question

a corporation that is owned by a few individuals who are typically associated with the firms management

answer

Closely held corporations

question

which shows what assets the company owns and who has claims on those assets as of a given date—for example, December 31, 2014.

answer

balance sheet

question

A report issued annually by a corporation to its stockholders. It contains basic financial statements as well as management's analysis of the firm's past operations and future prospects.

answer

annual report

question

is the most important report that corporations issue to stockholders, and it contains two types of information.

answer

annual report

question

describes the firm's operating results during the past year and discusses new developments that will affect future operations the

answer

verbal section of the annual report

question

balance sheet, income statement, statement of cash flows, the statement of stock holders equity

answer

the annual report provides these four basic financial statements:

question

which shows the firm's sales and costs (and thus profits) during some past period—for example, 2014.

answer

income statement

question

which shows how much cash the firm began the year with, how much cash it ended up with, and what it did to increase or decrease its cash.

answer

The statement of cash flows

question

which shows the amount of equity the stockholders had at the start of the year, the items that increased or decreased equity, and the equity at the end of the year.

answer

.The statement of stockholders' equity,

question

attempt to explain why things turned out the way they did and what might happen in the future.

answer

management's verbal statements

question

report what has actually happened to its assets, earnings, and dividends over the past few years,

answer

firm's financial statements

question

can be used to help forecast future earnings and dividends

answer

annual report

question

a "snapshot" of a firm's position at a specific point in time

answer

balance sheet

question

the assets that the company owns

answer

left side of the balance sheet statement shows

question

the firm's liabilities and stockholders' equity, which are claims against the firm's assets.

answer

right side of the balance sheet statement shows

question

assets that should be converted to cash within one year; and they include cash and cash equivalents, accounts receivable, and inventory.

answer

Current assets consist of

question

assets expected to be used for more than one year; they include plant and equipment in addition to intellectual property such as patents and copyrights

answer

Long-term assets are

question

Plant and equipment is generally reported as

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net of accumulated depreciation

question

net plant and equipment, and we often refer to them as "net fixed assets."

answer

Allied's long-term assets consist entirely of

question

net plant and equitpment

answer

"net fixed assets."

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total common equity/shares outstanding

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Book value per share

question

generally like debt because it pays a fixed amount each year

answer

preferred stock

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it is like common stock because a failure to pay the preferred dividend does not expose the firm to bankruptcy.

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preferred stock

question

The claims against assets are of two basic types

answer

liabilities (or money the company owes to others) and stockholders' equity

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claims that must be paid off within one year, including accounts payable, accruals (total of accrued wages and accrued taxes), and notes payable to banks and other short-term lenders that are due within one year.

answer

Current liabilities consist of

question

bonds that mature in more than a year.

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Long-term debt includes

question

it is the amount that stockholders paid to the company when they bought shares the company sold to raise capital, in addition to all of the earnings the company has retained over the years:

answer

stockholders' equity

question

paid in capital plus retained earnings

answer

stock holders equity formula

question

the cumulative total of all of the earnings the company has earned during its life.

answer

retained earnings are not just the earnings retained in the latest year—they are

question

total assets-total liabilities

answer

stockholders equity as residential

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the true value of the firm's assets would have declined, liabilities would not change, common equity declines, reduction in retained earnings and equity, assets = liabilities, sheet would balance

answer

If Allied had invested surplus funds in bonds backed by subprime mortgages and the bonds' value fell below their purchase price,

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common stock is more risky than

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bonds

question

are listed by the length of time before they will be converted to cash (inventories and accounts receivable) or used by the firm (fixed assets).

answer

Assets on the balance sheet are

question

claims are listed in the order in which

answer

hey must be paid:

question

Accounts payable must generally be paid

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within a few days

question

accruals must be paid

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promptly

question

notes payable to banks must be paid within

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one year

question

stockholders' equity accounts represent

answer

ownership and need never be "paid off."

question

corporations can do these with their profits

answer

Pay income tax to the government Hold profits within the firm Pay them to shareholders

question

equal liabilities and equity; otherwise, the balance sheet does not balance.

answer

Assets must, of course

question

actual spendable money

answer

only the cash and equivalents account represents

question

assets are reported in

answer

dollar terms,

question

credit sales that have not yet been collected.

answer

Accounts receivable represent

question

Inventories show the cost of

answer

raw materials, work in process, and finished goods

question

the cost of the buildings and equipment used in operations minus the depreciation that has been taken on these assets.

answer

Net fixed assets represent

question

generate cash over time, but they do not represent cash in hand.

