Chapter 2. Financial Statements, Taxes, and Cash Flow

Which of these questions can be answered by reviewing a firm's balance sheet?

1. What is the total amount of assets the firm owns? 2. How much debt is used to finance the firm?

True/False: Current assets plus current liabilities equals net working capital

False

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

Market Value

A balance sheet reflects a firm's

accounting value on a specific date

Net earnings refers to income earned

after interest and taxes

The short run is

an imprecise period of time

Liquidity refers to the ease of changing

assets to cash

Non-cash items do not affect

cash flow

The more debt a firm has, the greater its

degree of financial leverage

Which of the following is an example of a non-cash item on an income statement?

depreciation

When a firm smooths earnings to please investors, it is called

earnings management

The balance sheet identity shows that stockholders' equity equals assets ______ liabilities

minus

The last item (or "bottom line") on the income statement is typically the

net income

Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm

overstate; understate

Physical assets are termed

tangible assets

Financial leverage refers to a firm's

use of debt in capital structure

According to GAAP, when is income reported?

When it is earned or accrued

The short run is a period when there are

both fixed and variable costs

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

cash flows

Cash flow refers to

the difference between the number of dollars that came in and the number that went out

Which of the following is the balance sheet equation?

Assets equal liabilities plus stockholders' equity.

According to GAAP, when is revenue recognized on an income statement?

When the earnings process is virtually completed & When the value of an exchange of goods or services is known or reliably determined

Current assets (plus/minus) current liabilities equals NWC (net working capital)

Minus

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

Shareholders equity

Liquidity has two dimensions which are the ability to

quickly convert assets into cash without significant loss in value

Assets can be categorized as

tangible and intangible assets & current and fixed assets

The market value of an item is

the cash value you would get if you sold it