GAAP & Working Capital Management – Finance

GAAP & Working Capital Management – Finance Ch 1 – 3

These finance chapters discuss GAAP – generally accepted accounting principles & Working Capital Management.


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

Short Run

Costs fixed, must be paid

Long Run

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

Working Capital Management Decision

Determining whether to pay cash for a purchase or use the credit offered by the supplier


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


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


$100 of inventory that is sold today for $100

Book Value

Based on historical cost

Capital Spending

Net spending on fixed assets


Reduces both taxes and net income

Total Liability

Total assets
-fixed assets
+long term debt

Net Working Capital


Net Income

+(retained earnings)

Change in Net Working Capital

(Current Assets-Liabilities)-(Assets-Liabilities)

Uses of Cash

Require the spending of cash


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


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


Distinct legal entity and treated as a legal “person” and large amounts of capital


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


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