Fin week 2
The use of financial leverage can:
Greatly magnify both gains and losses. Increase the chance of financial distress and business failure. Increase the potential reward for investors.
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?
A decrease in depreciation expense ______ earnings per share.
Increase
Increasing its noncash liquid assets will enable a firm to do which of the following?
Increase its ability to meet short-term obligations Increase its ability to avoid financial distress
Who is entitled to the residual value of a firm's cash flows?
Shareholders
When looking at the income statement, the financial manager should keep in mind GAAP, cash versus noncash items, and ______ and costs
TIME
True or false: Free cash flow is the total of cash flow that the firm can distribute to creditors and to stockholders.
True
Assets can be described as items that _____.
a firm owns generate revenue provide market value to the firm
Liquidity refers to the ease of changing _____.
assets to cash
Noncash items do not affect _____.
cash flow
In finance, the value of a firm depends on its ability to generate ______.
cashflows
The more debt a firm has, the greater its:
degree of financial leverage
Depreciation is the accountant's estimate of the cost of ______ used up in the production process.
equipment
For a ______ asset, it would be purely a coincidence if the actual market value were equal to its book value.
fixed
The shareholders are the _____ in line to receive payment when a firm is forced to sell assets to pay off debt.
last
Holding too many liquid assets can be harmful for a firm because such assets are generally _____.
less profitable
What is a primary concern for a bank lending funds to a business for the short term?
liquidity
refers to the speed and ease with which an asset can be converted to cash.
liquidity
The price at which willing buyers and sellers would trade is called ____ value.
market
Net working capital equals current assets ______ current liabilities.
minus
The accounting equation shows that stockholders' equity equals assets ______ liabilities.
minus
On which side of the balance sheet do liabilities appear?
right
The last (residual) claimants to be paid by a firm are the ______.
stockholders
Most importantly, assets provide ______ to the firm.
value
Another name for short-term financial management is ___ management.
working capital
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
What does a balance sheet reflect about a firm?
Accounting value on a specific date
Which of the following are examples of noncash items on an income statement?
Depreciation
Operating cash flow includes capital spending and working capital requirements. True false question.
False
The fact that the balance sheets are listed at _____ means that there is no necessary connection between the total assets and the value of the firm.
at cost
Noncash items are expenses that directly affect _____ but do not directly affect ______.
net income; cash flow
Book value of assets is generally
not what the assets are actually worth
What should you keep in mind when examining an income statement?
time and costs GAAP cash versus noncash items
Which of the following is an example of a noncash item on an income statement?
Depreciation
A supplier may look at the size of _____ to see how promptly the firm pays its bills.
accounts payable
Residual value is the amount left over after paying ________________.
accounts payable other debt holders bondholders