chapter 2 financial statements, taxes, and cash flow
What does GAAP stand for?
Generally Accepted Accounting Principles
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
long term liabilities are not due in the current year (from the date of the balance sheet)
True
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.)
which one of these is considered to be the most liquid?
accounts receivable
book value of assets is generally:
not what the assets are actually worth
most importantly the assets provide ___________ to the firm
value
assets are recorded at historical cost, not market value, because:
it is hard to keep up with the market value
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 accounting equation shows that stockholders' equity = assets _________liabilities
minus
on which side of the balance sheet do liabilities appear?
the right side
the use of financial leverage can:
-Greatly magnify both gains and losses -Increase the chance of financial distress and business failure -Increase the potential reward for investors
Liquidity refers to the ease of changing _________.
assets to cash
net working capital + current liabilities = __________
current assets
if a firm's current assets are $100 and its current liabilities are $80, then its net working capital
$20
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
how are assets on a balance sheet listed?
in order of decreasing liquidity
who is entitled to the residual value of a firm's cash flows?
shareholders
current assets are defined as assets that can be turned into cash within ______ months
12
Whose responsibility is it to create value for a firm?
Management
The price at which buyers and sellers would trade is called _____ value
market
