Fin Mgmt - Topic 2

Current assets are listed in order of: The lowest dollar value to the highest dollar value. The most liquid to the least liquid. The highest dollar value to the lowest dollar value. The least liquid to the most liquid.

The most liquid to the least liquid.

A firm reported retained earnings of $305 in 20x2. For 20x3, the firm reports retained earnings of $400 and pays dividends of $25. What was net income in 20x3? $95 $120 $145 $195

$120 Solution: New RE = Old RE + NI - Div; 400 = 305 + NI - 25; NI = 120

The evolution of retained earnings is best described by: Change in retained earnings = net income - dividends Dividends = retained earnings - net income Change in net income = change in dividends + change in retained earnings Net income = revenues - (retained earning + dividends)

Change in retained earnings = net income - dividends

When a firm purchases short-term U.S. Treasury securities, they are generally included on the balance sheet as: Cash Accounts Receivables Inventories Marketable Securities

Marketable Securities

Earnings Before Interests and Taxes (EBIT) is also called: Operating Income Gross margin Net Income Gross profit

Operating Income

The matching principle in accrual accounting requires that: Revenues are matched to the expenses incurred to generate the revenues Revenues should be large enough to match expenses Revenues are matched to the year in which they are booked Expenses are matched to the year in which they are incurred

Revenues are matched to the expenses incurred to generate the revenues.

Accrual accounting recognizes: Revenues when the earnings process is complete and matches expenses to revenues recognized. Cash inflows as revenues and cash outflows as expenses. Revenues when cash is received and matches expenses to revenues recognized. Revenues when the earning process is complete and expenses when cash is paid.

Revenues when the earnings process is complete and matches expenses to revenues recognized.

Notes Payable carry an explicit interest cost True/False

True

Tax expense as shown on the income statement is the amount of cash the firm paid to the taxing authority during the period. True/False

False

The basic balance sheet equation states that Assets are equal to Liabilities plus Owner's equity. This is because all assets are: Financed either by other people's money or by the firm's owners' money. Subject to liquidation. Used as collateral to borrow money. Property of the providers of capital.

Financed either by other people's money or by the firm's owners' money.

A firm can use retained earnings to pay bills if needed. True/False

False

(True/False) An income statement always provides an accurate measure of a firm's cash flows.

False

(True/False) If you want to understand a firm's operations, cash accounting is a superior tool.

False

(True/False) The income statement represents a snapshot of the firm at one point in time.

False

Which of the following would not be considered an operating expense? Rent expense Depreciation expense Interest expense Non-direct labor expense

Interest expense

Accounts payable represents money a firm owes to: Suppliers due to purchases made on credit Lenders under short-terms borrowing agreements Employees Other accounts

Suppliers due to purchases made on credit

The use of the historical cost principle on the balance sheet means: The amounts on the balance sheet reflect revaluation using historical inflation rates That most assets are stated at the original cost less depreciation Inflation must be impounded in the original cost of assets Historical cost must be used to value the firm

That most assets are stated at the original cost less depreciation.

Retained earnings represents: The cumulative amount of the firm's earnings not distributed to shareholders The earning that the firm holds as cash in case of emergency The cumulative earnings retained by the stockholders over the entire history of the entity The portion of the firm's earning during the period that were not paid out as dividends

The cumulative amount of the firm's earnings not distributed to shareholders

Net Fixed Assets represents: The value of the firm's assets held for use stated at original cost Market value of the firm's non-current assets The total amount of depreciation claimed against the firm's fixed assets The original cost of the firm's assets held for use less accumulated depreciation

The original cost of the firm's assets held for use less accumulated depreciation.