Chapter 2 Learn

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%

The Tax Cuts and Jobs Act of 2017 set the corporate tax rate to be ______ regardless of the level of taxable income.

21%

In recent years, U.S. accounting standards have become more closely tied to:

IFRS.

On which side of the balance sheet do liabilities appear?

The right side

Which is true of taxes?

They can be one of the largest cash outflows a firm experiences.

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

accounting

What does a balance sheet reflect about a firm?

accounting value on a specific date

Under GAAP, U.S. firms must carry assets at:

book value

The short run is a period when there are ______ costs.

both fixed and variable

The statement of cash flow explains changes in _____.

cash and equivalents

The more debt a firm has, the greater its:

degree of financial leverage

The matching principle of GAAP requires revenues be matched with _____.

expenses

The short run for a firm is the period of time during which ______.

some costs are fixed output can vary

Net income refers to money earned ______.

after interest and taxes

Liquidity refers to the ease of changing _____.

assets to cash

In the long run, ________ are variable.

at all costs

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

book

A long-term liability represents a(n) _____.

debt that is not due in the coming year

_______ refers to the speed and ease with which an asset can be converted to cash.

liquidity

Most importantly, assets provide ______ to the firm.

value

If a firm's net working capital is $120 in 2021 and $100 in 2020, then the change in net working capital is:

+$20 $120 − 100 = $20

Assets can be described as items that _____.

- A firm owns - Provide market value to the firm - Generate revenue

The use of financial leverage can:

- Increase the chance of financial distress and business failure - Greatly magnify both gains and losses - Increase the potential reward for investors

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

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 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

The common set of standards and procedures by which audited financial statements are prepared are called _____.

GAAP

What does GAAP stand for?

Generally Accepted Accounting Principles

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.

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

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

______ income is money earned after interest and taxes.

net

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

statement of cash flows

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

true

In the long run, all costs are _____.

variable

______ costs change as the output of the firm changes.

variable

Another name for short-term financial management is ___ management.

working capital

Noncash items are expenses that directly affect _____ but do not directly affect ______.

net income; cash flow

Fixed costs are costs that will not change ______.

short run

How is the average income tax rate computed?

Total tax bill/Total taxable income

Financial statements are frequently a key source of information for financial decisions.

True

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

Net working capital equals current assets ______ current liabilities.

minus

Cash generated from a firm's normal business activities is called _____.

operating cash flow

The cash flow identity reflects the fact that:

-Cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders. -A firm generates cash through its various activities -Cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm.

Which of the following is a variable cost in the short run?

Raw materials used in production.

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 Change in NWC = $130 − 150 = −$20

Long-term liabilities are not due in the current year (from the date of the balance sheet).

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?