Finance 2

what the firm owns (life of less than 1 year)

must be paid within one year

long term debt and long term debt creditors

if the firm was to sell all of the assets and pay it debt, the residual value that remained would belong to the shareholders

difference of current assets and current liabilities

positive when assets exceed liabilities

long term asset

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

2 dimensions- ease of conversion verses loss of value

highly liquid asset can be sold quickly without a substantial price reduction

highly illiquid assest is one that cannot be quickly converted to cash without a substantial price reduction

• Current Assets
• Cash
• Accounts Receivable
• Inventory (least liquid for most businesses)

• Fixed Assets
• Buildings and Equipment (tangible)
• Trademark (intangible)

The portion of equity left to shareholders have all of the debts have been satisfied

assets-liabilities= shareholders equity

financial leverage

greater

• increases the potential reward to shareholders
• increases the potential for financial distress and business failure

True value- amount of cash we would get if we sold it

• Value listed on the balance sheet (bc of GAAP)
• Historical cost- what the firm paid for them

true

market value

• snapshot of the firm
• convenient means of organizing and summarizing what a firm owns (assets), what a firm owe's (liabilities) and the difference between the two (the firm's equity) at a given point in time.

Measures performance over some period of time, usually a quarter or a year.

Revenues-Expenses=Income

shows a before and after picture

bottom line- last item on the income statement

earnings per share

true

=Net Income/Total Shares Outstanding

=Total Dividends/Total shares outstanding

• GAAP
• Cash Vs. Non Cash items
• Time and Costs

• Revenue is recognized at the time of the sale
• (not the same as the time of collection)
• Expenses are based on the matching principle
• Figures shown may not be at all representative of the actual cash inflows and outflows that occurred in a particular period

• Primary reason that accounting income differs from cash flow
• most important is depreciation
• Expenses charged against revenues that do not directly affect cash flow

• raw materials
• direct labor expenses
• manufacturing overhead
• (reported on the income statement as COGS)
• Include both fixed and variable costs

• incurred during a particular period and might be reported as:
• selling expense
• general expense
• administrative expense

Can be fixed or variable

example: Company president salary, period cost and fixed (in the short run)

your tax bill divided by your taxable income

the percentage of your income that goes to pay your taxes.

extra tax you would pay if you earned one more dollar

The difference between the number of dollars that came in and the number that went out.

(Not the same as the statement of cash flows, does not represent the same information)

True

• involves 3 components:
• Operating cash flow
• capital spending
• Change in net working capital

cash flow that results from the day to day activities of producing and selling

• Revenue - costs
• (Don't include depreciation or interest bc not a cash expense, interest is a financing expense)
• (include taxes)

EBIT+ Depreciation-Taxes+ Operating Cash Flow

Shows whether a firms cash inflows are able to cover its everyday cash outflows

*Accounting principle include interest

refers to the net spending on fixed assets(purchases of fixed assets less sales of fixed assets)

=ending net fixed assets- beginning net fixed assets+ depreciation= net investment in fixed assets

can be negative if the firm sold more assets than it purchased

amount spent on net working capital

(measured as the change in net working capital over the period being examined and represents the net increase or decrease in current assets over current liabilities.)

"free" because it is not needed for working capital or fixed asset investments

• Operating cash flow
• -net capital spending
• -change in net working capital
• = cash flow from assets

not unusual to see a negative cash flow for a growing corporating (meaning the firm raised more money by borrowing and selling stock than it paid out to creditors ad stockholders that year 

net payments to creditors and owners during the year

interest paid less net new borrowing

Dividends paid less net new equity raised

Cash Flow From Assets= Cash Flow to creditors + Cash Flow to Stockholders

Cash Flow from Assets= Operating Cash Flow- Net Capital Spending- Change in net working capital

where Operating cash flow= EBIT+ Depreciation- Taxes

Net Capital Spending= Ending Net Fixed Assets- Beginning Net Fixed Assets+ Depreciation

Change in Net working Captial- Ending NWC- Begininng NWC

Cash Flow to Creditors= Interest Paid-Net New Borrowing

Cash Flow to Stockholders= Dividends Paid- Net New equity raised

• Net  Sales
• -Cost of Goods Solds
• - Depreciation
• = EBIT
• +Interest Paid
• =Taxable Income
• -Taxess
• =Net Income

• Operating Cash Flow
• EBIT
• + Depreciation
• -Taxes