answer

The noncash assets should

question

Current assets are often called

answer

working capital

question

these assets "turn over

answer

working capital

question

they are used and then replaced throughout the year

answer

turn over

question

current liabilities on its balance sheet.

answer

The total of accounts payable, accruals, and notes payable represent

question

If we subtract current liabilities from current assets, the difference is called

answer

net working capital

question

current assets- (current liabilities-notes payable)

answer

net working capital formula

question

accounts payable, accruals, and notes payable to the bank

answer

Current liabilities include

question

(accruals and accounts payable

answer

free" liabilities

question

which incur interest expense that is included as a financing cost on the firm's income statement

answer

interest-bearing notes payable

question

Current assets minus non-interest-bearing current liabilities.

answer

net operating working capital

question

current assets- (current liabilities-notes payable)

answer

net operating working capital formula

question

its short-term and long-term interest-bearing liabilities.

answer

A company's total debt includes

question

total debt plus the company's "free" (non-interest bearing) liabilities.

answer

Total liabilities equal

question

short term debt + long term debt

answer

total debt formula

question

total debt + (accounts payable + accruals)

answer

total liabilities formula

question

such as preferred stock, convertible bonds, and long-term leases

answer

"hybrid" securities

question

hybrid between common stock and debt,

answer

Preferred stock is a

question

debt securities that give the bondholder an option to exchange their bonds for shares of common stock.

answer

convertible bonds are

question

is used to calculate taxes

answer

Internal Revenue Service (IRS) rules

question

Internal Revenue Service (IRS) rules, the other is based on GAAP and is used for reporting to investors.

answer

two sets of financial statements

question

for stockholder reporting

answer

straight-line depreciation

question

(current assets- excess cash)-(current liabilities-notes payable)

answer

net operating working capital (NOWC) formula

question

Every entity—including state and local governments, nonprofit agencies, and individual households—has

answer

balance sheet.

question

assets that the firm owns and the debt and equity capital that was used to finance those assets. The assets are divided into those expected to be used within a year and those expected to be used for more than one year. liabilities and capital are divided into those items that must be paid off within a year and those that have longer maturities

answer

The balance sheet summarizes the

question

Stockholders' equity consists of

answer

paid-in capital, retained earnings

question

which is the amount of money the firm has raised by issuing newly created shares to stockholders,

answer

paid-in capital

question

which is the sum of all past earnings minus all past dividends.

answer

retained earnings

question

firm has current assets consisting of $100 cash, $300 of accounts receivable, and $400 of inventories. Its current liabilities include $200 of accounts payable, $100 of accrued wages and taxes, and $200 of notes payable to its bank. The cash balance is not considered "excess" cash. What is its NOWC?

answer

500

question

A report summarizing a firm's revenues, expenses, and profits during a reporting period, generally a quarter or a year.

answer

income statements

question

Earnings per share (EPS)

answer

the bottom line,"

question

net income/common shares outstanding

answer

Earnings per share (EPS)

question

dividends paid to common stockholders/ common shares outstanding

answer

dividends per share

question

total common equity/common shares outstanding

answer

book value per share

question

Earnings from operations before interest and taxes (i.e., EBIT).

answer

operating income

question

is derived from the firm's regular core business—in Allied's case, from producing and selling food products. Moreover, it is calculated before deducting interest expenses and taxes, which are considered to be non-operating costs

answer

operating income

question

earnings before interest and taxes

answer

EBIT

question

sales revenues-operating costs

answer

operating income

question

The charge to reflect the cost of assets depleted in the production process. is not a cash outlay.

answer

depreciation

question

is an annual charge against income that reflects the estimated dollar cost of the capital equipment and other tangible assets that were depleted in the production process

answer

depreciation

question

amounts to the same thing except that it represents the decline in value of intangible assets such as patents, copyrights, trademarks, and goodwill

answer

amortization

question

depreciation and amortization are reported as

answer

costs

question

Earnings before interest, taxes, depreciation, and amortization

answer

ebitda

question

Last year Firm X had sales of $100,000, labor costs of $30,000, material costs of $30,000, and depreciation of $10,000. Assume that labor and material costs were paid in cash. The tax rate on its net income was 40%. What was the firm's net income?

answer

18,000

question

in finance

answer

"cash is king."

question

A report that shows how items that affect the balance sheet and income statement affect the firm's cash flows

answer

statement of cash flows

question

is the accounting report that shows how much cash the firm is generating. The statement is divided into four sections

answer

statement of cash flows

question

operating activities, long term investing activities, financing activities, and summary

answer

statement of cash flows sections

question

This section deals with items that occur as part of normal ongoing operations

answer

operating activities

question

The first adjustment relates to depreciation and amortization. Allied's accountants subtracted depreciation (it has no amortization expense), which is a noncash charge, when they calculated net income. Therefore, depreciation must be added back to net income when cash flow is determined.

