Ch 2

Average Tax rate

tax bill/ taxable income

Balance Sheet

The balance sheet is a snapshot of the firm's assets and liabilities at a given point in time BOOK VALUE

Which do we need to use, accounting income and cash flow, when making decisions?

We need OCF for making financial decisions.

What is the difference between accounting income and cash flow?

Accounting income is net income on the income statement. Cash flow or operating cash flow (OFC) = EBIT + Dep - Taxes Dep is added back because it is a non cash expense Taxes are subtracted out as they are not available for growth.

4. Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value? A. real estate investment B. good reputation of the company C. equipment owned by the firm D. money due from a customer E. an item held by the firm for future sale

B

10. Your firm has total assets of $4,900, fixed assets of $3,200, long-term debt of $2,900, and short-term debt of $1,400. What is the amount of net working capital? A. -$100 B. $300 C. $600 D. $1,700 E. $1,800

B Net working capital = $4,900 - $3,200 - $1,400 = $300

1. Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? A. income statement B. creditor's statement C. balance sheet D. statement of cash flows E. dividend statement

C

2. Noncash items refer to: A. accrued expenses. B. inventory items purchased using credit. C. the ownership of intangible assets such as patents. D. expenses which do not directly affect cash flows. E. sales which are made using store credit

D

3. The _____ tax rate is equal to total taxes divided by total taxable income. A. deductible B. residual C. total D. average E. marginal

D.

9. A firm has net working capital of $640. Long-term debt is $4,180, total assets are $6,230, and fixed assets are $3,910. What is the amount of the total liabilities? A. $2,050 B. $2,690 C. $4,130 D. $5,590 E. $5,860

E. Current assets = $6,230 - $3,910 = $2,320 Current liabilities = $2,320 - $640 = $1,680 Total liabilities = $1,680 + $4,180 = $5,860

12. At the beginning of the year, a firm had current assets of $121,306 and current liabilities of $124,509. At the end of the year, the current assets were $122,418 and the current liabilities were $103,718. What is the change in net working capital? A. -$19,679 B. -$11,503 C. -$9,387 D. $1,809 E. $21,903

E. Change in net working capital = ($122,418 - $103,718) - ($121,306 - $124,509) = $21,903

What do you generally report first income statements

Revenue

Liquidity

-Ability to convert to cash quickly without a significant loss in value -Liquid firms are less likely to experience financial distress -But liquid assets typically earn a lower return

Net Working Capital

= Current Assets - Current Liabilities Positive when the cash that will be received over the next 12 months exceeds the cash that will be paid out

7. Depreciation: A. reduces both taxes and net income. B. increases the net fixed assets as shown on the balance sheet. C. reduces both the net fixed assets and the costs of a firm. D. is a noncash expense which increases the net income. E. decreases net fixed assets, net income, and operating cash flows.

A.

6. The book value of a firm is: A. equivalent to the firm's market value provided that the firm has some fixed assets. B. based on historical cost. C. generally greater than the market value when fixed assets are included. D. more of a financial than an accounting valuation. E. adjusted to the market value whenever the market value exceeds the stated book value.

B.

11. Jensen Enterprises paid $1,300 in dividends and $920 in interest this past year. Common stock increased by $1,200 and retained earnings decreased by $310. What is the net income for the year? A. -$210 B. $990 C. $1,610 D. $1,910 E. $2,190

B. Net income = $1,300 + (-$310) = $990

Market Vs Book Value

Book: Market: value of a company according to the financial markets

5. Which one of the following represents the most liquid asset? A. $100 account receivable that is discounted and collected for $96 today B. $100 of inventory which is sold today on credit for $103 C. $100 of inventory which is discounted and sold for $97 cash today D. $100 of inventory that is sold today for $100 cash E. $100 accounts receivable that will be collected in full next week

D. Assets are listed in order of decreasing liquidity -Ease of conversion to cash -Without significant loss of value

8. An increase in the depreciation expense will do which of the following? I. increase net income II. decrease net income III. increase the cash flow from assets IV. decrease the cash flow from assets A. I only B. II only C. I and III only D. II and III only E. II and IV only

D. II. decrease net income III. increase the cash