Chapter 2. Financial Statements, Taxes, and Cash Flow
Which of these questions can be answered by reviewing a firm's balance sheet?
1. What is the total amount of assets the firm owns? 2. How much debt is used to finance the firm?
True/False: Current assets plus current liabilities equals net working capital
False
The price at which willing buyers and sellers would trade is called
Market Value
A balance sheet reflects a firm's
accounting value on a specific date
Net earnings refers to income earned
after interest and taxes
The short run is
an imprecise period of time
Liquidity refers to the ease of changing
assets to cash
Non-cash items do not affect
cash flow
The more debt a firm has, the greater its
degree of financial leverage
Which of the following is an example of a non-cash item on an income statement?
depreciation
When a firm smooths earnings to please investors, it is called
earnings management
The balance sheet identity shows that stockholders' equity equals assets ______ liabilities
minus
The last item (or "bottom line") on the income statement is typically the
net income
Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm
overstate; understate
Physical assets are termed
tangible assets
Financial leverage refers to a firm's
use of debt in capital structure
According to GAAP, when is income reported?
When it is earned or accrued
The short run is a period when there are
both fixed and variable costs
In finance, the value of a firm depends on its ability to generate
cash flows
Cash flow refers to
the difference between the number of dollars that came in and the number that went out
Which of the following is the balance sheet equation?
Assets equal liabilities plus stockholders' equity.
According to GAAP, when is revenue recognized on an income statement?
When the earnings process is virtually completed & When the value of an exchange of goods or services is known or reliably determined
Current assets (plus/minus) current liabilities equals NWC (net working capital)
Minus
On a balance sheet, total assets must always equal total liabilities plus
Shareholders equity
Liquidity has two dimensions which are the ability to
quickly convert assets into cash without significant loss in value
Assets can be categorized as
tangible and intangible assets & current and fixed assets
The market value of an item is
the cash value you would get if you sold it