GAAP & Working Capital Management – Finance Ch 1 – 3
These finance chapters discuss GAAP – generally accepted accounting principles & Working Capital Management.
GAAP
Financial Statements in U.S. show assets at historical cost and shows revenue when it accrues
Market Value
Value of the asset or firm
Income Statement
Measures performance over some period of time. Revenues-expenses=income
Costs fixed, must be paid
Variable costs, sufficient time to pay
Capital Structure Decision
Determining how much debt should be assumed to fund a project
Working Capital Management
Accounts payable
Accounts receivable
Inventory
Working Capital Management Decision
Determining whether to pay cash for a purchase or use the credit offered by the supplier
Maximize
Because they have been hired to represent the interests of the current shareholders
Cash Outflows
Payment of dividends
Payment of government taxes
Balance Sheet
Shows accounting value of a firm’s equity as of a particular date
Noncash Items
Expenses which do not directly affect cash flows
Average
This tax rate is equal to total taxes divided by total taxable income
Good reputation of the company
Included in a firm’s market value but yet is excluded from the firm’s accounting value
Liquid
$100 of inventory that is sold today for $100
Book Value
Based on historical cost
Capital Spending
Net spending on fixed assets
Depreciation
Reduces both taxes and net income
Total Liability
Total assets
-fixed assets
+long term debt
-NWC
Net Working Capital
Total-fixed-short
Net Income
Dividends
+(retained earnings)
Change in Net Working Capital
(Current Assets-Liabilities)-(Assets-Liabilities)
Uses of Cash
Require the spending of cash
Sales
A common-size income statement is an accounting statement that expresses all of a firm’s expenses as percentage of
Standard Industrial Classification Code
The U.S. government coding system that classifies a firm by the nature of its business operations
Decrease Common Stock
Use of Cash
Decrease in Inventory
Source of Cash
Liquidity
Interval measure
Quick Ratio
Accounts Receivable
An increase that will increase a firm’s quick ratio without affecting its cash ratio
Long term solvency
Ratios that measure a firm’s financial leverage
Easier Evaluation
When a firm uses the same accounting procedures as other firms in the industry
Capital Budgeting
Process of planning and managing a firm’s long term investments, also evaluating size, timing, and risk
Capital Structure
Mixture of long term debt and equity the firm uses to finance its operations
Working Capital
A firm’s short-term assets less its short-term liabilities
General Partnership
Two or more individuals who each have unlimited liability for all of the firm’s business debts
Corporation
Distinct legal entity and treated as a legal “person” and large amounts of capital
Stakeholder
Any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm
Capital Budgeting Decision
Deciding whether to purchase a new machine for the production line
Sole Proprietorship
Business owned by one person
Partnership
Business owned by two or more owners
Agency Problem
Conflict of interest between the principal and the agent
Primary Market
Corporation is selling and transaction raises money for company.
Public offering
Private placement
Secondary Market
One owner selling to another
Auction Markets
Dealers buy and sell for themselves
Balance Sheet
Snapshot of the firm, summarizes what a firm owns/owes and difference
Fixed Asset
Long life
Intangible Asset
Trademark or patent
Tangible Asset
Truck or computer
Current Liability
Life of less than 1 year, even accounts payable
Financial Leverage
Use of debt in a firm’s capital structure