answer

Depreciation and amortization

question

To make or buy inventory items, the firm must use cash. It may receive some of this cash as loans from its suppliers and workers (payables and accruals); but ultimately, any increase in inventories requires cash

answer

Increase in inventories.

question

contains both verbal and quantitative information.

answer

annual report

question

1) Balance Sheet, (2) Income Statement, (3) Statement of Cash Flows, and (4) Statement of Stockholders' Equity.

answer

quantitative information consists of four financial statements

question

shows the firm's assets and claims against those assets, assets are equal to liabilities and equity

answer

balance sheet

question

claims are listed in the order of

answer

when they must be paid

question

cash and their equivalents, accounts receivable, inventory

answer

Current assets include

question

Assets are shown in order of

answer

their liquidity

question

exceed one year

answer

long-term assets

question

Liabilities are divided into

answer

current liabilities and long term debt

question

We differentiate between

answer

total debt and total liabilities

question

A company's total debt includes both

answer

its short-term and long-term interest bearing liabilities

question

total liabilities equal

answer

total debt plus the companys free liabilities

question

net working capital formula

answer

the difference between current assets and current liabilities

question

current assets less the difference between current liabilities and notes payable.

answer

net operating working capital is equal to

question

is capital supplied by common stockholders and represents ownership

answer

net worth

question

reports on operations over a period of time

answer

income statement

question

bottom line of income statement

answer

earnings per share

question

The income statement is tied to

answer

the balance sheet through the retained earnings account

question

net income minus dividends paid

answer

retained earnings for the year

question

this amount is added to the cumulative retained earnings from prior years to obtain the year-end retained earnings balance.

answer

retained earnings for the year

question

The value of any asset, including a share of stock, is based on

answer

the cash flow the asset is expected to produce

question

shows how much cash a firm generates

answer

statement of cash flows

question

Changes in stockholders' equity during an accounting period are reported in the

answer

statement of stockholders' equity

question

new stock issues, stock repurchases, net income, and dividends paid

answer

Changes in stockholders' equity can come from

question

must be added back to net income when cash flow is determined.

answer

depreciation

question

Which of the following does NOT increase cash and cash equivalents during the year

answer

repayment of long term debt

question

NOWC

answer

net operating work capital

question

current assets - (current liabilities-notes payable)

answer

net operating work capital formula

question

The focus on traditional financial statements is

answer

accounting data rather than cash flow

question

cash flow is important to

answer

investors, managers, and stock analysts.

question

FCF = [EBIT(1 - T) + Depreciation and amortization] - [Captial expenditures + ?Net operating working captial]

answer

The equation for free cash flow is:

question

is the cash flow actually available for payments to all investors (stockholders and debtholders) after the company has made investments in fixed assets, new products, and operating working capital

answer

free cash flow

question

Negative FCF is not always

answer

bad

question

means the company doesnt have sufficient internal funds to finance its investments in fixed assets and working capital, and that it will have to raise new money in the capital markets to pay for these investments.

answer

negative FCF means that the company does not have

question

If FCF is negative because after-tax operating income is negative this is

answer

bad, because the company is probably experiencing operating problems

question

The financial statements reflect historical data, but managers' performance must be evaluated on the basis of

answer

market values

question

represents the difference between the money stockholders have invested in the firm versus the cash they could receive if the firm were sold.

answer

Market Value Added

question

MVA = (Shares outstanding × Stock price) - Total common equity

answer

The equation for MVA is:

question

Shareholder wealth is maximized when

answer

the difference is maximized

question

the better the job management is doing for its shareholders.

answer

the higher the firms MVA,

question

is sometimes called "economic profit and it is closely related to MVA

answer

economic value added

question

= EBIT(1 - T) - (Total investor-supplied operating capital × After-tax percentage cost of capital)

answer

The equation for EVA is:

question

notes payable, long-term debt, and total common equity

answer

Note that total invested capital is equal to the sum of

question

EVA differs from net income because EVA has

answer

a deduction for the cost of equity

question

useful for establishing reasonable compensation for divisional managers as well as top company officers.

answer

EVA

question

gross income less a set of exemptions and deductions.

