Chapter 2: Financial Statements and Cash Flow

Which of these questions can be answered by reviewing a firm's balance sheet? A) What is the amount of sales of the firm in this period? B) What is the totlal amount of assets the firm owns? C) How much of the firm's net income was paid out in dividends? D) How much debt is used to finance the firm?

B, D

Which of these are reported in the operations section of an income statement? After-tax cash flows Interest paid to bondholders Revenues from principal operations Expenses from principal operations

C, D

Which of the following is not a component of operating cash flow?

Capital spending

Rank the ease (from easiest to hardest) of turning the following assets into cash: Plant and Equipment Inventory Cash Equivalents Accounts Receivable

Cash Equivalents Accounts Receivable Inventory Plant and Equipment

Non-cash items do not affect

Cash Flow

The statement of cash flow explains changes in

Cash and equivalents

Assets are listed on a US firm's balance sheet at Current price Cost Market Value Average price of similar assets

Cost

What does a balance sheet reflect about a firm? A) economic value at a specific point in time B) income over a specified time period C) earnings per share over a specified time period D) accounting value on a specific date

D

A systematic expensing of an asset based on the asset's estimated life

Depreciation

Which of the following do not directly affect cash flow? Wages Interest Payments Depreciation Cash Sales

Depreciation

The actual economic value of an asset varies ____ the asset's future cash flows.

Directly with

EPS stands for

Earnings Per Share

Net income expressed per share of common stock is known as

Earnings Per Share

What does EBIT stand for?

Earnings before interest and taxes

Depreciation is the accountant's estimate of the cost of ___ used up in the production process.

Equipment

True of False: for financial analysis, financial statements and accounting numbers are more important than cash flows.

False

True or False: Stockholders' Equity appears on the left-hand side of the balance sheet.

False

True or False: in the short run, all costs are fixed

False

True or false: in the short run, all costs are fixed

False

True or False: Operating Cash Flow includes capital spending and working capital requirements

False: OCF is cash flow generated by business activities, excluding financing, capital spending, or changes in NWC

Whcih of the following are included in a firm's inventory according to GAAP? Fixed Assets Finished Goods Work in Progress Raw Materials

Finished Goods WIP Raw Materials

Which one of the following is shown on the left-hand side of the balance sheet? Current liabilities Long-term Debt Fixed Assets Stockholders' Equity

Fixed Assets

Which one of these is the most illiquid? Cash Fixed Assets Marketable Securities Inventory

Fixed Assets

GAAP stands for

Generally Accepted Accounting Principles

Which of the following shows performance during the year? Statement of Retained Earnings Statement of Cash Flows Balance Sheet Income Statement

Income Statement

The purpose of a(n) ______ is to measure performance over a set period of time.

Income statement

Stockholders' Equity ___ when retained earnings increase.

Increases

When a firm pays out fewer dividends, it ____ the accounting value of its retained earnings.

Increases

Raw materials, work in process, and finished goods are examples of

Inventory

Accounting ____ refers to the speed and ease with which assets can be converted to cash.

Liquidity

The _____ tax rate is the tax paid on each extra dollar of income while the _____ tax rate is the percentage of income paid in taxes.

Marginal; Average

The price at which willing buyers and sellers would trade is called ____ value.

Market

_____ ______ is the price at which willing buyers and sellers would trade the assets.

Market Value

_______ income is earnings after interest and taxes

Net Income

Non-cash items are expenses that directly affect ____ but do not directly affect ____.

Net income; cash flow

What impact will the collection of cash from a firm's credit customers have on its net working capital?

No effect

Which of the following are found on an income statement? The non-operating section The assets section The liabilities section The operations section

Non-operating section Operations section

An income statement reflects activity that occurs ____ while a balance sheet reflects values _____. On a specific date; as of the same date On a specific date; that occur over a period of time Over a period of time; as of a specific date Over a period of time; over the same period of time

Over a period of time; as of a specific date

Net Cash Flow is ______ when current assets are greater than current liabilities

Positive

Accountants usually distinguish between ____ costs and _____ costs.

Product, Period

How is income defined? Change in cash and equivalents Revenues minus expenses Retained earnings minus dividends Revenues plus expenses

Revenue minus expenses

What does the operations section of an income statement report? Retained earnings accumulations Only expenses from financing activities Revenues and expenses from principal operations Only revenues and operating cash flows

Revenues and expenses from principal operations

How is income defined?

Revenues minus expenses

The _____ _____ is defined as an imprecise period of time.

