Corporate Finance 8Th General Concepts, Chapter 2

Front 1

Balance sheet vs. income statement in terms of time

Back 1

Balance sheet: snapshot (moment in time)
Income statement: video sequence (period of time)

Front 2

The balance sheet identity

Back 2

Assets ≡ Liabilities + Stockholders Equity

Front 3

What's wrong with the following:

Current assets $100
Long term assets $250

Current liabilities $50
Long term liabilities $200
Shareholders' equity $50

Back 3

Assets not equal to liabilities + equity, in this case the equity should actually be $100.

Front 4

How is shareholders' equity determined?

Back 4

Assets - liabilities

Front 5

In what order are liability and equity obligations met?

Back 5

Liabilities are paid first, anything left over is equity.

Front 6

List types of current assets in order of highest to lowest liquidity

Back 6

Cash and equivalents
Accounts Receivable
Inventories
Other

Front 7

List types of fixed assets in order of highest to lowest liquidity

Back 7

Property, plant, and equipment (less depreciation)
Intangible assets and other

Front 8

Three concerns of a financial manager when analyzing balance sheet

Back 8

Liquidity
Debt vs Equity
Value vs Cost

Front 9

Liquidity

Back 9

Ease and quickness with which assets can be converted to cash without significant loss in value

Front 10

Which type of assets are most liquid?

Back 10

Current assets (in particular, cash and equivalents).

Front 11

Which has lower rates of return, fixed or liquid assets?

Back 11

Liquid

Front 12

Debt vs. Equity in a nutshell

Back 12

Creditors have first claim on cash flow, shareholders' equity is residual difference between assets and liabilities.

Front 13

Value vs. Cost in a nutshell

Back 13

Under GAAP, financial statements carry assets at cost. Market value is price at which assets, liabilities, and equity could actually be bought or sold.

Front 14

Is cost same as value?

Back 14

No, market value is usually much different than historical cost.

Front 15

Accounting definition of income

Back 15

Income ≡ Revenue - Expenses

Front 16

Primary parts of an income statement

Back 16

Operating
Non-operating
Taxes
Bottom line (net income)

Front 17

Items on the operating section of income statement

Back 17

Total operating revenues
Cost of goods sold
Selling, general and administrative expenses
Depreciation
--------
Total operating income

Front 18

Items on the non-operating section of income statement

Back 18

Other income
Earnings before interest and taxes
Interest expense
---------
Pretax income

Front 19

Items on taxes section of income statement

Back 19

Current taxes
Deferred taxes

Front 20

Bottom line of income statement

Back 20

Net income =
Total operating income + other income - interest expense - taxes

Front 21

Three things to keep in mind when analyzing income statement

Back 21

GAAP
Non-Cash Items
Time and Costs

Front 22

GAAP

Back 22

Generally accepted accounting principles

Front 23

Matching principle of GAAP

Back 23

revenues must be matched with expenses, so income is reported when it is earned (even though no cash-flow may have occurred yet)

Front 24

Why is income reported when it is earned instead of when cash-flow occurs?

Back 24

Matching principle of GAAP

Front 25

Non-Cash items

Back 25

Depreciation, deferred taxes, items for which no actual cash-flow occurs.

Front 26

Why is net income not cash

Back 26

Includes non-cash items such as depreciation and deferred taxes

Front 27

Time and costs (income statement analysis)

Back 27

in the short run some assets are fixed and some are variable, in the long run all assets are variable. Financial accounts don't distinguish between fixed and variable. Instead classified by product costs and period costs.

Front 28

Marginal tax rate

Back 28

Percentage paid on next dollar earned

Front 29

Average Tax rate

Back 29

Tax bill / taxable income

Front 30

Net working capital

Back 30

Net working capital ≡ current assets - current liabilities

Front 31

Growth in net working capital

Back 31

Difference between net working capital measured at two points in time (i.e. two different balance sheets)

Front 32

From finance perspective, most important item that can be extracted from financial statements

Back 32

Cash flow

Front 33

Cash flow identity

Back 33

CF(A) ≡ CF(B) + CF(S)
Cash flow from assets is equal to the cash flow from the creditors and stockholders

Front 34

In the cash flow identity, what is and what's included in CF(A)

Back 34

Cash flow from the firms assets:
operating cash flow - capital spending - additions to net working capital

Front 35

In the cash flow identity, what is and what's included in CF(B)

Back 35

Cash flow to the firms creditors:
interest plus retirement of debt minus long-term debt financing

Front 36

In the cash flow identity, what is and what's included in CF(S)

Back 36

Cash flow to the firms stockholders:
Dividends plus repurchase of equity minus new equity financing

Front 37

Operating cash flow

Back 37

EBIT + depreciation - taxes

Front 38

Capital spending

Back 38

Acquisition of fixed assets - sales of fixed assets

Front 39

Statement of cash flows

Back 39

Official accounting statement, helps explain change in accounting cash

Front 40

Components of statement of cash flows

Back 40

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

Front 41

Cash flow from operations

Back 41

Net income + non-cash items + adjustments to current assets and liabilities other than cash

Front 42

Cash flow from investing

Back 42

Changes in assets:
acquisition of fixed assets (negative cash flow) and sales of fixed assets (positive cash flow).
Called net capital expenditures

Front 43

Cash flow from investing

Back 43

Changes in equity and debt
Retirement (-)
Proceeds from long-term debt sales (+)
Dividends (-)
Repurchase of stock (-)
Proceeds from new stock issuance (+)