Higher rated debt tends to have lower debt ratios, higher earnings to interest payments, and a higher return on assets. Explain why the notes to a firm's financial statements are an integral part of the financial statements. The notes to a firm's financial statements form an integral part of the financial statements because they disclose the significant accounting policies used to prepare the financial statements and provide additional detail concerning some of the items in the financial statements. Define the term cash flow. Explain the difference between cash flow and earnings.
Cash flow is the sum of net income before extraordinary items and noncash expenses.
Earnings represent an accounting measure of profit and include the effect of noncash items such as depreciation, deferred income taxes, minority interest, etc., while cash flow includes only those items that affect the cash position of the firm. Define the term working capital. Working capital include the short-term assets and liabilities that mature within one year. It is current assets minus current liabilities. Working capital measures the firm's liquidity, that is, its ability to meet its short-term obligations as they come due.