Ch 1 and 2

A corporation receives cash from financial markets by selling ______ and ______.

-stocks -bonds

The corporate tax code is _____.

extremely complicated

Book value of assets is generally

not what the assets are actually worth

Most equity shares of large firms in the U.S. trade on:

organized auction markets

Which of the following are current assets?

-Inventory -Accounts receivable

When is revenue recognized on an income statement?

-When the value of an exchange of goods or services can be reliably determined -When the earnings process is virtually completed

The possible goal of profit maximization _____.

-can be achieved by cost-cutting -would probably be the most commonly sighted goal for a business

In a _____ partnership, one or more general partners will run the business and have unlimited liability, but there will be one or more _____ partners who will not actively participate in the business.

-limited -limited

True or false: Cash flows to the firm from the financial markets.

True

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

If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals ______.

$200 - 150 = $50

The cash flow identity reflects the fact that:

-A firm generates cash through its various activities -Cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders - cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm.

Residual value is the amount left over after paying ________________.

-Bondholders -Other debt holders -Accounts payable

Which of the following are fixed assets?

-Land -Plant -Buildings

The statement of cash flow explains changes in _____.

cash and equivalents

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

cash flows

Some of the cash flow generated by a firm goes back to the financial markets in the form of ______.

dividends and debt payments

For financial managers, the accounting value of the stock is not an especially important concern; it is the ______ value that matters.

market

From the stockholders' perspective, what is the primary purpose of awarding stock options to managers?

To increase shareholders' wealth

A good financial decision aims at which of the following?

-Increase the market value of shareholders' equity -Increase the value of the firm's existing stock

A general partnership has which of the following characteristics?

-It is difficult to transfer ownership. -Each owner has unlimited liability for all firm debts.

Corporations in other countries are often called

-Joint stock companies -Public limited companies

The Sarbanes-Oxley Act requires corporate officers to do which of the following?

-List any deficiencies in internal controls -Accept responsibility for material errors in the annual report -Confirm the validity of the annual financial report

Which of the following will be found in the liabilities section of a firm's balance sheet?

-Long-term bonds issued by the firm -Notes payable

The controller is responsible for

-Tax payments -Financial accounting

Which of these are generally considered to be short-run fixed costs?

-Property taxes -Rent payments for a warehouse -Management salaries

Which of the following are examples of short-run fixed costs?

-Rent -Bond interest

What are two classifications of costs used by financial accountants?

-Product costs -Period costs

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

-Notes payable -Accounts payable

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

Accounts receivable

A customer has yet to pay the bill for products purchased on credit. The seller records this debt in which balance sheet account?

Accounts receivable

_____ refers to the speed and ease with which an asset can be converted to cash.

Liquidity

Whose responsibility is it to create value for a firm?

Management

Which one of these is an important mechanism used by unhappy stockholders to replace current management?

Proxy fight

Which of the following is a variable cost in the short run?

Raw materials used in production.

_____ are rules describing how the corporation regulates its existence.

Bylaws

In a shareholder-manager relationship, who is the agent?

Managers

______ income is money earned after interest and taxes.

Net

The EBITDA ratio is similar in spirit to:

PE ratio

______ costs include such things as raw materials, direct labor expense, and manufacturing overhead.

Product

A long-term liability represents a(n) _____.

a debt that is not due in the coming year

The relationship between stockholders and management can best be described as a(n) ______ relationship.

agency

In the long run, ________ are variable.

all costs

_____ corporation is for profit, and has the legal attributes of accountability, transparency, and purpose.

benefit

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

book

Forming a corporation involves preparing articles of incorporation and a set of _____

bylaws

The five main areas of finance are

corporate finance, Investments, financial institutions, international finance, and fintech.

The need to monitor management actions is an example of a(n) _____ (direct/indirect) agency cost.

direct

In a corporation, the stockholders elect _____, who then select the managers.

director

Depreciation is the accountant's estimate of the cost of ______ used up in the production process.

equipment

In financial markets, debt and ______ securities are bought and sold.

equity

In a large corporation, the _____ would be responsible for answering the three main questions that must be asked when starting a firm.

financial manager

James is an owner of J & Jo Company. If he wants to find out the cash flow of his bakery, he should look into the firm's _____.

financial statements

If you think of the balance sheets as a snapshot, then the _____ can be thought of as a video covering the period between before and after pictures.

income statement

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

marginal

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

market

The corporate goal involving bankruptcy avoidance, stability, and safety relate to controlling

risk

A supplier may look at the size of _____ to see how promptly the firm pays its bills.

accounts payable

Which of the following are period costs?

-Administrative expenses -General expenses -Selling costs

Which of the following are included in the fixed asset portion of a balance sheet?

