FIN 335 PAST REVIEW ANSWERS AND QUESTIONS
SET A+
✔✔Marketability - ✔✔The ease with which products can be sold. "Hot" items, such as
the latest smartphone, have high marketability. Three-year-old smartphones have low
marketability.
- the ability to sell something quickly but for a certain price
✔✔The balance sheet - ✔✔The balance sheet is a snapshot of the firm's assets and
liabilities at a given point in time
• Assets are listed in order of decreasing liquidity (Ease of conversion to cash without
significant loss of value)
• Balance Sheet Identity: Assets = Liabilities + Stockholders' Equity
✔✔liquidity equals - ✔✔flexibility
✔✔Net working Capital - ✔✔- current assets - current liabilities
- usually positive for a healthy firm
✔✔Debt vs. Equity - ✔✔Shareholders' equity = Assets - Liabilities
✔✔Book value - ✔✔the balance sheet value of the assets, liabilities, and equity
✔✔Market Value - ✔✔true value; the price at which the assets, liabilities, or equity can
actually be bought or sold
✔✔market value and book value are often very different - ✔✔because book values can
be so different from true economic values.
✔✔should market value or book value be used to make decisions? - ✔✔market value
should be used for decision making because it is the true price
, ✔✔two simplified balance sheets - ✔✔accounting terms (book value)
economic terms (market value)
✔✔the price and rate of a bond is - ✔✔inverse
(teeter totter, rate up, price down, vise versa)
✔✔Income statement - ✔✔measures performance over a specified period of time
(period, quarter, year)
- report revenues first and then deduct any expenses for the period
- end result = Net income = "bottom line"
- dividends paid to shareholders
- addition to retained earnings
IS equation: Net income = Revenue-Expenses
✔✔GAAP Matching Principle - ✔✔- recognize revenue when its fully earned
- match expenses required to generate revenue to the period of recognition
✔✔Noncash items - ✔✔- expenses charged against revenue that do not affect cash
flow
- depreciation = most important
✔✔Data is life - ✔✔- publicly traded companies must file regular reports with the
Securities and Exchange Commission
- these reports are usually filed electronically and can be searched at the SEC public
site called EDGAR
✔✔marginal tax rate - ✔✔the extra taxes paid on an additional dollar of income
- the percentage paid on the next dollar earned
✔✔average tax rate - ✔✔total taxes paid divided by total taxable income
✔✔Corporate taxes in the united states - ✔✔21%
✔✔cash flow from assets - ✔✔the total of cash flow to creditors and cash flow to
stockholders, consisting of the following: operating cash flow, capital spending, and
change in net working capital
CFFA= cash flow to creditors + cash flow to stockholders
CFFA= operating cash flow - Net capital spending - Changes in NWC
✔✔OCF (operating cash flow) - ✔✔EBIT + Depreciation - Taxes
✔✔NCS (net capital spending) - ✔✔ending net fixed assets - beginning net fixed assets
+ depreciation
SET A+
✔✔Marketability - ✔✔The ease with which products can be sold. "Hot" items, such as
the latest smartphone, have high marketability. Three-year-old smartphones have low
marketability.
- the ability to sell something quickly but for a certain price
✔✔The balance sheet - ✔✔The balance sheet is a snapshot of the firm's assets and
liabilities at a given point in time
• Assets are listed in order of decreasing liquidity (Ease of conversion to cash without
significant loss of value)
• Balance Sheet Identity: Assets = Liabilities + Stockholders' Equity
✔✔liquidity equals - ✔✔flexibility
✔✔Net working Capital - ✔✔- current assets - current liabilities
- usually positive for a healthy firm
✔✔Debt vs. Equity - ✔✔Shareholders' equity = Assets - Liabilities
✔✔Book value - ✔✔the balance sheet value of the assets, liabilities, and equity
✔✔Market Value - ✔✔true value; the price at which the assets, liabilities, or equity can
actually be bought or sold
✔✔market value and book value are often very different - ✔✔because book values can
be so different from true economic values.
✔✔should market value or book value be used to make decisions? - ✔✔market value
should be used for decision making because it is the true price
, ✔✔two simplified balance sheets - ✔✔accounting terms (book value)
economic terms (market value)
✔✔the price and rate of a bond is - ✔✔inverse
(teeter totter, rate up, price down, vise versa)
✔✔Income statement - ✔✔measures performance over a specified period of time
(period, quarter, year)
- report revenues first and then deduct any expenses for the period
- end result = Net income = "bottom line"
- dividends paid to shareholders
- addition to retained earnings
IS equation: Net income = Revenue-Expenses
✔✔GAAP Matching Principle - ✔✔- recognize revenue when its fully earned
- match expenses required to generate revenue to the period of recognition
✔✔Noncash items - ✔✔- expenses charged against revenue that do not affect cash
flow
- depreciation = most important
✔✔Data is life - ✔✔- publicly traded companies must file regular reports with the
Securities and Exchange Commission
- these reports are usually filed electronically and can be searched at the SEC public
site called EDGAR
✔✔marginal tax rate - ✔✔the extra taxes paid on an additional dollar of income
- the percentage paid on the next dollar earned
✔✔average tax rate - ✔✔total taxes paid divided by total taxable income
✔✔Corporate taxes in the united states - ✔✔21%
✔✔cash flow from assets - ✔✔the total of cash flow to creditors and cash flow to
stockholders, consisting of the following: operating cash flow, capital spending, and
change in net working capital
CFFA= cash flow to creditors + cash flow to stockholders
CFFA= operating cash flow - Net capital spending - Changes in NWC
✔✔OCF (operating cash flow) - ✔✔EBIT + Depreciation - Taxes
✔✔NCS (net capital spending) - ✔✔ending net fixed assets - beginning net fixed assets
+ depreciation
