FNAN300 Exam 1
According to the originators of the current US corporate tax code, the only rates are
15%, 25%, 34%, and 35%
Stockholder's Equity
Assets - Liabilities
NWC (Net Working Capital)
CA - CL Current Assets - Current Liabilities
If dividends are $100, stock sold is $10, and stock repurchased is $25, what is the CF/SH?
CF/SH = dividends paid - Net New Equity $100- (10-20) = $115
Which of the following is true?
Cash flows can be derived from financial statements
The cash flow identity states that cash flows from ____ should equal cash flows to creditors and equity investors.
Cash flows from Assets should equal CF/CR and CF/SH
Which of the following positions generally report to the chief financial officer (CFO)?
Controller and Treasurer
The federal government taxes which of the following?
Corporate earnings and shareholder dividends
Noncash Items
Depreciation - Directly affect Net Income but DOES NOT AFFECT cash flow;Part of the matching principle.
Cash Flow
Dollars In - Dollars Out
NCS
End NFA-Beginning NFA+Depreciation
Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?
Enron, Worldcom, Tyco
Which of the following are classified as fixed-assets on the balance sheet? (relatively illiquid)
Equipment, Land, Buildings
Depreciation
Estimate of the cost of equipment and fixed assets used in production process and spread out over the span of its usable life
Investments (as a financial area)
Ex: domestic security analyst for a brokerage firm
capital structure decision
Ex: establishing the preferred debt-equity level
What should you keep in mind when examining an income statement?
GAAP, cash vs non cash items, and time/cost
According to the textbook, which of the following is NOT one fo the three main questions to be addressed if you want to start your own business?
How many employees will I need?
Which of the following 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 firms owns?
Rank the ease (easiest to hardest) of turning these assets into cash
1. cash equivalents 2. accounts receivable 3. inventory 4. plant and equipment
CF/CR
Interest - (beginning LTD - Ending LTD)
Which of the following areas of finance is concerned with financial asset allocation?
Investments
OCF
Revenue - [Costs + taxes (do not include depreciation & interest)]
Income
Revenues - Expenses
Which corporate officer is responsible for managing the firm's cash?
Treasurer is responsible for managing the firm's cash and credit, financial planning, and its capital expenditure.
Market Value
True Value the amount of cash the firm would receive if they'd sell the asset
Current assets ____ exceed current liabilities in a healthy firm
Usually
Addition to Retained Earnings
[(sales-costs-depreciation-taxes)(1-tax rate)]
Advantage of Corporate form
ability to raise larger sums of equity capital than other organizational forms
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 your firm on credit. Which account is the customers trade credit recorded in on the balance sheet?
accounts receivable
long run future
all future long run business costs are variable
Short Run
an imprecise period of time
NWC will be negative when CA ____ CL
are less than
Which of the following are reasons that the corporation is the most important form of business?
can sue and be sued separate legal entities enter into contracts
Operating Cash Flow
cash flow from the firm's day-to-day activities
Variable Cost
changes as the output of the firm changes
The officer responsible for corporate tax reporting is:
controller
Intangible Fixed Asset Give Example:
copyright
Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts?
corporation
Product costs are usually shown on the income statement under the heading of ____.
cost of goods sold
Assets can be characterized as
current and fixed tangible and intangible
The more debt a firm has, the greater its
degree of financial leverage
When a firm smooths earnings to please investors, it is called ____.
earnings management
Depreciation is the accountant's estimate of the cost of ____ used in the production process matched with the benefits produced from owning it.
equipment and other fixed assets
Marginal Tax Rates are the most important tax rate because:
financial decisions are usually based on new cash flows, incremental cash flows are taxed at marginal tax rates
Costs that do not change in the short run arise because of ____
fixed commitments
How is ownership transferred in a corporation?
gifting or selling of shares of stock
sole proprietorship
has its profits taxed as personal income
Net Income (Net Earnings)
in income after interest and taxes
A LLC's owners have _____ liability.
limited
Capital budgeting is concerned with making and managing expenditures on _____.
long-term assets
Which of the following are included in a firm's capital structure?
long-term debt and equity
What is the purpose of the income statement?
measure performance over some period of time (usually a quarter or year)
Income Statement
measures performance over some period of time
capital structure
mixture of the firm's debt and equity
Non-Cash items are expenses that directly affect ____ but do not directly affect ____.
net income; cash flow
CF/CR
net payments to creditors; Interest paid less net new borrowing
CF/SH
net payments to owners (stockholders); dividends paid less net new equity raised.
