Chapter 2
______ costs change as the output of the firm changes.
variable
The shareholders are the _____ in line to receive payment when a firm is forced to sell assets to pay off debt.
last
Holding too many liquid assets can be harmful for a firm because such assets are generally _____.
less profitable
The Tax Cuts and Jobs Act of 2017 set the corporate tax rate to be ______ regardless of the level of taxable income.
21%
What does stockholders' equity represent?
A residual claim against the book value of the firm's assets. (The book value of the firm's assets less the book value of its liabilities.)
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
When a customer purchases an item on credit, the purchase amount is recorded by the seller in which one of these accounts?
Accounts receivable
Which one of these is considered to be the most liquid?
Accounts receivable
Which of the following are fixed assets?
Buildings Land Plant
Which of the following are included in the fixed asset portion of a balance sheet?
Buildings Trademarks
Which one of the following is true?
Cash flows can be derived from financial statements.
True or false: Operating cash flow includes capital spending and working capital requirements.
False
True or false: The corporate tax code is simplistic and makes good economic sense.
False
Which of the following are period costs?
General expenses Selling costs Administrative expenses
What does GAAP stand for?
Generally accepted accounting principles
Which of these items do NOT appear on a balance sheet?
Good management Knowledge that has no patent Favorable economic conditions
In recent years, U.S. accounting standards have become more closely tied to:
IFRS
Assets are listed on a balance sheet in which order?
In order of decreasing liquidity
Why is it important for accounting standards to become more comparable across countries?
Increasing globalization of business makes it necessary to understand financial reporting by firms that follow other accounting standards.
Which of the following is a current asset?
Inventory
Which one of the following complies with GAAP?
Matching revenues with expenses
Which is true of taxes?
They can be one of the largest cash outflows a firm experiences.
True or false: Free cash flow is the total of cash flow that the firm can distribute to creditors and to stockholders.
True
True or false: Taxes can be a large cash outflow for a corporation.
True
Which of these questions can be answered by reviewing a firm's balance sheet?
What is the total amount of assets the firm owns? How much debt is used to finance the firm?
According to GAAP, when is income reported?
When it is earned or accrued
What does a balance sheet reflect about a firm?
accounting value on a specific date
A supplier may look at the size of _____ to see how promptly the firm pays its bills.
accounts payable
The cash flow identity states that cash flows from ______ should equal cash flows to creditors and equity investors.
assets
Liquidity refers to the ease of changing _____.
assets to cash
Under GAAP, U.S. firms must carry assets at:
book value
The statement of cash flow explains changes in _____.
cash and equivalents
In finance, the value of a firm depends on its ability to generate ______.
cash flows
What should you keep in mind when examining an income statement?
cash versus noncash items time and costs GAAP
The difference between the total assets and total liabilities is shareholders' equity, also called ____ equity or ____ equity.
common owners
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
Which of the following are examples of noncash items on an income statement?
depreciation
Which of the following do not directly affect cash flow?
depreciation
Accounting profit ____ cash flow.
differs from
Depreciation is the accountant's estimate of the cost of ______ used up in the production process.
equipment
The matching principle of GAAP requires revenues be matched with _____.
expenses
The corporate tax code is _____.
extremely complicated
James is an owner of J & Jo Company. If he wants to find out the cash flow of his bakery, he should look into the firm's _____.
financial statements
For a _____ asset, it would be purely a coincidence if the actual market value were equal to its book value.
fixed
Costs that do not change in the short run arise because of ______.
fixed commitments
The passage of the Tax Cuts and Jobs Act of 2017 was to make the federal corporate tax rate in the United States a _____ tax.
flat
Cash flow to creditors is equal to _____.
interest paid less net new borrowing
Period costs are the costs that are allocated to a specific ______.
interval of time
Which of the following are current assets?
inventory and accounts receivable
The ______ tax rate is the tax rate paid on the next dollar of income.
marginal
The ___________ principle of GAAP states that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service.
matching
Cash flow to stockholders is dividends paid _____ (minus/plus) net new equity raised.
minus
Net working capital equals current assets ______ current liabilities.
minus
Noncash items are expenses that directly affect _____ but do not directly affect ______.
net income; cash flow
A company's _____ cash flows reflect whether its cash flows from business operations can cover its everyday cash outflows.
operating
Cash generated from a firm's normal business activities is called _____.
operating cash flow
Residual value is the amount left over after paying:
other debt holders. accounts payable. bondholders.
An income statement reflects activity that occurs _____ while a balance sheet reflects values ____.
over a period of time; as of a specific date
A positive operating cash flow indicates that the firm is generating enough cash to ______.
pay operating costs
Net working capital is ______ (negative/positive) when current assets exceed current liabilities.
positive
____ costs include such things as raw materials, direct labor expense, and manufacturing overhead.
product
Accountants usually distinguish between _____ costs and _____ costs.
product; period
The short run for a firm is the period of time during which ______.
some costs are fixed output can vary
An official accounting statement that helps to explain the change in cash and cash equivalents is called the _____.
statement of cash flows
When looking at the income statement, the financial manager should keep in mind GAAP, cash versus noncash items, and ___ and costs.
time
Free cash flow is better described as ____.
total distributable cash flow
Most importantly, assets provide ______ to the firm.
value
In the long run, all costs are _____.
variable
If a firm's current assets are $100 and its current liabilities are $80, then its net working capital is:
$20 $100 - 80 = $20
If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the net capital spending is ____.
$50 $100 - 60 + 10 = $50
If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals ______.
