Chapter 2
What should you keep in mind when examining an income statement
GAAP, Cash vs non cash items, and time and costs. (assets appear on the balance sheet)
Which of the following are current assets?
Inventory and accounts receivable (patents and copyrights are long-term intangible assets) (buildings are long-term fixed assets)
Which of the following are examples of short run fixed costs
Rent and Bond interest (utilities are a variable cost dependent on level of production)
The short run for a firm is the period of time in which
Some costs are fixed (In the short run some costs are fixed and some are variable, in the long run all costs are variable). ALSO - Outcome can vary.
Which of the following is true about a US modified flat-tax rate system
The tax-rate becomes flat at very high income levels.
Which of the following are fixed assets on a balance sheet
accumulated depreciation, and trademarks (cash is a current asset, trademarks are intangible fixed assets)
Which of the following are period costs
administrative expenses, selling costs, and general costs. (cost of goods sold are product costs - directly related to production)
In the long run________________costs are variable
all costs
The cash flow identity states that cash flow from _____________________should equal cash flows to creditors and equity investors
assets
Under GAAP firms must carry assets at _____________value
book
on a balance sheet assets are listed at their______________ value
book
In finance, the the value of a firm depends on its ability to generate
cash flow
Operating cash flow
cash flow generated by business activities, excluding financing, capital spending, and change in net working capital.
Net working capital plus current liabilities equal
current assets
net working capital plus current liabilities equals
current assets.
The more debt a firm has the greater its
degree of financial leverage
Net capital spending is equal to the change in net fixed assets plus
depreciation
cash flow to stock holders equals
dividends paid minus net new equity raised.
change in capital spending
ending net fixed assets - beginning net fixed assets Plus depreciation
non-cash items are ________________ that _________________ cashflow
expenses; do not directly affect
the corporate tax code is
extremely complicated
assets are listed on the balance sheet in
in increasing order of the time to convert them into cash Or listed in decreasing order of liquidity
cash flow to creditors equals
interest paid - net new borrowing
operating cash flow
is cash flow generated by business activities, excluding financing, capital spending, or changes in networking capital
Which of the following are fixed assets?
land, plant, patents
What is the primary concern for a bank lending to a company in the short- term
liquidity ( banks are more interested if the company will pay back the loan so liquidity is the most important)
Which of these are generally considered short run fixed costs
management salaries, property taxes, rent payments for a warehouse
the purpose of an income statement is to
measure performance over a certain period of time (snapshot)
Residual value is the amount left over after paying
other debt holders bond holders accounts payable and preferred stockholders.
are selling expenses period or product costs
period costs
operating cash flow reflects which of the following?
tax payments (capital spending is subtracted from operating cash flow to compute cash flow to investors in the firm.) Operating cash flow is EBIT +depreciation - tax payments.
marginal tax rate
the tax rate if you earned 1 more dollar
average tax rate
total tax bill divided by taxable income
an increase in depreciation expense lowers net income true or false
true ( think Donald Trump casino. Due to depreciation expense it was determined his casino made no profits and therefore did not have to pay taxes, Even though the depreciation expense did not necessarily cost them cash, or hinder them from using the profits before the depreciation expense for other activities.