FIN Ch 2 Quiz

Which of the following are classified as liabilities on firms balance sheet?

- Accounts payable - Long term debt

Which of these questions can be answered by reviewing a firms balance sheet?

- What is the total amount of assets the firm owns? - How much debt is used to finance the firm?

Under GAAP, assets are generally carried on a firm's balance sheet at ____.

- book value - historical value

Rank the ease of turning the following assets into cash.

- cash equivalents - accounts receivable - inventory - plants and equipment

Marginal tax rates are the most important tax rates because:

- financial decisions are usually based on new cash flows - incremental cash flows are taxed at marginal tax rates

What should you keep in mind when examining an income statement?

- time and costs - GAAP - cash vs non-cash items

Long term liabilities represents obligations of the firm lasting more than ____

1 year

U.S. corporations pay tax at a rate of ___ percent.

21

According to the current U.S. corporate tax code, the corporate tax rate in effect for 2019 is:

21%

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

Amounts not yet collected from customers on sales already made are called:

Accounts receivable

Which one of these is considered to be the most liquid?

Accounts receivable

T/F - for financial analysis, financial statements and accounting numbers are more important than cash flows

False

T/F: Current assets plus current liabilities equals net working capital.

False

T/F: Ending net fixed assets minus depreciation equals net investment in fixed assets

False

T/F: with the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.

False

Which of the following is NOT a component of cash flows from assets?

Financing expenses

The three most important items to keep in mind when reviewing an income statement are:

GAAP, cash vs noncash items, and time & costs

On which side of the balance sheet do liabilities appear?

The right side

How is the average income tax computed?

Total tax bill/ total taxable income

Net capital spending is negative when:

a firm purchased more assets than it sold

NWC will be negative when current assets ____ current liabilities

are less than

Non-cash items do not affect

cash flow

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

cash flows

The more debt a firm has, the greater its:

degree of financial leverage

Cash flows to stockholders equals ______.

dividends paid minus net new equity raised

When a firm smooths earnings to please investors, it is called ________.

earnings management

The GAAP matching principle requires to be matched with:

expenses

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

income statement

Cash flow to creditors equals:

interest paid minus net new borrowing

Period costs are the costs that are allocated to a specific_____.

interval of time

Current assets are classified as relatively ____ these assets can be converted to cash within the next 12 months.

liquid

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

marginal

The balance sheet identity shows that stockholders equity assets ____ liabilities.

minus

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

net income; cash flow

The cash flow that results from the firm's day-to-day activities of producing and selling is called...

operating cash flows

Earnings management is a controversial practice in which corporations ______ or ______ their earnings to "smooth out" dips and surges and keep investors calm

overstate; understate

What is the purpose of an income statement?

to measure performance over a set period of time

Common stockholders are entitled to the difference btwn _____ and _____.

total assets; total liabilities

Free cash flow is better described as

total distributable cash flow

Financial leverage refers to a firms

use of debt in its capital structure

Depreciation is the accountants estimate of the cost of ____ used in the production process matched with the benefits produced from owing it.

- equipment - fixed assets

Product costs are usually shown on the income statement under the heading of _____

Cost of goods sold

According to GAAP, when is income reported?

When it is earned or accrued

Costs that do not change in the short run arise because of _____

fixed commitments

Current assets ____ currents liabilities equals NWC.

minus

The last item (or bottom line) on the income statement is typically the _____

net income

A primary reason that accounting income differs from cash flow is that income statement contains _____

noncash items

A positive operating cash flow indicates that the firm is generating enough cash to :

pay everyday cash flows

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

assets

A company's _____ tax rate is its tax bill divided by its total taxable income, and its _______ tax rate is the tax rate its pays on the next dollar of income.

average; marginal

Tax rates for proprietorships, partnerships, and LLCs ______ with the passage of Tax Cuts and Jobs Act of 2017.

changed

The cash flow identity states that the cash flow from assets equals cash flows to _____.

creditors and stockholders

Net capital spending is equal to ending net fixed assets minus beginning net fixed assets ______.

plus depreciation

In practice, accountants tend to classify costs as either ____ costs or _____ costs.

product; period

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value

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

both fixed and variable

interest paid ___ net new borrowing equals cash flow to creditors

minus

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

Which of the following are components of cash flow from assets?

- change in NWC - capital spending - operating cash flow

Operating cash flows

- tell us whether or not a firm's cash inflows from its operations are sufficient to cover everyday cash outflows - is a sign of trouble if negative over a long period of time

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

What is depreciation?

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

Which of the following is the balance sheet equation?

Assets equal liabilities plus stockholders equity

Which of the following statements is true?

Cash flows can be derived from financial statements

Which of the following is an example of a non-cash item on an income statement?

Depreciation

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

True

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

market

The ____ principle of GAAP states that costs associated with a good service should be recorded at the same time as the revenue from selling that good or service

matching

T/F: Dividends paid minus net new equity raised equals cash flow to stockholders

True

T/F: Free cash flow is also known as cash flow from assets

True

T/F: Interest paid minus net new borrowing equals cash flow to creditors

True

The common set of standards and procedures by which audited financial statements are prepared is known as the:

Generally Accepted Accounting Principles

Stockholders equity is always shown on the ___ of the balance sheet

right side

Liquidity refers to the ease of changing _________.

Assets to cash

Who is entitled to the residual value of a firm's cash flows?

Shareholders

Changes in capital spending can be negative if

the firm sold more assets than it purchased

A balance sheet reflects a firms

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

Shareholders equity equals _____

assets minus liabilities

On the balance sheet, assets are listed at their ____ value

book

Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as:

period costs

Ending net fixed assets minus beginning net fixed assets _____ depreciation equals investment in fixed assets

plus

Physical assets are termed ______ assets.

tangible

Current assets are defined as assets that can be turned into cash within _____ months.

twelve

____ changes as the output of the firm changes

variable cost

Liabilities can be classified as ___ or long-term.

current

Assets can be categorized as

current and fixed assets tangible and intangible assets

T/F: Operating cash flows does not include depreciation or interest.

True