Chapter2: FINANCIAL STATEMENTS, TAXES, AND CASH FLOW 2.5 Summary and Conclusions
This chapter has introduced some of the basics of financial statements, taxes, and cash
1. The book values on an accounting balance
sheet can be very different from market
values. The goal of financial management is
to maximize the market value of the stock,
not its book value.
2. Net income as it is computed on the income
statement is not cash flow. A primary reason
is that depreciation, a noncash expense, is
deducted when net income is computed.
3. Marginal and average tax rates can be
different, and it is the marginal tax rate that
is relevant for most financial decisions.
4. The marginal tax rate paid by the
corporations with the largest incomes is 35
5. There is a cash flow identity much like the
balance sheet identity. It says that cash flow
from assets equals cash flow to creditors
The calculation of cash flow from financial statements isn't difficult. Care must be taken in
handling noncash expenses, such as depreciation, and not to confuse operating costs
with financing costs. Most of all, it is important not to confuse book values with market
values, or accounting income with cash flow.