CHAPTER 3: FINANCIAL STATEMENT AND TAXES one that is most important to stockholders.

-is derived from the firm’s regular core business

Annual Report -A report issued annually by a corporation to its Operating -earnings (from operations) before interest and
stockholders. It contains basic financial income (EBIT) taxes
statements as well as management’s analysis of
the firm’s past operations and future prospects. Depreciation -the charge to reflect the cost of assets used up
-most important report that corporations issue in the production process.
to stockholders -annual charge against income
Two types of 1. Verbal section, describes the firm’s operating -not a cash outlay.
Information is results during the past year and discusses new Amortization -represents the decline in value of intangible
an Annual developments that will affect future operations. assets such as patents, copyrights,
Report 2. four basic financial statements trademarks, and goodwill
- A noncash charge similar to depreciation
Four Basic 1. Balance Sheet except that it is used to write off the costs of
Financial 2. Income Statement intangible assets.
Statements 3. Statement of Cash Flows EBITDA earnings before interest, taxes, depreciation,
4. Statement of Stockholders’ Equity and amortization
Balance Sheet1 shows what assets the company owns and who Statement of -A report that shows how things that affect the
has claims on those assets as of a given date— Cash balance sheet and income statement affect the
for example, December 31, 2008 Flows firm’s cash flows.
Income shows the firm’s sales and costs (and thus -shows how much cash the firm is generating
Statement profits) during some past period—for example, Statement of A statement that shows by how much a firm’s
2008. Stockholders’ equity changed during the year and why this
Statement of shows how much cash the firm began the Equity change occurred
Cash Flows year with, how much cash it ended up with, and
what it did to increase or decrease its cash. Retained represents a claim against assets, not assets
Statement of shows the amount of equity the stockholders earnings
Stockholders’ had at the start of the year, the items that Free Cash Flow The amount of cash that could be withdrawn
Equity increased or decreased equity, and the equity at (FCF) from a firm without harming its ability to
the end of the year. operate and to produce future cash flows.
Balance Sheet2 A statement of a firm’s financial position at a Taxable income “gross income less a set of exemptions and
specific point in time deductions.”
Progressive Tax A tax system where the tax rate is higher on
“snapshot” of a firm’s position higher incomes. The personal income tax in the
*Cash and represents actual spendable money. United States, which ranges from 0% on the
equivalents lowest incomes to 35% on the highest incomes,
account is progressive.
*Accounts represents credit sales that have not yet been Marginal Tax The tax rate applicable to the last unit of a
receivable collected Rate person’s income.
*Inventories show the cost of raw materials, work in process,
and finished goods. Average Tax Taxes paid divided by
*Net fixed represent the cost of the buildings and Rate taxable income.
assets equipment used in operations minus the
depreciation that has been taken on these Capital Gain or The profit (loss) from the sale of a capital asset
assets. Loss for more (less) than its purchase price.
*Working Current assets (often called working capital
capital because these assets “turn over”; that is, they Capital assets Assets such as stocks, bonds, and real estate
are used and then replaced throughout the Capital Gain Asset Price Bought < Price of Asset Sold
year) Alternative Created by Congress to make it more difficult for
Minimum wealthy individuals to avoid paying taxes
*Net working Current assets minus accounts payable and Tax (AMT) through the use of various deductions.
capital accruals.
Hybrid such as preferred stock, convertible Tax Loss Carry- corporate operating losses can be carried
Securities bonds, and long-term leases. Back or backward for 2 years and carried forward for
Preferred stock is a hybrid between common stock and debt, Carry-Forward 20 years to offset taxable income in a given
Ordinary year.
Convertible are debt securities that give the bondholder an
bonds option to exchange their bonds for shares of S Corporation` A small corporation that, under Subchapter S of
common stock the Internal Revenue Code, elects to be taxed as
Earnings per is often called “the bottom line,” denoting that a proprietorship or a partnership yet retains
share (EPS) of all items on the income statement, EPS is the limited liability and other benefits of the
corporate form of organization.