-Buildings -Trademarks

Two basic classifications under which most potential financial goals fall?

-Earning or increasing profits -Controlling risk

True or false: Free cash flow is the total of cash flow that the firm can distribute to creditors and to stockholders.

True

It is sometimes argued that, left to themselves, managers tend to minimize the amount of resources over which they have control.

False

True or false: Finance is mainly important to study if you are planning a career in finance.

False

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

False

The short run is ______.

an imprecise period of time

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

depreciation

If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the net capital spending is ____.

$100 - 60 + 10 = $50

If a firm's current assets are $100 and its current liabilities are $80, then its net working capital is:

$100 - 80 = $20

If a firm's net working capital is $120 in 2021 and $100 in 2020, then the change in net working capital is:

$120 − 100 = $20

If ending net fixed assets are $100, beginning fixed assets are $40, and depreciation is $10, then the change in capital spending is _____.

($100 − 40) + 10 = $70

Which of the following are true of a sole proprietorship?

-A proprietorship has a limited life. -It is the simplest type of business to form.

Which of the following show why a corporation is the most important form of business?

-Corporations can enter into contracts. -A corporation is a separate legal entity with the ability to acquire and exchange property. -Corporations can sue and be sued.

If a firm's net working capital goes from $150 in 2020 to $130 in 2021, then the change in net working capital is:

Change in NWC = $130 − 150 = −$20

In large firms, financial activity is usually associated with which top officer?

Chief financial officer

True or false: Under SOX, corporate officers must declare annual reports contain zero omissions.

False

What does GAAP stand for?

Generally Accepted Accounting Principles

A bad financial decision is defined as a decision that ______ owners' equity.

decreases

Period costs are the costs that are allocated to a specific ______.

interval of time

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

Which one of the following complies with GAAP?

matching revenues with expenses

The goal of a for-profit business is to ______ existing owners' equity.

maximize

Cash flow to stockholders is dividends paid ____ (minus/plus) net new equity raised.

minus

Managers who are successful in pursuing _____ will be in greater demand in the labor market and thus command higher salaries.

stockholder goals

The owners of a corporation are called ______.

stockholders

Assets can be described as items that _____.

-provide market value to the firm -generate revenue -a firm owns

What does a balance sheet reflect about a firm?

Accounting value on a specific date

If you make an extra $1,000 in income and your marginal tax rate is 30 percent while your average tax rate is 20 percent, then you will pay an extra ______ in taxes.

Additional tax = (.30)($1,000)

Under GAAP, U.S. firms must carry assets at

Book value

Which term applies to the mixture of debt and equity maintained by a firm?

Capital structure

Which one of the following is true?

Cash flows can be derived from financial statements.

The federal government taxes which of the following?

Corporate earnings and shareholder dividends

Which of the following do not directly affect cash flow?

Depreciation

True or false: Operating cash flow includes capital spending and working capital requirements.

False

True or false: The corporate tax code is simplistic and makes good economic sense.

False

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

GAAP

How are assets on a balance sheet listed?

In order of decreasing liquidity

If you earn an extra $100 of taxable income this year and owe taxes of $34 on that income, then your marginal tax rate is _____ percent.

Marginal tax rate = $34/$100

In addition to the importance of finance for marketing, accounting, and management careers, finance is also now considered a _____ discipline, especially at the graduate level.

STEM

Which is true of taxes?

They can be one of the largest cash outflows a firm experiences.

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

True

______ costs change as the output of the firm changes.

Variable

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

both fixed and variable

The goal of the for-profit business is to maximize

owners

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

pay operating costs

Accountants usually distinguish between _____ costs and _____ costs.

product; period

The advantages and disadvantages of a partnership are basically the same as those of a _____.

proprietorship

____ is the authority to vote someone else's stock.

proxy

An official accounting statement that helps to explain the change in cash and cash equivalents is called the _____.

statement of cash flows

Firms that are poorly managed are more attractive as acquisitions. This form of threat known as a _____ motivates managers to act in the stockholders' best interests. (Enter one word per blank.)

takeover

A partnership must have at least _______ owners.

two

In recent years, U.S. accounting standards have become more closely tied to _____.

IFRS

How is ownership transferred in a corporation?

Ownership is transferred by gifting or selling shares of stock

Which one of the following parties would be the last party to receive payment if a firm were to close? Assume all parties have a legitimate claim on the firm's assets.

Shareholders

An important question that must be asked when starting a firm is

Which type of operating system should you use for your computers?

True or false: Taxes can be a large cash outflow for a corporation.

