Business Finance Ch 2 Reading assignment

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

- Accounts payable - Long-term debt

Which of the following are classified as fixed assets on the balance sheet?

- Buildings - Equipment - Trademark

Marginal tax rates are the most important tax rates because:

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

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

1 year

Rank the ease (from easiest to hardest) of turning the following assets into cash.

1. Cash Equivalents 2. Accounts Receivable 3. Inventory 4. Plant and Equipment

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

Shareholders

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

book

The short run is a period when there are ______ costs

both fixed and variable

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

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 Reason: Capital spending = Ending net fixed assets - beginning net fixed assets + depreciation.

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

earnings management

Interest paid _________ (Plus/Minus) net new borrowing equals cash flow to creditors.

minus or less

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

operating cash flow

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

period costs

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value

Which of the following is the balance sheet equation?

Assets equal liabilities plus stockholders' equity.

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

Generally Accepted Accounting Principles (GAAP)

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

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

pay everyday cash outflows.

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

- Cash versus non cash items - Time and costs - GAAP

Operating cash flow (Select all that apply.)

- 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

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

False

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

False

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

False Went down from 35 >>>> 21

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

Financing expenses

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

True

According to GAAP, when is income reported?

When it is earned or accrued

Net working capital will be negative when current assets ______ current liabilities.

are less than

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

income statement

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

market

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

assets

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

marginal

The ______ tax rate is the tax rate paid on the next dollar of income.

marginal

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

overstate; understate

Cash flow refers to _______.

the difference between the number of dollars that came in and the number that went out

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

- historical cost - book value

Assets can be categorized as (select all that are appropriate)

- tangible and intangible assets - current and fixed assets

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

Blank 1: minus or less

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

FALSE! Financial analysis relies on cash flows, not accounting or book numbers.

What does GAAP stand for?

Generally Accepted Accounting Principles

True or false: Dividends paid minus net new equity raised equals cash flow to stockholders.

True

True or false: Interest paid minus net new borrowing equals cash flow to creditors.

True

Shareholders' equity equals ________________.

assets minus liabilities

Non-cash items do not affect:

cash flow

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

cash flows

Cash flow to stockholders equals ____.

dividends paid minus net new equity raised

The GAAP matching principle requires revenues to be matched with:

expenses

A balance sheet reflects a firm's:

accounting value on a specific date

Net earnings refers to income earned ______.

after interest and taxes

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

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

net income

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

net income; cash flow

Ending net fixed assets minus beginning net fixed assets _________________ depreciation equals net investment in fixed assets.

plus

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

plus depreciation

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

right side

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

shareholders' equity

Physical assets are termed ______________ assets.

tangible

The market value of an item is:

the cash value you'd get if you sold it

What is the purpose of the income statement?

to measure performance over a set period of time

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

total assets; total liabilities

Free cash flow is better described as ____.

total distributable cash flow

Financial leverage refers to a firm's _________.

use of debt in its capital structure

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

True Reason: Cash flow from assets is also known as free cash flow, though there is some variation in the calculation.

U.S. corporations pay tax at a rate of ______ percent. (Enter number only.)

21

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

Depreciation

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

Dividends

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

changed

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

Assets

Which one of the following is true? Multiple choice question. Cash flows can be derived from financial statements. Earnings, net income, and cash flows are identical. The Income Statement explicitly shows cash flows. Cash flows always exceed earnings.

Cash flows can be derived from financial statements.

In the long-run, costs may be considered as ________.

all variable

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

liquid Reason: Anything that can be converted to cash within a year can be considered relatively liquid.

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

______ changes as the output of the firm changes.

Variable cost

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

fixed commitments

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

noncash items

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

True

In practice, accountants tend to classify costs as either ______ costs or _______ costs.

product; period

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

- Capital spending - Operating cash flow - Change in net working capital

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?

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 completed

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

- equipment - fixed assets

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

accounts receivable

Which of the following is a current asset?

accounts receivable or inventory

Liquidity refers to the ease of changing _____.

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

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

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

GAAP, cash versus noncash items, and time and costs

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

The United States imposes a tax on the profits of US resident corporations at a rate of 21 percent (reduced from 35 percent by the 2017 Tax Cuts and Jobs Act). The corporate income tax raised $230.2 billion in fiscal 2019, accounting for 6.6 percent of total federal revenue, down from 9 percent in 2017.

Net capital spending is negative when:

a firm sold off more assets than it purchased