Short Run

An official accounting statement that helps to explain the change in cash and cash equivalents is called the

Statement of Cash Flows

The amount of taxes paid on a firm's earnings is determined by a set of rules known as the

Tax Code

What does it mean when the firm has a positive net working capital

The firm should have sufficient cash to meet its current obligations

What is the most important item that can be extracted from financial statements?

The firm's actual cash flows

Which section of the income statement reports a firm's operating revenues and expenses?

The operations section

What is the purpose of the income statement?

To measure performance over a set period of time

How is the average income tax computed?

Total tax bill / Total Taxable Income

True or False: Retained earnings are a portion of stockholders' equity, therefore when they increase stockholders' equity increases.

True

True or False: A balance sheet shows what a firm owns and how it is financed.

True

True or False: Contract liabilities put the firm at risk of default

True

True or False: revenue includes both cash and credit sales of goods and services

True

True or False: the realization (timing) of income can be useful to a firm.

True

True or false: taxes can be a large cash outflow for a corporation

True

True or false: there is a correlation between future cash flows and the economic value of an asset.

True

When is the appreciation of property recognized as a gain?

When the property is sold.

A balance sheet reflects a firm's ___ value on a particular date.

accounting

Net earnings refers to income earned ____

after interest and taxes

In the long run, _____ are variable

all costs

Liquidity refers to the ease ofd changing Liabilities to assets Cash in to other assets Assets to cash Cash to liabilities

assets to cash

On the balance sheet, assets are listed at their ___ value.

book

The short run is a period where there are ____ costs

both fixed and variable costs

In finance, the value of a firm depends on its ability to generate

cash flows

To smooth its earnings, a firm is more apt to sell appreciated property and realize the income on that sale when its other earnings are

down

Non-cash items are _____ that _____ affect cash flow.

expenses; do not directly

Selling a firm's plant and equipment results in a change in

fixed assets

Financial Accountants do not distinguish between

fixed costs and variable costs

Revenues minus expenses measures a firm's

income

For financial decision-making purposes, the most important tax rate is the

marginal tax rate

The accounting equation shows that stockholders' equity equals assets ______ liabilities

minus

Current assets are defined as assets that can be turned into cash within ____

one year (12 months)

Cash flow from operations is calculated by adding depreciation to EBIT and _____ current taxes.

subtracting

In the long run, all costs are

variable

GAAP requires that income is reported

when it is accrued, regardless of payment status.

If your tax bill is $200 and your taxable income is $2000, then your average tax rate is

10%

What does stockholders' equity represent?

A residual claim against the firm's assets

Which of these are generally considered to be short-run fixed costs? Property Taxes Overhead expenses Management Salaries Income Taxes

A, B, C

Liabilities usually involve which of these? Require a cash payout within a stated period of time New equity issue Obligations of the firm

A, C

Which of the following are examples of short-run fixed costs Bond Interest Material Costs Sales Commissions Rent

A, D

A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts?

Accounts Receivable

When a customer purchases an item on credit, the purchase amount is recorded in the books of the seller in which account? Accrued expense Cash Accounts Receivable Accounts Payable

Accounts Receivable

Which one of these is considered to be the most liquid? Accounts Receivable Land Inventory Equipment and Machines

Accounts Receivable

In March, AI purchased 10 video games for his store's inventory. In April, he sold five games on credit and received the payment in May. The income should be reported in the month of

April.

The cash flow identity states that cash flows from ____ should equal cash flows to creditors and equity investors

Assets

What is the balance sheet equation?

Assets = Liabilities + Stockholders' Equity

Stockholders Equity is the residual difference between Profits and Expenses Current and Fixed Assets Equity and Assets Assets and Liabilities

Assets and Liabilities

A company's ___ tax rate is the 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

Which of the following is true? The Income Statement explicitly shows cash flows Cash Flows can be derived from financial statements Earnings, net income, and cash flows are identical Cash flows always exceed earnings

B

Which of these will result from a firm using cash to buy inventory? Net working capital would decrease Cash would decrease Inventory would increase Net working capital would increase

B, C

The short run for a firm is the period of time during which Output is fixed Output can vary All costs are variable Some costs are fixed

B, D

If a firm's current assets are $100 and its current liabilities are $80, then its net working capital is

$20

If you man an extra $1,000 in income and your marginal tax rate is 30% while your average tax rate is 20%, then you will pay an extra

$300 in taxes

If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital =

$50