

Current assets and Fixed assets

What are the two types of liabilities?

Current liabilities and long-term liabilities

When is net working capital positive?

Positive differences that mean cash will become available over the next 12 months

What are some examples of tangible fixed assets?

Land, Equipment and Buildings

What are some examples of intangible fixed assets?

Patents and Trademarks

What type of values are the firm's assets listed as on the balance sheet?

The values are book values and are generally not what the assets are worth

What is the formula for cash flow from assets?

Cash flow from assets = Operating cash flow − Net capital spending − Change in net working capital

What is the formula for cash flow to creditors?

Interest paid − Net new borrowing

What is the formula for cash flow to stockholders?

Dividends paid − Net new equity raised