Chapter 1 - 4

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

12

Which one of these statements related to the time value of money (TVM) is correct? Assume a positive rate of interest.

A dollar received today is more valuable than a dollar received next month.

What does stockholder's equity represent?

A residual claim against the firms assets

A balance sheet reflects a firm's _____ value on a particular day.

Accounting

Which one of the following accounts is generally the most liquid?

Accounts Receivable

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

Accounts receivable

Discounting cash flows involves

Adjusting all expected future cash flows to their current value

Net earnings refers to income earned

After interest and taxes

Which one of these terms refers to a conflict of interest between the stockholders and managers of a corporation?

Agency problem

The interest rate charged per period multiplied by the number of periods per year is called the

Annual Percentage Rate (APR)

In March, Al purchased 10 video games for his store's inventory. In April, he sold 5 games on credit and received the payment in May. The income should be recorded in the month of ______.

April

Balance Sheet Equation

Assets = Liabilities + Stockholder's Equity

Liquidity refers to the ease of changing _____

Assets to cash

Which one of the following statements concerning liquidity is correct?

Balance sheet accounts are listed in order of decreasing liquidity.

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

Book

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

Cash VS non-cash items, GAAP, & Time and costs

The statement of cash flows explains changes in ______.

Cash and equivalents

_____ refers to a firm's interest payments minus any net new borrowing.

Cash flow to creditors

Assume a stated rate of interest of 8 percent. Which form of compounding will produce the highest effective rate of interest?

Continuous

Which form of business structure faces the greatest agency problems?

Corporation

Which form(s) of business is treated as a distinct legal entity separate from its owners?

Corporation

Which one of the following business types is best suited to raising large amounts of capital?

Corporation

Which type of business organization has all the respective rights and privileges of a legal person?

Corporation

Net Working Capital + Current Liabilities =

Current Assets

Which one of the following is a capital budgeting decision?

Deciding whether or not to open a new store

Which one of these will increase earnings per share?

Decreasing deferred taxes

Kate starts saving for retirement today and plans to make annual contributions into this retirement account. Which one of these is most apt to increase the total amount she has saved on the day she retires? Assume she earns a positive rate of return each year.

Delaying her retirement by 1 year

What is the formula for computing operating cash flow?

EBIT + Depreciation − Current taxes

EBIT

Earnings Before Interest and Taxes

What does a balance sheet reflect about a firm?

Economic value at a specific point in time Explanation: Economic value is the market value. The balance sheet shows accounting value which is mostly historical

An interest rate expressed as if it were compounded once per year is called the

Effective Annual Rate (EAR)

The Effective Annual Rate (EAR) of a loan will increase if

Either the annual percentage rate (APR) or the compounding frequency is increased.

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

Equipment

T/F: Operating Cash flows include capital spending and working capital requirements

False

T/F: Stockholder's equity appears on the left-hand side of the balance sheet.

False

The activity of making net payments to creditors and owners (excluding interest) is called a(n) ________ activity in the accounting statement of cash flows.

Financing

A change in which one of these accounts will appear as an investing activity in an accounting statement of cash flows?

Fixed assets

What does GAAP stand for?

Generally Accepted Accounting Principles

Which of these items is not shown on the balance sheet?

Good management, Proprietary Assets, Favorable economic factors

Which term applies to a set of cash flows that are finite in number and increase in amount at a steady rate?

Growing annuity

Which one of the following would have the greatest value assuming each has a Year 0 cash flow of zero and a Year 1 annual cash flow of $100?Assume a discount rate of 8 percent, compounded annually. Also, assume any growth rate is positive.

Growing perpetuity

You are comparing two investments, A and B, with unequal annual cash flows and varying numbers of years. Which one of these statements is correct regarding this comparison?

If B has a higher net present value, then B will have the higher net future value at any point in time, given a stated discount rate.

How are assets on a balance sheet listed?

In order of decreasing liquidity

Stockholder's Equity _____ when Retained Earnings increases.

Increases

When a firm pays out fewer dividends, it ______ the accounting value of its retained earnings.

Increases

Which one of the following will increase the present value of a finite stream of even cash flows? Assume a positive rate of return.

Increasing the Time 2 cash flow by $100 and lowering the Time 3 cash flow by $100

Given a firm with positive annual cash flows, which one of the following will increase the current value of that firm?

Increasing the annual growth rate of the cash flows

Which type(s) of loan repays the interest as an annuity and the principal as a lump sum?

Interest-only loans

Cash flows from the acquisition and sale of fixed assets are located in the ______ activities section of the accounting statement of cash flows.

Investing

An annuity

Is a stream of equal payments that occur in equal periods of time for a finite period.

Short term finance...

Is concerned with managing net working capital.

Which of the following are tanglible fixed assets?

Land & Plant

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

Liquidity

Which one of these statements is correct? 1. Long-term debt is the residual difference between assets and liabilities. 2. Net income that is not paid out in dividends decreases retained earnings. 3. Long-term debt requires a payout of cash within a stated time period. 4. Stockholders' equity is stated at market value on the balance sheet. 5. Stockholders' equity increases as the liquidity of a firm increases.

