FIN 301: CHAPTER 3
39 Cards in this Set
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annual report
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a report issued annually by a corporation to its stockholders. It contains 4 basic financial statements (balance sheet, income statement, statement of cash flows, and the statement of stockholders' equity) as well as management's analysis of the firm's past operations and future prospects…
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balance sheet
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shows what assets the company owns and who has claims on those assets as of a given date, example: December 31, 2014
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income statement
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shows the firm's sales and costs (and thus profits) during some past period, example: 2014
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statement of cash flows
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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
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statement of stockholders' equity
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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
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balance sheet
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a statement of a firm's financial position at a specific point in time. Left side shows current and long-term (fixed) assets while the right side shows the firm's liabilities (current and long-term debt) and stockholders' equity.
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current assets
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assets that should be converted to cash within one year. Includes cash and cash equivalents, accounts receivable, and inventory
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long-term assets
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assets expected to be used for more than one year. Include plant and equipment in addition to intellectual property such as patents and copyrights
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current liabilities
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claims that must be paid off within one year. Includes accounts payable, accruals (total of accrued wages and accrued taxes), and notes payable to banks and other short-term lenders that are due within a year
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long-term debt
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includes bonds that mature in more than a year
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stockholders' equity
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represents the amount that stockholders paid the company when shares were purchased and the amount of earnings the company has retained since its origination.
SE = Paid-in capital + Retained earnings
SE can also be thought of as residual:
SE = Total assets - Total liabilities
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retained earnings
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represent the cumulative total of all earnings kept by the company during its life
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working capital
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current assets. These assets "turn over". They are used and then replaced throughout the year.
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net working capital
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= current assets (cash, accounts receivable, and inventories) - current liabilities (accounts payable, accruals, and notes payable)
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net operating working capital (NOWC)
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= current assets - (current liabilities - notes payable).
The distinction between net working capital and NOWC is that NOWC interest-bearing notes payable are subtracted from current liabilities
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total debt vs total liabilities
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total debt = short-term debt + long-term debt
total liabilities = total debt + (accounts payable + accruals)
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depreciation
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most companies prepare two sets of financial statements--one based on IRS rules and used to calculate taxes; the other based on GAAP and used for reporting to investors. Firms often used accelerated depreciation for tax purposes but straight-line depreciation for stockholder reporting
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income statement
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a report summarizing a firm's revenues, expenses, and profits during a reporting period, generally a quarter or a year
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operating income (EBIT)
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earnings form operations before interest and taxes.
EBIT = Sales Revenues - Operating Costs
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Depreciation
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the charge to reflect the cost of assets depleted in the production process. Depreciation is not a cash outlay
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Amortization
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A non-cash charge similar to depreciation except that it represents a decline in value of intangible assets (trademarks, copyrights, patents, and goodwill)
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EBITDA
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earnings before interest, taxes, depreciation, and amortization
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statement of cash flows
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a report that shows how items that affect the balance sheet and income statement affect the firm's cash flows. 4 Sections of statement of cash flows: 1) operating activities, 2) long-term investing activities, 3) financing activities, and 4) summary
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statement of stockholders' equity
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a statement that shows by how much a firm's equity changed during the year and why this change occurred
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free cash flow (FCF)
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the amount of cash that could be withdrawn without harming a firm's ability to operate and to produce future cash flows.
FCF = [EBIT(1 - T) + Depreciation and Amortization] - [Capital Expenditures + change in Net Operating Working Capital]
First Term and Second Term explanations: PG 75
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net operating profit after taxes (NOPAT)
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EBIT(1 - T); the profit a company would generate if it had no debt and held only operating assets
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Market Value Added (MVA)
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the excess of the market value of equity over its book value. Simply put: the difference between the market value of a firm's equity and the book value as shown on the balance sheet, with market value found by multiplying the stock price by the number of shares outstanding
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Economic Value Added (EVA)
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= NOPAT - Annual dollar cost of capital
= EBIT(1 - T) - (Total invested capital x After-tax percentage cost of capital)
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Progressive Tax
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a tax system where the tax rate is higher on higher incomes. The personal income tax in the US, which ranges from 0% on the lowest incomes to 39.6% on the highest incomes, is progressive.
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taxable income
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gross income less a set of exemptions and deductions
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marginal tax rate
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"the tax rate on the last dollar of income." Also stated as: the tax rate applicable to the last unit of a person's income
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average tax rate
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taxes paid divided by taxable income
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capital gain or loss
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the profit (or loss) from the sale of a capital asset (i.e. stock) for more (or less) than its purchase price (what you paid for it). If you held the asset for a year or less, it is a short-term gain or loss. If you held it for more than a year, it is a long-term gain or loss
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taxing capital gains
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short-term capital gains are taxed like the ordinary income tax bracket. Long-term gains, however, are mostly taxed at 15% but have a maximum tax rate of 20%
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double taxation of corporate income
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income is first taxed at the corporate rate; and when what is left is paid out as dividends, it is taxed again
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alternative minimum tax (AMT)
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created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.
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triple taxation of dividends
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1) the original corporation is taxed, 2) they second corporation is taxed on the dividends it receives, and 3) the individuals who receive the final dividends are taxed again. This is why 70% of dividends received is excluded from taxable income, while the remaining 30% is taxed at the or…
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tax loss carry-back or carry-forward
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ordinary corporate operating losses can be carried backward for 2 years and carried forward for 20 years to offset taxable income in a given year.
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s corporation
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a small corporation that, under S subchapter S of the Internal Revenue Code, elects to be taxed as a proprietorship or a partnership yet retains limited liability and other benefits of the corporate form of organization
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FIN 301: EXAM 2