chapter 2. Finance 350

financial statement showing a firm's accounting value on a particular date

assets = liability + stockholders' equity

net worth = current assets - current liabilities

The common set of standards and procedures by which audited financial statements are prepared.

Adjusts book value to market value

Balance sheet is in terms of book value

financial statement summarizing a firm's performance over a period of time, usually a quarter of a year.

• Income statement equation is:
• revenues - expenses = income

• earnings per share =
• net income/ tot shares outstanding

*Net income is often expressed on a per-share basis and called earnings per share (EPS)

• Dividends per share =
• tot div/ tot shares outstanding

General rule is to recognize revenue when the earnings process is virtually complete, but in practice, this principle usually means that revenue is recognized at the time of sale, which need not be the same as the time of collection

Non-cash items = expenses charged against revenues that do not directly affect cash flow, such as depreciation.

Ex: Suppose a firm purchases a fixed asset for $5,000 and pays in cash. Instead of deducting the $5,000 as an expense, an accountant might depreciate the asset over a five-year period. ($1,000 for the next 5 years as an expense... this deduction isn't cash - it's an accounting number. The actual cash outflow occurred when the asset was purchased).

product costs include such things as raw materials, direct labor expense, and manufacturing overhead. These are reported as cost of goods sold, but they include both fixed and variable costs.

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

• average = tot taxes paid/ tot taxable income
• *In other words, the percentage of your income that goes to pay taxes

• marginal tax rate = amount of tax payable on the next dollar earned.
• *In other words, the extra tax you would pay if you earned one more dollar.

cash flows from assets = cash flow to creditors + cash flow to to stockholders

The tot of cash flow to creditors and cash flow to stockholders.

Consisting of the following: operating cash flow, capital spending, and changes in net working capital.

Net working capital is the amount spent on net working capital. It is measured as the change in net working capital over the period being examined and represents the net increase in current assets over current liabilities

cash generated from a firm's normal business activities. Tells us whether or not a firm's cash inflows from its business operations are sufficient to cover its everyday cash outflows

OCF is revenues - costs, but we don't want to include depreciate (not a cash outflow), or interest (b/c it's a financing expense). We do want to include taxes, b/c taxes are paid in cash.

• Operating Cash Flow:
• Earnings before interest and taxes (EBIT)
• + Depreciation
• - Taxes
• = Operating cash flow

Net capital spending is just money spent on fixed assets less money received from the sale of fixed assets. Can be negative if the firm sold more assets than it purchased.

• Capital Spending:
• Ending net fixed assets
• - Beginning net fixed assets
• + Depreciation
• = Net investments in fixed assets

To determine the change in net working capital, the easiest approach is just to take the diff b/t the beg and ending net working capital (NWC).

• Operating cash flow
• - Net capital spending
• - Change in NWC
• = Cash flow from assets

• Net capital spending:
• Ending net fixed assets
• - Beg net fixed assets
• + Depreciation
• = Net investment in fixed assets

• Net working capital:
• Ending NWC
• - Beg NWC
• = Change in NWC

A firm's interest payments to creditors less net new borrowings

• Cash flow to creditors:
• Interest paid
• - Net new borrowing
• = Cash flow to creditors

Dividends pay out by a firm less net new equity raised

• Cash flow to stockholders:
• Dividends paid
• - Net new equity raised
• = Cash flow to stockholders

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

cash flow from assets:

• Cash flow to creditors (bondholders)
• + Cash flow to stockholders (owners)

Cash flow from assets:

• Operating cash flow
• - Net capital spending
• - change in net working capital

where:

• operating cash flow =
• earnings before interest and taxes (EBIT)
• + Depreciation
• - Taxes

• Net capital spending =
• Ending net fixed assets
• - Beg net fixed assets
• + Depreciation

• Change in NWC =
• Ending NWC
• - Beg NWC

• cash flow to creditors =
• interest paid
• - Net new borrowing

• Cash flow to stockholders =
• Dividends paid
• - Net new equity raised