answer

Taxable income is defined as

question

is taxed at a maximum rate of 15%,

answer

a long term capital gain

question

is taxed as ordinary income

answer

short term capital gain

question

investment income consists of

answer

dividend and interest income

question

Interest income (except interest on state and local government debt which is exempt from federal taxes) is taxed as

answer

ordinary income

question

dividends are taxed at the same rate as

answer

long term capital gains

question

interest payments are not tax deductible for individuals except for interest on

answer

home mortgage

question

Key Financial Statements

answer

Balance Sheet Income Statement Statement of Stockholders' Equity Statement of Cash Flows

question

provides a snapshot of a firm's financial position at one point in time.

answer

balance sheet

question

summarizes a firm's revenues and expenses over a given period of time.

answer

Income statement - summarizes a firm's revenues and expenses over a given period of time.

question

shows how much of the firm's earnings were retained, rather than paid out as dividends.

answer

Statement of stockholders' equity

question

reports the impact of a firm's activities on cash flows over a given period of time.

answer

Statement of cash flows

question

Snack food company that underwent major expansion in 2013. So far, expansion results have been unsatisfactory.

answer

what is D'Leon Inc.

question

Company's cash position is weak. Suppliers are being paid late. Bank has threatened to cut off credit. Board of Directors has ordered that changes must be made!

answer

D'Leon Inc. unsatisfactory because

question

= EBIT(1 - Tax rate)

answer

AT operating income=

question

NOWC= Current assets-(current liabilities-notes payable)

answer

What effect did the expansion have on net operating working capital?

question

Accounting statements insufficient for evaluating managers' performance because they

answer

do not reflect market values.

question

Difference between market value and book value of a firm's common equity.(P0 x Number of shares) - Book value.

answer

MVA =

question

Estimate of a business' true economic profit for a given year.

answer

EVA =

question

2014 MVA IS -$267,592 2013 mva IS = $186,232

answer

Shareholder wealth has been destroyed!

question

AT operating income > cost of capital needed to produce that income.

answer

.If EVA is positive

question

Positive EVA on annual basis helps

answer

to ensure MVA is positive.

question

while EVA can be calculated on a divisional basis as well.

answer

MVA is applicable to entire firm

question

What if D'Leon's sales manager decided to offer 60-day credit terms to customers, rather than 30-day credit terms?If competitors match terms, and sales remain constant... A/R would . Cash would .

answer

AR would increase and Cash would decrease

question

Inventory and fixed assets to meet increased sales. A/R , Cash . Company may have to seek additional financing.

answer

If competitors don't match, and sales double... Short-run: .

question

If competitors don't match, and sales double... long run:

answer

Collections increase and the company's cash position would improve.

question

No effect on physical assets. Fixed assets on the balance sheet would decline. Net income would decline. Tax payments would decline. Cash position would improve.

answer

What happens if D'Leon depreciates fixed assets over 7 years (as opposed to the current 10 years)?

question

Individual Taxes Corporate Taxes

answer

Federal Income Tax System

question

Both have a progressive structure (the higher the income, the higher the marginal tax rate).

answer

Corporate and Personal Taxes

question

15% and rise to 35% for corporations with income over $10 million, although corporations with income between $15 million and $18.33 million pay a marginal tax rate of 38%. Also subject to state tax (around 5%).

answer

Corporations Rates begin at

question

10% and rise to 39.6% for single individuals with incomes over $400,000 and married couples filing jointly with incomes over $450,000. May be subject to state tax.

answer

individuals Rates begin at

question

tax deductible for corporations (paid out of pre-tax income),but usually not for individuals (interest on home loans being the exception).

answer

Interest paid:

question

usually fully taxable (an exception being interest from a "muni").

answer

Interest earned:

question

paid out of after-tax income.

answer

Dividends paid:

question

most investors pay 15% taxes. Investors in the 10% or 15% tax bracket pay 0% on qualified dividends.

answer

Dividends received:

question

Single individuals with incomes over $400,000 and married couples filing jointly with incomes over $450,000 pay

answer

20% taxes on dividends.

question

---- are paid out of net income which has already been taxed at the corporate level, this is a form of "double taxation".

answer

Dividends are paid out of

question

A portion of dividends received by corporations is

answer

tax excludable, in order to avoid "triple taxation."

question

Tax Loss Carry-Back and Carry-Forward - since corporate incomes can fluctuate widely, the Tax Code allows firms to

answer

carry losses back to offset profits in previous years or forward to offset profits in the future.

question

- defined as the profits from the sale of assets not defined as the profits from the sale of assets not normally transacted in the normal course of business, capital gains for individuals are generally taxed as ordinary income if held for a year or less, and at the capital gains rate if held for more than a year.