Capital Spending
net spending on fixed assets
Limited partnership
offers liability protection to some of its owners but not to all of its owners
A positive OCF indicates that the firm is generating enough cash to
pay operating costs
agency conflict
potential conflict of interest between owners and managers
COGS (Cost of Goods Sold)
raw materials, direct labor expense, manufacturing overhead (fixed & variable)
Recognition Principle (GAAP)
recognize revenue when the earning process is complete and can be reliably determined; at time of sale
Corporation
seperate legal entity
A ______ get paid after the employees, suppliers and creditors.
shareholder
The owners of a corporation are called _____.
shareholders
Balance Sheet
snapshot of the firm Organized and Summarized view of assets, liabilities, & the firm's equity at any given point in time.
short run future
some short run business costs are relatively fixed (have to be paid no matter what) but some are still variable such as payments to laborers and suppliers.
Cash Flow From Assets
sometimes called free cash flow because the firm is free to distribute to creditors and stockholders because it's not needed for working capital or fixed asset investment
Change in NWC
the amount spent on NWC
An agency issue is most apt to develop when
the control of a firm is separated from the firm's ownership
The primary responsibility of financial managers is to increase the value of ____.
the existing shares of stock
Marginal Tax Rate
the extra tax you would pay if you earned one more dollar; RELEVANT to financial decision making
Shareholders' Equity if best defined as
the residual value of a firm
Liquidity
the speed/ease an asset is converted to cash
financial leverage
the use of debt in a firm's capital structure; the more debt (as % of assets), the greater the degree of financial leverage
Book Value
the values shown on the balance sheet for the firm's assets
Common stockholders are entitled to the difference between ____ and ____ .
total assets and total liabilities
Free cash flow is better described as ____.
total distributable cash flow
According to GAAP, when is revenue recognized on an income statement?
when the value of an exchange of goods or services is known or reliably determined when the earnings process is virtually complete
Ensuring that the firm has sufficient funds to continue operations on a day-to-day basis comes under the heading of _____ management.
working capital
The daily financial operations of a firm are controlled by managing the:
working capital
What three questions are the financial manager concerned with?
working capital management capital budgeting capital structure
ATR (Average Tax Rate)
your tax bill divided by your taxable income; % of income that goes to taxes
If ending NFA are $100, beginning NFA are $60, and depreciation is $10, then the change in capital spending is ____.
$50
If the Federal marginal tax bracket is 34%, the state marginal tax bracket is 5%, and the local marginal tax bracket is 1%, how much money will a corporation KEEP if it makes another $1 million in taxable income?
$600,000 $1 million * (1-40%)
Net Income
(Sales-COGS-Other Costs-Depreciation)(1-tax rate)
Average Tax Rate (ATR)
(Taxes+Additional Taxes)/(taxable + marginal income)
If interest paid is $100 and net new borrowing is $150, then cash flow to creditors equals:
-$50
When a corporation is formed, it is granted which of the following rights?
Legal power to sue provincial citizenship for jurisdictional purposes the ability to issue stock
Assets
Liabilities + Stockholders' Equity
Matching Principle (GAAP)
Match revenues with the costs associated with producing them.
Current Assets
NWC+CL CL=TA-LTD-OE
Owner's Equity
NWC+Net Fixed Assets-LTD
Cash Flow from Assets
Operating cash flow, capital spending, and change in net working capital
A ____ is similar to a proprietorship, except that there are two or more owners.
Partnership
Which of the following is NOT one of the basic areas of finance?
Personal Finance is not considered one of the basic areas of finance. The 4 basic areas of finance are: Corporate Finance, Investments, Financial Institutions, and International Finance
Which of the following are traditional financial ratio categories?
Profitability ratios Turnover ratios Financial Leverage ratios