Long-term debt requires a payout of cash within a stated time period.

When you are making a financial decision, the most relevant tax rate is the _____ rate.

Marginal

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

Market

_____ refers to the difference between a firm's current assets and its current liabilities.

Net Working Capital

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

Notes payable & Long-term bonds

Liabilities usually involve which of these

Obligations of the firm & Require a cash payout within a stated period of time

Annuities with payments occurring at the end of each time period are called _____, whereas annuities with payments occurring at the beginning of each time period are called _____.

Ordinary annuities, annuities due

An annuity stream where the payments occur forever is called a(n)

Perpetuity

The net present value of an investment is best defined as the

Present value of the investment's future cash flows minus the investment's cost.

In which type of loan does the borrower initially receive the present value of the future lump sum loan repayment amount?

Pure Discount Loan

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

Raw materials used in production

Which of the following are included in a Firm's inventory according to GAAP?

Raw materials, Finished goods, Work in process

How is income defined?

Revenue - expenses

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

Shareholder's equity

Which type of business is the easiest and cheapest to form?

Sole proprietorship

Which of the following statements is correct?

Sole proprietorships and partnerships are taxed in a similar fashion.

The short run for a firm is the period of time during which _____.

Some costs are fixed, Output can vary

What is treasury stock?

Stock the firm has repurchased

The last claimants to be paid by a firm are the ________.

Stockholders

If a firm defaults on it's bond contracts, bondholders can do which of the following to get their money back?

Sue the firm in court

Which of the following items is taken into consideration while determining the operating cash flow of a firm?

Tax payments

Assume two annuities will each provide $500 annual cash flows for 5 years. One is an ordinary annuity and the other is an annuity due. Which statement concerning these annuities is correct?

The annuity due is more valuable than the ordinary annuity

Which one of the following statements is correct concerning the organizational structure of a corporation?

The chief operations officer reports to the chief executive officer

Which one of the following statements concerning a sole proprietorship is correct?

The owner of a sole proprietorship may be forced to sell personal assets to pay company debts.

The value of a firm is best defined as the

Total present value of all the firm's future cash flows

Which position is generally directly responsible for financial planning and capital expenditures?

Treasurer

T/F: Contract liabilities put the firm at risk of default.

True

T/F: Revenue includes both cash and credit sales of goods and services.

True

A conflict of interest between the stockholders and management of a firm is called:

an agency problem.

Your _____ tax rate measures the total taxes you pay divided by your total taxable income.

average

One of the most important limitations of the balance sheet is that it only shows the

book value rather than marketing value.

The process of planning and managing a firm's long-term investments is called:

capital budgeting.

The mixture of debt and equity used by a firm to finance its operations is called:

capital structure.

A current asset is best defined as

cash and other assets owned by the firm that should convert to cash within the next year.

The treasurer and the controller of a corporation generally report to the

chief financial officer.

The person generally directly responsible for overseeing the tax management, cost accounting, financial accounting, and information system functions is the:

controller.

A business created as a distinct legal entity composed of one or more individuals or entities is called a(n):

corporation.

Sole Proprietorships

create unlimited liability for their owners.

Capital structure refers to

decisions related to long-term debt and equity financing.

Al's has a positive net income and a marginal tax rate of 34 percent. Given this, an increase in which one of the following will cause the operating cash flow to increase?

depreciation

The cash flow of a firm, also referred to as cash flow from assets, must be equal to the cash flow to

equity holders plus the cash flow to debt holders.

Which one of these is handled differently in calculating cash flows for accounting versus financial purposes?

interest expense

The cash flow to creditors increases when

interest is paid on outstanding debt

Current assets include

inventory and accounts receivable

Depreciation

is a noncash expense that reduces the pretax income.

A business entity operated and taxed like a partnership, but with limited liability for the owners, is called a

limited liability company.

A business entity operated and taxed like a partnership, but with limited liability for the owners, is called a:

limited liability company.

A(n) ____ asset is one that can be quickly converted into cash without significant loss in value.

liquid

Your _____ tax rate is the percentage of the next taxable dollar of income you earn that is payable as a tax.

marginal

The primary goal of financial management is to:

maximize the current value per share of the existing stock.

The division of profits and losses among the members of a partnership is formalized in the

partnership agreement.

The primary purpose of the Sarbanes-Oxley Act of 2002 is to

protect investors from corporate abuses.

The long-term debts of a firm are liabilities

that do not come due for at least 12 months.

Agency costs refer to

the costs of any conflicts of interest between stockholders and management.

The goal of financial management focuses on the fact that

the current stockholders are the owners of the corporation.

Cash flow to stockholders must be positive when

the dividends paid exceed the net new equity raised.

The issuance of new equity shares is a cash flow from

the financial markets to a firm.

The person generally directly responsible for overseeing the cash and credit functions, financial planning, and capital expenditures is the:

treasurer.

The management of a firm's short-term assets and liabilities is called:

working capital management