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.


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


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
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


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