FIN 357 Lecture Notes - Lecture 2: Operating Cash Flow, Accounting Liquidity, Cash Flow

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OC1068027

4 Jan 2017

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1. Chapter 2: Financial Statements and Cash Flow

a. Balance sheet: states what the firm owns and how it is financed

i. Assets = Liailities + “tokholdes’ euity

ii. Accounting liquidity: the ease and quickness with which assets can be converted to cash

1. Current assets are the most liquid (within a year)

2. High liquidity can help firms meet short-term obligations, but highly liquid

assets also tend to have a lower rate of return

iii. Debt versus Equity

1. Liabilities are debts, which are usually associated debt service (a fixed cash

burden that puts the firm in default of contract if they are not paid)

2. “tokholde’s euity is the esidual diffeees etee assets ad liailities

a. “tokholde’s shae

iv. Value versus Cost

1. Cayig o ook alue: the aoutig alue of a fi’s assets

a. “peifially say alue he the aoutig ues ae ased o

ost pole i the aoutig old

b. A fi’s assets ay ot alays e eoded at aket alue

b. The income statement:

i. Revenue - Expense = Income

ii. Operations: principal income

1. EBIT (earnings before interest and taxes)

iii. Last item on the list is usually net income (usually expressed in earnings per share)

iv. GAAP states that income is reported when earned or accrued (even if there is no cash

flow yet)

v. Non-cash items

1. Depreciation: accountat’s estiate of the ost of euipet used up i the

production process

2. Deferred taxes: the differences between accounting income and true taxable

income

a. Taxes not paid today will have to be paid in the future; therefore, they

represent a liability

3. Time and costs

a. Short-run: the period of time in which certain equipment, resources

and commitments of the firm are fixed, but the time is long enough for

the firm to vary its output by using more labor and raw materials

i. Fixed costs: bond interest, overhead and property taxes

b. Long-run: all costs are variable

i. Product costs: total production costs

ii. Period costs: costs that are allocated to a time period; selling,

general and administrative expenses

c. Taxes:

i. Taxes can be one of the largest cash outflows for a company

ii. Corporate tax rates: (not strictly increasing)

iii. Average tax rate: your tax bill divided by taxable income (percentage of income that

pays for taxes)

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FIN 357 Lecture Notes - Lecture 2: Operating Cash Flow, Accounting Liquidity, Cash Flow

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