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43 Cards in this Set

  • Front
  • Back
Balance sheet vs. income statement in terms of time
Balance sheet: snapshot (moment in time)
Income statement: video sequence (period of time)
The balance sheet identity
Assets ≡ Liabilities + Stockholders Equity
What's wrong with the following:

Current assets $100
Long term assets $250

Current liabilities $50
Long term liabilities $200
Shareholders' equity $50
Assets not equal to liabilities + equity, in this case the equity should actually be $100.
How is shareholders' equity determined?
Assets - liabilities
In what order are liability and equity obligations met?
Liabilities are paid first, anything left over is equity.
List types of current assets in order of highest to lowest liquidity
Cash and equivalents
Accounts Receivable
List types of fixed assets in order of highest to lowest liquidity
Property, plant, and equipment (less depreciation)
Intangible assets and other
Three concerns of a financial manager when analyzing balance sheet
Debt vs Equity
Value vs Cost
Ease and quickness with which assets can be converted to cash without significant loss in value
Which type of assets are most liquid?
Current assets (in particular, cash and equivalents).
Which has lower rates of return, fixed or liquid assets?
Debt vs. Equity in a nutshell
Creditors have first claim on cash flow, shareholders' equity is residual difference between assets and liabilities.
Value vs. Cost in a nutshell
Under GAAP, financial statements carry assets at cost. Market value is price at which assets, liabilities, and equity could actually be bought or sold.
Is cost same as value?
No, market value is usually much different than historical cost.
Accounting definition of income
Income ≡ Revenue - Expenses
Primary parts of an income statement
Bottom line (net income)
Items on the operating section of income statement
Total operating revenues
Cost of goods sold
Selling, general and administrative expenses
Total operating income
Items on the non-operating section of income statement
Other income
Earnings before interest and taxes
Interest expense
Pretax income
Items on taxes section of income statement
Current taxes
Deferred taxes
Bottom line of income statement
Net income =
Total operating income + other income - interest expense - taxes
Three things to keep in mind when analyzing income statement
Non-Cash Items
Time and Costs
Generally accepted accounting principles
Matching principle of GAAP
revenues must be matched with expenses, so income is reported when it is earned (even though no cash-flow may have occurred yet)
Why is income reported when it is earned instead of when cash-flow occurs?
Matching principle of GAAP
Non-Cash items
Depreciation, deferred taxes, items for which no actual cash-flow occurs.
Why is net income not cash
Includes non-cash items such as depreciation and deferred taxes
Time and costs (income statement analysis)
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.
Marginal tax rate
Percentage paid on next dollar earned
Average Tax rate
Tax bill / taxable income
Net working capital
Net working capital ≡ current assets - current liabilities
Growth in net working capital
Difference between net working capital measured at two points in time (i.e. two different balance sheets)
From finance perspective, most important item that can be extracted from financial statements
Cash flow
Cash flow identity
CF(A) ≡ CF(B) + CF(S)
Cash flow from assets is equal to the cash flow from the creditors and stockholders
In the cash flow identity, what is and what's included in CF(A)
Cash flow from the firms assets:
operating cash flow - capital spending - additions to net working capital
In the cash flow identity, what is and what's included in CF(B)
Cash flow to the firms creditors:
interest plus retirement of debt minus long-term debt financing
In the cash flow identity, what is and what's included in CF(S)
Cash flow to the firms stockholders:
Dividends plus repurchase of equity minus new equity financing
Operating cash flow
EBIT + depreciation - taxes
Capital spending
Acquisition of fixed assets - sales of fixed assets
Statement of cash flows
Official accounting statement, helps explain change in accounting cash
Components of statement of cash flows
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Cash flow from operations
Net income + non-cash items + adjustments to current assets and liabilities other than cash
Cash flow from investing
Changes in assets:
acquisition of fixed assets (negative cash flow) and sales of fixed assets (positive cash flow).
Called net capital expenditures
Cash flow from investing
Changes in equity and debt
Retirement (-)
Proceeds from long-term debt sales (+)
Dividends (-)
Repurchase of stock (-)
Proceeds from new stock issuance (+)