Chapter 2

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______ costs change as the output of the firm changes.

variable

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

last

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

less profitable

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

21%

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

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

Accounts receivable

Which of the following are fixed assets?

Buildings Land Plant

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

Buildings Trademarks

Which one of the following is true?

Cash flows can be derived from financial statements.

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

Which of the following are period costs?

General expenses Selling costs Administrative expenses

What does GAAP stand for?

Generally accepted accounting principles

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

Good management Knowledge that has no patent Favorable economic conditions

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

IFRS

Assets are listed on a balance sheet in which order?

In order of decreasing liquidity

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.

Which of the following is a current asset?

Inventory

Which one of the following complies with GAAP?

Matching revenues with expenses

Which is true of taxes?

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

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

True

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

True

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 income reported?

When it is earned or accrued

What does a balance sheet reflect about a firm?

accounting value on a specific date

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

accounts payable

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

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

book value

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

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

cash versus noncash items time and costs GAAP

The difference between the total assets and total liabilities is shareholders' equity, also called ____ equity or ____ equity.

common owners

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 are examples of noncash items on an income statement?

depreciation

Which of the following do not directly affect cash flow?

depreciation

Accounting profit ____ cash flow.

differs from

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

equipment

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

expenses

The corporate tax code is _____.

extremely complicated

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

For a _____ asset, it would be purely a coincidence if the actual market value were equal to its book value.

fixed

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

fixed commitments

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

Cash flow to creditors is equal to _____.

interest paid less net new borrowing

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

interval of time

Which of the following are current assets?

inventory and accounts receivable

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

marginal

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

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

minus

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

Residual value is the amount left over after paying:

other debt holders. accounts payable. bondholders.

An income statement reflects activity that occurs _____ while a balance sheet reflects values ____.

over a period of time; as of a specific date

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

pay operating costs

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

positive

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

product

Accountants usually distinguish between _____ costs and _____ costs.

product; period

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

some costs are fixed output can vary

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

statement of cash flows

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

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

$20 $100 - 80 = $20

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

$50 $100 - 60 + 10 = $50

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

$50 $200 - 150 = $50

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

$70 ($100 − 40) + 10 = $70

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

+$20

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

-20

Period costs are the costs that are allocated to a specific ______.If your tax bill is $200 and your taxable income is $2,000, then your average tax rate is _____ percent.

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

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

Accounts payable Notes Payable

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

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

Shareholders

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

income statement

A decrease in depreciation expense ______ earnings per share.

increases

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

market

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.

Rank the ease of turning the following assets into cash.

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

What are two classifications of costs used by financial accountants?

Product costs Period costs

Assets can be described as items that _____.

Provide market value to the firm. Generate revenue. A firm owns.

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

Rent Bond interest Management salaries Rent payments for a warehouse Property taxes

How is income defined?

Revenue minus expenses

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

Sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period. 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.

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

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.

cost

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

creditors and stockholders

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

debt that is not due in the coming year

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

less than

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

liquidity

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

Assets = Liabilities + Stockholders' equity

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

Notes payable Long-term bonds issued by the firm

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

creditors

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.

34 Marginal tax rate = $34/$100

How is the average income tax rate computed?

Average tax rate = total tax bill/total taxable income.

Financial statements are frequently a key source of information for financial decisions.

True

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

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

Noncash items do not affect _____.

cash flow

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

cash flow from assets

Cash flow to stockholders equals:

dividends paid minus net new equity raised.

What is the purpose of the income statement?

To measure performance over a set period of time

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

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

market

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

sale

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.

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

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

shareholders' equity

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

working capital

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

sale, revenue, earning, earnings, or sales

The use of financial leverage can: (Select all that apply) Increase the potential reward for investors. Decrease the noncash expenses incurred by the firm. Greatly magnify both gains and losses. Increase the chance of financial distress and business failure.

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

Why is positive net working capital important?

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

Which one of the following represents what a firm owns at a given point in time?

Its assets

______ income is money earned after interest and taxes.

Net

Fixed costs are costs that will not change ______.

in the short run

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

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

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

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

increasesRaw materials used in production.

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

it is hard to keep up with the market value

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

liquidity


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