Chapter Two p2
For a mature firm, operating cash flow:
- is a sign of trouble if negative over a long period of time - is usually positive
Long-term liabilities represent obligations of the firm lasting over _____.
1 year
1. T/F: Long-term liabilities are not due in the current year (from the date of the balance sheet).
1. True
2. True or false: Current assets plus current liabilities equals net working capital.
2. False, CA minus CL equals NWC.
U.S. corporations pay tax at a rate of ________percent.
21
3. T/F Long-term liabilities are not due in the current year (from the date of the balance sheet).
3. True
5. True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.
5. False
6. True or false: Operating cash flow does not include depreciation or interest.
6. True
7. True or false: Free cash flow is also known as cash flow from assets.
7. True
Which one of these is considered to be the most liquid?
Accounts receivable
Which of the following is the balance sheet equation?
Assets equal liabilities plus stockholders' equity.
Which of the following are components of cash flow from assets?
Change in net working capital Capital spending Operating cash flow
Which of the following is an example of a non-cash item on an income statement?
Depreciation
4. True or false: Current assets plus current liabilities equals net working capital.
False
Which of the following is NOT a component of cash flow from assets?
Financing expenses
Which of these questions can be answered by reviewing a firm's balance sheet?
How much debt is used to finance the firm? What is the total amount of assets the firm owns?
Which of the following is a current asset?
Inventory
Which of the following are components of cash flow from assets?
Operating cash flow Change in net working capital Capital spending
How is the average income tax rate computed?
Total tax bill / Total taxable income
______ changes as the output of the firm changes.
Variable cost
According to GAAP, when is income reported?
When it is earned or accrued
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
A balance sheet reflects a firm's:
accounting value on a specific date
net earnings refers to income earned
after interest and taxes
In the long-run, costs may be considered as ________.
all variable
The short run is ______.
an imprecise period of time
Liquidity refers to the ease of changing _____.
assets to cash
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
The short run is a period when there are ______ costs.
both fixed and variable
Non-cash items do not affect
cash flow
In finance, the value of a firm depends on its ability to generate ______.
cash flows
Assets can be categorized as (select all that are appropriate)
current and fixed assets tangible and intangible assets
The more debt a firm has, the greater its:
degree of financial leverage
Cash flow to stockholders equals ____.
dividends paid minus net new equity raised
When a firm smooths earnings to please investors, it is called ________.
earnings management
Costs that do not change in the short run arise because of ______.
fixed commitments
Cash flow to creditors equals:
interest paid minus net new borrowing
The ______ tax rate is the tax rate paid on the next dollar of income.
marginal
The price at which willing buyers and sellers would trade is called ______ value.
market
Current assets ____________current liabilities equals NWC.
minus
The last item (or "bottom line") on the income statement is typically the _________.
net income
The cash flow that results from the firm's day-to-day activities of producing and selling is called
operating cash flow
Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm.
overstate; understate
A positive operating cash flow indicates that the firm is generating enough cash to:
pay everyday cash outflows.
Net capital spending is equal to ending net fixed assets minus beginning net fixed assets ____.
plus depreciation
Liquidity has two dimensions which are the ability to:
quickly convert assets into cash without significant loss in value
On a balance sheet, total assets must always equal total liabilities plus:
shareholders' equity
Physical assets are termed ______________ assets.
tangible
The market value of an item is:
the cash value you'd get if you sold it
Cash flow refers to _____.
the difference between the number of dollars that came in and the number that went out
Cash flow refers to:
the difference between the number of dollars that came in and the number that went out
Changes in capital spending can be negative if
the firm sold more assets than it purchased
Free cash flow is better described as ____
total distributable cash flow
Free cash flow is better described as ____.
total distributable cash flow
Financial leverage refers to a firm's _________.
use of debt in its capital structure