$50 $200 - 150 = $50
If ending net fixed assets are $100, beginning fixed assets are $40, and depreciation is $10, then the change in capital spending is _____.
$70 ($100 − 40) + 10 = $70
If a firm's net working capital is $120 in 2021 and $100 in 2020, then the change in net working capital is:
+$20
If a firm's net working capital goes from $150 in 2020 to $130 in 2021, then the change in net working capital is:
-20
Period costs are the costs that are allocated to a specific ______.If your tax bill is $200 and your taxable income is $2,000, then your average tax rate is _____ percent.
10 Average tax rate = $200/$2,000 = 0.1, or 10%
Which of the following are classified as liabilities on a firm's balance sheet?
Accounts payable Notes Payable
A customer has yet to pay the bill for products purchased on credit. The seller records this debt in which balance sheet account?
Accounts receivable
Who is entitled to the residual value of a firm's cash flows?
Shareholders
The purpose of a(n) ______ is to measure performance over a set period of time.
income statement
A decrease in depreciation expense ______ earnings per share.
increases
The price at which willing buyers and sellers would trade is called ____ value.
market
The cash flow identity reflects the fact that:
-a firm generates cash through its various activities. -cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders. -cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm.
Rank the ease of turning the following assets into cash.
1. Cash Equivalents 2. Accounts Receivable 3. Inventory 4. Plant and Equipment
What are two classifications of costs used by financial accountants?
Product costs Period costs
Assets can be described as items that _____.
Provide market value to the firm. Generate revenue. A firm owns.
Which of the following are examples of short-run fixed costs?
Rent Bond interest Management salaries Rent payments for a warehouse Property taxes
How is income defined?
Revenue minus expenses
Which of the following is true about the difference between the income statement and cash inflows and outflows?
Sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period. Income taxes are often deferred, so the amount on the income statement may not represent the amount of the check to the IRS. Cost of raw materials purchased on credit are accounts payable rather than cash outflows until they are paid, which may be in a different period.
Long-term liabilities are not due in the current year (from the date of the balance sheet).
True
The fact that the balance sheets are listed at _____ means that there is no necessary connection between the total assets and the value of the firm.
cost
The cash flow identity states that cash flow from assets equals cash flows to ____.
creditors and stockholders
A long-term liability represents a(n) _____.
debt that is not due in the coming year
Changes in capital spending can be negative when the acquisition of fixed assets is ______ the sale of fixed assets.
less than
_____ refers to the speed and ease with which an asset can be converted to cash.
liquidity
Which one of these is a correct version of the balance sheet equation?
Assets = Liabilities + Stockholders' equity
Which of the following will be found in the liabilities section of a firm's balance sheet?
Notes payable Long-term bonds issued by the firm
Cash flow to ____ is interest paid less net new borrowing.
creditors
If you earn an extra $100 of taxable income this year and owe taxes of $34 on that income, then your marginal tax rate is _____ percent.
34 Marginal tax rate = $34/$100
How is the average income tax rate computed?
Average tax rate = total tax bill/total taxable income.
Financial statements are frequently a key source of information for financial decisions.
True
When is revenue recognized on an income statement?
When the value of an exchange of goods or services can be reliably determined. When the earnings process is virtually completed
A company's ______ tax rate is its tax bill divided by its total taxable income, and its ______ tax rate is the tax rate it pays on the next dollar of income.
average; marginal
On the balance sheet, assets are listed at their _____ value.
book
Noncash items do not affect _____.
cash flow
The total of cash flow to creditors and cash flow to stockholders is called _____.
cash flow from assets
Cash flow to stockholders equals:
dividends paid minus net new equity raised.
What is the purpose of the income statement?
To measure performance over a set period of time
In March, Al's paid cash for a video game for the store's inventory. In April, it sold the game on credit. In May, Al's received payment for the sale. Based on matching principle, the expense should be recorded in ___ and the income should be reported in ____.
April; April
For financial managers, the accounting value of the stock is not an especially important concern; it is the ____ value that matters.
market
In general, revenue should be recognized at the time of ____, which is not necessarily the same time as the money is collected.
sale
If you make an extra $1,000 in income and your marginal tax rate is 30 percent while your average tax rate is 20 percent, then you will pay an extra ______ in taxes.
300 Additional tax = (.30)($1,000)
On a balance sheet, total assets must always equal total liabilities plus ______.
shareholders' equity
Another name for short-term financial management is ___ management.
working capital
In general, revenue should be recognized at the time of _____, which is not necessarily the same time as the money is collected.
sale, revenue, earning, earnings, or sales
The use of financial leverage can: (Select all that apply) Increase the potential reward for investors. Decrease the noncash expenses incurred by the firm. Greatly magnify both gains and losses. Increase the chance of financial distress and business failure.
Increase the potential reward for investors. Greatly magnify both gains and losses. Increase the chance of financial distress and business failure.
Why is positive net working capital important?
It means the firm should have sufficient cash to meet its current obligations.
Which one of the following represents what a firm owns at a given point in time?
Its assets
______ income is money earned after interest and taxes.
Net
Fixed costs are costs that will not change ______.
in the short run
Increasing its noncash liquid assets will enable a firm to do which of the following?
Increase its ability to meet short-term obligations Increase its ability to avoid financial distress
If you think of the balance sheets as a snapshot, then the _____ can be thought of as a video covering the period between before and after pictures.
income statement
Which of the following is a variable cost in the short run?
increasesRaw materials used in production.
Assets are recorded at historical cost, not market value, because _____.
it is hard to keep up with the market value
What is a primary concern for a bank lending funds to a business for the short term?
liquidity