answer

capital gains

question

Most taxpayers pay 15% taxes on

answer

long-term capital gains..

question

Single individuals with incomes over $400,000 and married couples filing jointly with incomes over $450,000 pay

answer

20% taxes on long-germ capital gains

question

.Statements (b) and (d) will decrease the amount of cash on a company's balance sheet. Statement (a) will increase cash through the sale of common stock. Selling stock provides cash through financing activities. On one hand, Statement (c) would decrease cash; however, it is also possible that Statement (c) would increase cash, if the firm receives a tax refund for taxes paid in a prior year.

answer

Which of the following actions are most likely to directly increase cash as shown on a firm's balance sheet? Explain and state the assumptions that underlie your answer. a.It issues $8 million of new common stock. b.It buys new plant and equipment at a cost of $3 million. c.It reports a large loss for the year. d.It increases the dividends paid on its common stock.

question

issued once a year by a corporation, contains basic financial statements, analysis of past performances, and future prospects

answer

annual report

question

provides a quantitative summary of a companys assets, liabilities, and net worth at a specific point in time

answer

balance sheet

question

gives details about the firms sales costs and profits for the past accounting period

answer

income statement

question

explains the changes in a companies retained earnings over the accounting year

answer

statement of retained earnings

question

provides details about the flow of funds from operating, financing, and investing activities

answer

statement of cash flows

question

how much cash is a firm generating through operating, financing and investing activities?

answer

statement of cash flows

question

how much debt and equity has the firm issued to finance its assets

answer

balance sheet

question

as long as the information follows the GAAP

answer

personal judgment is allowed when

question

b.It buys new plant and equipment at a cost of $3 million.d.It increases the dividends paid on its common stock.

answer

will decrease the amount of cash on a company's balance sheet.

question

a. will increase cash through the sale of common stock. Selling stock provides cash through financing activities.

answer

It issues $8 million of new common stock.

question

would decrease cash; however, it is also possible that it would increase cash, if the firm receives a tax refund for taxes paid in a prior year

answer

.c.It reports a large loss for the year.

question

net collection of inventory items increased by more than the firm sold between year one and year two because

answer

inventory increased

question

the firm had 200 of actual money to spend because the balance sheet said that

answer

the cash and cash equivalent had 200 to spend

question

if everything else on a balance sheet remains the same then the cash and cash equivalents will

answer

decrease

question

helps determine if the company is generating enough cash and if it will need to generate more cash by selling dividends or issuing new debt

answer

the statement of cash flow helps determine

question

$1,000,000 in revenues does not mean the same thing as

answer

cash flow of 1,000,000

question

could mean collections that still need to be made

answer

revenues

question

a company records a loss of money on the sale of its outdated inventory

answer

operating activity

question

uses cash to purchase 10% of its common stock

answer

financing activity

question

a company buys common stock in its suppliers firm with its extra cash

answer

investing activity

question

earns revenue from its cash receipts from royalties

answer

operating activity

question

day to day actions needed to conduct business

answer

operating activity

question

affect a firms cash position

answer

operating activity

question

purchase or sale of investment

answer

investing activity

question

cash inflow or outflows to repay or obtain capital

answer

financing activity

question

sum of what initial stockholders paid when they bought company shares and the earnings that the company has retained over the years

answer

equity

question

analyze the companys real cash postiosn

answer

free cash flow

question

residual cash flow after taking into account, operating cash flows, including fixed asset acquisitions, asset sales and working capital expenditures.

answer

free cash flow

question

performance measures

answer

market value added and economic value added

question

evaluates shareholder wealth

answer

MVA

question

NOPAT means

answer

net operating profit after taxes

question

the US federal tax system is

answer

progressive

question

you sell shares you bought for more than you bought them for, how will it be treated when taxed?

answer

capital gain taxed at the current ordinary income tax

question

an increase in depreciation expense leads to

answer

lower taxable income, decrease tax deducted from earnings and lead to higher operating cash flow.

question

tax payers must pay the higher of the

answer

alternative minimum tax (amt)

question

if pay a 1$ IN income pay a dollar in

answer

pretax

question

formula differences between NWC, NOWC, and triangle NOWC

answer

NWC=currents assets-current liabilities NOWC= current assets-(AP+accruels) Triangle NOWC= current assets-(current liabilities-notes payable)

question

capital expenditure formula

answer

net plant - net plant + depreciation notes payable+Long Term debt+ total common equity

question

formula for total common equity

answer

common stock plus retained earnings

question

formula for EVA

answer

EBIT(1-T)- ( total invested capital*WACC)

Chapter 3 business finance – Flashcards

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