Chapter 2 Finance

US corporate taxes switch to a constant flat-rate tax once the average tax rate reaches:

35%

Shareholders Equity (book value)

= equipment + working capital - long term debt

Cash flow from assets

Can be positive, negative, or equal to zero

Which is the term that refers to the firms interest payment minus any net new borrowing?

Cash flow to creditors

As seen on the income statement

depreciation reduces both the pretax income and the net income

Book value:

is based on historical cost

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

Accounts recievable

An increase in which one of the following will cause the operating cash flow to increase for a profitable firm? A. Taxes B. Depreciation C. Changes in the amount of net fixed capital D. Net working capital E. Administrative expenses

B. Depreciation

Which of the following statements concerning liquidity is correct? Trademarks and patents are highly liquid. If you can sell an asset next year at a price equal to its actual value, the asset is highly liquid. The less liquidity a firm has, the lower the probability the firm will encounter financial difficulties. If you sold an asset today, it was a liquid asset. Correct Balance sheet accounts are listed in order of decreasing liquidity.

Balance sheet accounts are listed in order of decreasing liquidity

In the accounting statement of cash flows, which one of these is calculated by adding back noncash expenses to net income and adjusting for changes in current assets and liabilities?

Cash flow from operating activity

New working capital is defined as:

Current assets - current liability

Which of the following accounts is included in stockholders equity? A. Intangible assets B. Plant and equipment C. Deferred taxes D. Accumulated retained earnings E. Long-term debt

D. Accumulated retained earnings

Which one of these statements is correct? A.The addition to retained earnings is equal to net income plus dividends. B. Pretax income is equal to net income minus taxes. C. Operating income is equal to operating revenue minus cost of goods sold. D. Earnings per share can be negative but dividends per share cannot. E.Only current taxes are included in the tax expense.

D. Earnings per share can be negative but dividends per share cannot

Which one of these is a non cash item: A. current taxes B. interest expense C. dividends D. depreciation E. selling expenses

D. depreciation

For a firm with long-term debt, net income is equal to:

Dividends + addition to retained earnings

Net Capital Spending Formula

End net fixed assets - Beg net fixed assets + Depreciation expense for year

Noncash items refer to

Expenses charged against revenues that do not directly affect cash flow

The financial statement summarizing a firm's accounting performance over a period of time is the:

Income Statement

Cash flow to creditors for 2015?

Interest paid 2015 - (LTD 2015 - LTD 2014)

One of the reasons why cash flow analysis is popular is because:

It is difficult to manipulate or spin the cash flows

Which term defines the tax rate that applies to the next dollar of taxable income earned?

Marginal

If you sell an asset, you are most likely to receive which value for the asset?

Market Value

An increase in treasury stock:

Results from a repurchase of outstanding shares of stock

The cash flow to stockholders must be positive when:

The cash flow from assets is positive and also exceeds the cash flow to creditors

What is the amount of the non-cash items for 2015?

Whatever depreciation is on the income statement

On a balance sheet, deferred taxes are classified as

a long-term liability

Assuming the number of shares outstanding remains constant, an increase in dividends per share will reduce the:

addition to retained earnings.

What will increase the book value of the stockholders equity in a profitable, non-dividend paying firm?

an increase in earnings per share

The cash flow of the firm must be equal to:

cash flow to stock holders + cash flow to creditors

A firms dividend payments less any net new equity raised is referred to as the firms:

cash flow to stockholders

Free cash flow is:

cash that the firm can distribute to creditors and stockholders

Net working capital

current assets - current liabilities

All else held constant, the earnings per share will:

decrease as the number of shares outstanding increase

Depreciation for a profitable firm:

decreases net income by less than $1 for every $1 of depreciation expense

Assets are listed on the balance sheet in order of:

decreasing liquidity

Earnings per share will increase when:

depreciation decreases

Cash flow to stockholders is defined as:

dividends 2015 - (end common stock - beg common stock)

Cashflow to Stockholders

dividends paid - net new equity raised

Under generally accepted accounting principles (GAAP), a trims assets are reported at:

historical cost less accumulated depreciation

Earning per share will increase

if net income increase and the number of shares outstanding increase

The income statement:

includes non cash expense

The carrying value or book value of assets

is determined under GAAP and is based on the cost of the asset

When making financial decisions, the most relevant tax rate is the __________ rate.

marginal

According to generally accepted accounting principles, costs are:

matched with revenues

An increase in total assets:

must be offset by an equal increase in liabilities and stockholders equity

Net capital spending is equal to the:

net change in fixed assets + depreciation

The cash flow resulting from a firms ongoing, normal business activities is referred to as the:

operating cash flow

The statement of cashflows consist of cashflows from:

operating, investing activities and finance activities

The cash flow to creditors includes the firms cash:

outflow when interest is paid on outstanding debt

A firm starts its year with a positive net working capital. During the year, the firm acquires more short-term debt than it does short-term assets. This means that:

the ending net working capital can be positive, negative, or equal to zero

According to generally accepted accounting principles (GAAP), revenue is recognized as income when:

the transaction is complete and the goods or services are delivered

Liquidity is:

valuable to a firm even though liquid assets tend to be less profitable to own