True

Noncash items do not affect _____.

cash flow

The passage of the Tax Cuts and Jobs Act of 2017 was to make the federal corporate tax rate in the United States a _____ tax.

flat

The life of a corporation ______.

is unlimited

A corporation is a distinct ______ entity and as such can have a name and take advantage of the legal powers of natural persons.

legal

Holding too many liquid assets can be harmful for a firm because such assets are generally _____.

less profitable

The accounting equation shows that stockholders' equity equals assets ______ liabilities.

minus

The difference between the total assets and total liabilities is shareholders' or

owners equity

Net working capital is _____ (negative/positive) when current assets exceed current liabilities.

positive

When a corporation raises funds in the financial markets, the transaction occurs on the _____.

primary market

Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?

-Enron -WorldCom -Tyco -Adelphia

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

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

Which of these items do NOT appear on a balance sheet?

-Good management -Knowledge that has no patent -Favorable economic conditions

Which of the following are considered stakeholders in a company?

-Government -Suppliers -Employees

What does stockholders' equity represent?

A residual claim against the book value of the firm's assets. (The book value of the firm's assets less the book value of its liabilities.)

What is depreciation?

A systematic expensing of an asset based on the asset's estimated life

When a customer purchases an item on credit, the purchase amount is recorded by the seller in which one of these accounts?

Accounts receivable

In March, Al's paid cash for a video game for the store's inventory. In April, it sold the game on credit. In May, Al's received payment for the sale. Based on matching principle, the expense should be recorded in ___ and the income should be reported in ____.

April; April

Which one of these is a correct version of the balance sheet equation?

Assets = Liabilities + Stockholders' equity

If your tax bill is $200 and your taxable income is $2,000, then your average tax rate is _____ percent.

Average tax rate = $200/$2,000 = 0.1, or 10%

What is the purpose of the income statement?

To measure performance over a set period of time

How is the average income tax rate computed?

Total tax bill/Total taxable income

According to GAAP, when is income reported?

When it is earned or accrued

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 _____.

assets to cash

The total of cash flow to creditors and cash flow to stockholders is called _____.

cash flow from assets

Cash flow to _____ is interest paid less net new borrowing.

creditors

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

creditors and stockholders

The more debt a firm has, the greater its:

degree of financial leverage

Accounting profit ____ cash flow.

differs from

EBITDA multiple is equal to the enterprise value _____ (divided/multiplied) by EBITDA.

divided

Cash flow to stockholders equals ____.

dividends paid minus net new equity raised

The matching principle of GAAP requires revenues be matched with _____.

expenses

Partnership in which all the partners share in gains or losses, and all have unlimited liability for all partnership debts, not just some particular share.

general

A decrease in depreciation expense ______ earnings per share.

increases

Cash flow to creditors is equal to _____.

interest paid less net new borrowing

Assets are recorded at historical cost, not market value, because _____.

it is hard to keep up with the market value

The shareholders are the _____ in line to receive payment when a firm is forced to sell assets to pay off debt.

last

Changes in capital spending can be negative when the acquisition of fixed assets is ______ the sale of fixed assets.

less than

Capital budgeting is concerned with planning and managing a firm's _____.

long-term investments

Since ________ and ownership are separated, a corporation's life is unlimited.

management

Net working capital equals current assets ______ current liabilities.

minus

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

net income; cash flow

A company's _____ cash flows reflect whether its cash flows from business operations can cover its everyday cash outflows.

operating

Cash generated from a firm's normal business activities is called _____.

operating cash flow

Indirect agency costs are often due to lost ______.

opportunities

A business without separate legal authority formed by two or more people is known as a _____.

partnership

How is income defined?

revenue minus expenses

In general, revenue should be recognized at the time of ______ , which is not necessarily the same time as the money is collected.

sale

The primary responsibility of financial managers is to increase the value of _____.

the existing shares of stock

When looking at the income statement, the financial manager should keep in mind GAAP, cash versus noncash items, and _____ and costs.

time

Free cash flow is better described as ____.

total distributable cash flow

Most importantly, assets provide ______ to the firm.

value

In the long run, all costs are _____.

variable

Another name for short-term financial management is ___ management.

working capital

_____ is included in working capital

-Current (short-term) assets -Accounts payable -Accounts receivable

Which of the following are among the most important questions to be asked when a business is started?

-How will everyday financial activities be handled? -What long-term investments should be made? -Where will long-term financing be obtained to pay for investments?

When a corporation is formed, it is granted which of the following rights?

-The ability to issue stock -Legal powers to sue -State citizenship for jurisdictional purposes

In a large corporation, the financial manager is primarily responsible for:

-financing decisions. -financial aspects of operations, such as collections of accounts receivables. -long-term investment decisions.

A treasurer's responsibilities typically include

-managing capital expenditure decisions. -making financial plans. -handling cash flows.

A limited liability company is taxed like a ______ and its owners have ____ liability.

-partnership -limited

Which corporate officer is responsible for accurate financial reporting of the firm's activities?

