Chapter 2 - Accounting Statements and Cash Flow

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1. Assets Left hand side of balance sheet

- Listed in order of liquidity or length of time to convert to
cash

2. Liabilities and Right hand side of balance sheet

Equity - Liabilities are listed in order to be repaid
- Equity is never repaid

3. Common equity Assets - liabilities - preferred stock = Common equity

- A residual account

4. What does de- Allows bond holders to sue for repayment

fault mean?

5. How does the It increases when retained earnings increase - Firm must
accounting value retain profits instead of paying dividends
of the equity ac-
counts increase?

6. What does sig- - Dividend payment will increase stock price

naling theory - #1 signal of financial health is dividend payments
suggest about
payment of divi-
dends?

7. 3 components of 1) Common stock (par value)

common equity 2) Paid in capital (excess over par)
3) Retained earnings: earning not paid out as dividends
go here

8. Accounting liq- How easily the firm can convert assets into cash
uidity - The more liquid, the less likely the firm will experience
financial distress in the short term

9. Income Revenue - expenses

10. 3 things to re- 1) Revenue shows at the time of the sale not when the
member about cash is received
income state- 2) There are several non cash items on the income state-
ments: ment which do not affect cash flow, like deferred taxes
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 Chapter 2 - Accounting Statements and Cash Flow
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(paid in the future)
3) Product costs (total production costs incurred during
the period reported on the income statement: reported as
COGS) VS. Period Costs (Costs allocated to the period
reported on the income statement: selling, general & ad-
ministrative expenses)

11. Net working capi- Current assets - current liabilities

tal - Positive NWC shows the available cash is greater than
the cash to be paid out
- NOT THE SAME AS CASH FLOW

12. Assets= Liabilities + Equity

13. Cash flow from Operating cash flow - change in fixed assets - change in
assets (CFa) = NWC
OR
Cash flow to bondholders or creditors (CFb) + Cash flow
to stockholders (CFS)

14. Operating cash- EBIT + depreciation - taxes

flow (OFC) = - Tells us if the firm has enough money to operate the
business on a day to day basis

15. Change in NCS Ending fixed assets - beginning fixed assets +depreciation
or Change in Net
Capital Spending
=

16. Change in NWC = (Current ending Assets - Current ending liabilities) - (cur-
rent beginning assets - current beginning liabilities)

17. Cash flow from Operating cash flow - change in fixed assets - change in
assets = net working capital

18. Cash flow from Cash flow creditors + cash flow stockholders
assets =

19. Cash flow to Interest paid - net new long term borrowing
creditors =
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20. Cash flow to Dividends paid - net new equity

stockholders -

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