MS In Accounting & Finance

Liquidity [LO1] What does liquidity measure? Explain the trade-off a fi rm faces between high liquidity and low liquidity levels.

Accounting and Cash Flows [LO2] Why might the revenue and cost fi gures shown on a standard income statement not be representative of the actual cash infl ows and outfl ows that occurred during a period?

Book Values versus Market Values [LO1] In preparing a balance sheet, why do you think standard accounting practice focuses on historical cost rather than market value?

Operating Cash Flow [LO4] In comparing accounting net income and operating cash fl ow, name two items you typically fi nd in net income that are not in operating cash fl ow. Explain what each is and why it is excluded in operating cash fl ow.

Book Values versus Market Values [LO1] Under standard accounting rules, it is possible for a company’s liabilities to exceed its assets. When this occurs, the owners’ equity is negative. Can this happen with market values? Why or why not?

Cash Flow from Assets [LO4] Suppose a company’s cash fl ow from assets is negative for a particular period. Is this necessarily a good sign or a bad sign?

Operating Cash Flow [LO4] Suppose a company’s operating cash fl ow has been negative for several years running. Is this necessarily a good sign or a bad sign?

Net Working Capital and Capital Spending [LO4] Could a company’s change in NWC be negative in a given year? ( Hint: Yes.) Explain how this might come about. What about net capital spending?

Cash Flow to Stockholders and Creditors [LO4] Could a company’s cash fl ow to stockholders be negative in a given year? ( Hint: Yes.) Explain how this might come about. What about cash fl ow to creditors?

Firm Values [LO1] Referring back to the General Motors example used at the beginning of the chapter, note that we suggested that General Motors’ stockholders probably didn’t suffer as a result of the reported loss. What do you think was the basis for our conclusion?