Controller

True or false: Ownership in the corporate form is difficult to transfer.

False

True or false: The Sarbanes-Oxley Act provides incentives for companies to go public in US markets.

False

The relative ease of transferring ownership, the limited liability for business debts, and the unlimited life of the business are why the corporate form is superior to sole proprietorships or partnerships for _____.

raising cash

Stockholders are entitled to only what is left after employees, suppliers, and creditors are paid, which makes them _____ owners.

residual

Because shareholders get paid last after all other obligations are satisfied, they are often called _____.

residual owners

When one owner of a security sells the security to another person, the transaction takes place in the _________ market

secondary

A ______ is someone other than an owner or a creditor who potentially has a claim of the cash flows of a firm.

stakeholder

The financial manager acts in the shareholders' best interests by making decisions that increase the value of _____.

the stock

A benefit corporation is for profit, and has the legal attributes of accountability, _____, and purpose.

transparency

Organized auction markets include:

New York Stock Exchange

The aim of the act known as _____ is to protect investors form corporate abuse.

SOX

______ are frequently used to encourage key managers to maximize the value of the firm's stock.

Stock options

The liability of a shareholder in a corporation is limited to which of these?

The amount the shareholder invested in the corporation

Which one of these motivates managers to make good decisions?

Threat of a hostile takeover

What is the main goal of financial management?

To maximize current value per share of existing stock

It is argued that, left to themselves, managers would tend to maximize the amount of resources over which they have control or, more generally, _____ power or wealth.

corporate

Joint stock company is another name for what is referred to as a ______ in the United States.

corporation

The most important form of business organization in the United States in terms of size is

corporation

Due to the extreme costs of SOX, hundreds of public firms have chosen to "go _____" Due to the extreme costs of SOX, hundreds of public firms have chosen to "go

dark

Businesses are motivated to organize as corporations because stockholders in a corporation have _______ liability for corporate debts.

limited

Ownership in a corporation can be dispersed over a huge number of stockholders, it can be argued that ______ effectively controls the firm.

management

An LLC is essentially a hybrid of _____ and corporation.

partnership

Corporate profits are taxed twice, first at the corporate level when they are earned and again at the _____ level when they are paid out.

personal

Which of the following is true about the difference between the income statement and cash inflows and outflows?

-Income taxes are often deferred, so the amount on the income statement may not represent the amount of the check to the IRS. -Cost of raw materials purchased on credit are accounts payable rather than cash outflows until they are paid, which may be in a different period. -Sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period.

Increasing its noncash liquid assets will enable a firm to do which of the following?

-Increase its ability to avoid financial distress -Increase its ability to meet short-term obligations

The use of financial leverage can:

-Increase the chance of financial distress and business failure. -Increase the potential reward for investors. -Greatly magnify both gains and losses.

Which of the following are included in a firm's capital structure?

-Long-term debt -Equity

Which of the following can be used to encourage managers to act in the best interests of shareholders?

-Managerial compensation tied to performance -Better prospects of promotion

Which are true concerning product costs?

-Product costs are reported as costs of goods sold. -Product costs contain both fixed and variable costs.

Which of the following, according to the textbook, are possible financial goals for a company?

-Survive. -Avoid financial distress and bankruptcy. -Beat the competition. -Maximize sales or market share. -Minimize costs. -Maximize profits. -Maintain steady earnings growth.

Which of the following are important when considering a partnership?

-Taxation of partnership income -Fund raising limitations -Personal liability for firm debts

Which of the following positions generally report to the chief financial officer (CFO)?

-Treasurer -Controller

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

Inventory is

-current asset. -part of working capital.

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

Current assets are defined as assets that can be turned into cash within ______ months.

12

The Tax Cuts and Jobs Act of 2017 set the corporate tax rate to be ______ regardless of the level of taxable income.

21%

Which of the following are examples of noncash items on an income statement?

Depreciation

Why is it important for accounting standards to become more comparable across countries?

Increasing globalization of business makes it necessary to understand financial reporting by firms that follow other accounting standards.

Why is positive net working capital important?

It means the firm should have sufficient cash to meet its current obligations.

What is a primary concern for a bank lending funds to a business for the short term?

Liquidity

If you hire a real estate company to sell your house, you are most apt to encounter which one of the following?

Agency problem

______ budgeting is the process of making and managing expenditures on long-term assets.

Capital

The costs incurred due to a conflict of interest between stockholders and management are called ______ costs.

agency

An organization must prepare ______ and bylaws when forming a corporation.

articles of incorporation

Stockholders in a corporation have _____ liability for corporate debts.

limited

In a limited partnership, a limited partner's liability for business debts is ______.

limited to his/her cash contribution to the partnership