FINC 3310 Chapter 2

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

capital spending operating cash flow change in net working capital

Noncash items do not affect ______.

cash flow

In finance, the value of a firm depends on its ability to generate ______.

cash flows

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

cash versus noncash items GAAP time and costs

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

changed

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

cost of goods sold

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

creditors and stockholders

Liabilities can be classified as ______ or long-term.

current

Assets can be categorized as:

current and fixed assets. tangible and intangible assets.

Net working capital is defined as:

current assets minus current liabilities, should be positive for a healthy firm

The more debt a firm has, the greater its:

degree of financial leverage.

Net capital spending is equal to the change in net fixed assets plus ______.

depreciation

Which of the following is an example of a noncash item on an income statement?

depreciation

____ paid minus net new equity raised equals cash flow to stockholders.

dividends

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

The GAAP matching principle requires revenues to be matched with ______.

expenses

Noncash items are ______ that ______ cash flow.

expenses; do not directly affect

True or false: Ending net fixed assets plus beginning net fixed assets minus depreciation equals net investment in fixed assets.

false

True or false: For financial analysis, financial statements and accounting numbers are more important than cash flows.

false

True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.

false

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.

Which of the following is not a component of cash flow from assets?

financing expenses

Depreciation is the accountant's estimate of the cost of ______ used in the production process matched with the benefits produced from owning it.

fixed assets equipment

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

fixed commitments

hat does GAAP stand for?

generally accepted accounting principles

The common set of standards and procedures by which audited financial statements are prepared are called ______.

generally accepted accounting principles (GAAP)

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:

had to decrease.

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

Which of the following is a current asset?

inventory

which of the following is a current asset?

inventory

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

liquid

Which of the following are classified as liabilities on a firm's balance sheet?

long-term debt accounts payable

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

marginal

The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the:

marginal tax rate

The price at which willing buyers and sellers would trade is called ______ value.

market

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

matching

Current assets (plus/minus) current liabilities equals NWC.

minus

Interest paid (plus/minus) net new borrowing equals cash flow to creditors.

minus

The balance sheet identity shows that stockholders' equity equals assets ______ liabilities.

minus

The last item (or "bottom line") on the income statement is typically the ______.

net income

Noncash items are expenses that directly affect ______ but do not directly affect ______.

net income; cash flow

A primary reason that accounting income differs from cash flow is that an income statement contains ______.

non cash items

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

Paid-in surplus is classified as:

owners' equity.

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

pay everyday cash outflows.

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 net investment in fixed assets.

plus

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.

Stockholders' equity is always shown on the ______ of the balance sheet.

right side

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

shareholders

On a balance sheet, total assets must always equal total liabilities plus:

shareholders' equity.

Physical assets are termed ______ assets.

tangible

Operating cash flow:

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

Book value

the balance sheet value of the assets, liabilities, and equity

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

Changes in capital spending can be negative if:

the firm sold more fixed assets than it purchased.

What is the purpose of the income statement?

to measure performance over a set period of time

Shareholders' equity equals ______.

total assets minus total liabilities

Common stockholders are entitled to the difference between ______ and ______.

total assets; total liabilities

Free cash flow is better described as ______.

total distributable cash flow

How is the average income tax rate computed?

total tax bill / total taxable income

True or false: Free cash flow is also known as cash flow from assets.

true

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

true

True or false: Operating cash flow does not include depreciation or interest.

true

Market value

true value; the price at which the assets, liabilities, or equity can actually be bought or sold

Financial leverage refers to a firm's ______.

use of debt in its capital structure

______ 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

Long-term liabilities represent obligations of the firm lasting more than ______.

1 year

According to the current U.S. corporate tax code, the corporate tax rate in effect for 2021 is ______ percent.

21

balance sheet

A snapshot of the firm's assets and liabilities at a given point in time

Which one of the following terms is defined as the total tax paid divided by the total taxable income?

Average tax rate

Which one of the following has nearly the same meaning as free cash flow?

Cash flow from assets

True or false: Current assets plus current liabilities equals net working capital.

False

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

GAAP, cash versus noncash items, and time and costs

Income statement equation

Net Income = Revenue - Expenses

Liquidity

Speed and ease of conversion to cash without significant loss of value, Valuable in avoiding financial distress

Income Statement

The income statement measures performance over a specified period of time (period, quarter, year). Report revenues first and then deduct any expenses for the period.

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?

What does shareholders' 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

A balance sheet reflects a firm's:

accounting value on a specific date.

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

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

accounts receivable

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

accounts receivable.

Net income 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

Which of the following is shown on the left-hand side of the balance sheet?

assests

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

assets

Liquidity refers to the ease of changing Blank______.

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

On the balance sheet, assets are listed at their ______ value.

book

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

book value historical cost

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

both fixed and variable