Chapter 2 LearnSmart Questions
What does stockholders' equity represent?
A residual claim against the firm's total assets
What is depreciation
A systematic expensing of an asset based on the asset's estimated life
Net earnings refers to income earned
After interest and taxes
Under GAAP, assets are generally carried on a firm's balance sheet at
Book value Historical cost
Rank the ease (easiest to hardest) of turning the following assets into cash
Cash equivalents Accounts receivable Inventory Plant and equipment
The more debt a firm has, the greater its:
Degree of financial leverage
Which of the following is an example of non-cash item on an income statement?
Depreciation
Depreciation is the accountant's estimate of the cost of __?__ used in the production process matched with the benefits produced from owning it.
Equipment Fixed Assets
Non-cash items are expenses that do not directly affect
Example: depreciation
What does GAAP stand for?
Generally accepted accounting principles
Marginal tax rates are the most important tax rates because
Incremental cash flows are taxed at marginal tax rates Financial decisions are usually based on new cash flows
__?__ are expenses that directly affect net income but do not directly affect cash flow
Non-cash items
__?__ are the costs that are allocated to a specific interval of time
Period costs
Assets can be categorized as
Tangible and intangible assets Current and fixed assets
Assets can be categorized as
Tangible or intangible Current or fixed
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?
In the long-run, costs may be considered as
all variable
On the balance sheet, assets are listed at their
book value
On a balance sheet, assets are listed at their
book values
Costs that do not change in the short run arise because of
fixed commitments
The short run is an
imprecise period of time
The price at which willing buyers and sellers would trade is called
market value
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
A balance sheet reflects a firm's
Accounting value on a specific date
Long term liabilities are not due in the current year (from the date of the balance sheet)
True
According to GAAP, when is revenue recognized on an income statement?
When the value of an exchange of goods or services is known or reliably determined When the earnings process is virtually completed
Liquidity refers to the ease of changing assets to
cash
Non-cash items are expenses that
do not directly affect cash flow
When a firm smooths earnings to please investors, it is called
earnings management
For financial decision-making purposes, the most important tax rate is the
marginal tax rate
Which of the following are classified as liabilities on a firm's balance sheet?
Accounts payable Long term debt
Which of the following are classified as liabilities on a firm's balance sheet?
Accounts payable Long-term debt
Net working capital =
current assets - current liabilities
Financial leverage refers to a firm's use of
debt in its capital structure