chapter 2: Smart Learn: Financial Management
if ending net fixed assets are $100, beginning fixed assets are $40, and depreciation is $10, then the change in capital spending is
($100 - $40) + $10 = $70
what should you keep in mind when examining an income statement?
-GAAP -cash versus non cash items -time and costs
an income statement reflects activity that occurs ____ while a balance sheet reflects values ____
-Over a period time -as of a specific date
examples of short run fixed costs
-bond interest -rent
what are fixed assets?
-buildings -plant -land
current assets?
-inventory -accounts receivable -cash and cash equivalent
assets can de described as items that
-provide market value to the firm -a firms owns -generate revenue
when is revenue recognized on an income statement?
-when the earnings process is virtually completed (the exchange of goods or services is completed or virtually completed) -when the value of an exchange of goods or services can be reliably determined
Rank these (from easiest to hardest) of turning the following assets into cash.
1. Cash Equivalents 2. Accounts Recievable 3. Inventory 4. Plant and Equipment
what does GAAP stand for
Generally Accepted Accounting Principles
Which of these questions can be answered by reviewing a firm's balance sheet?
How much debt is used to finance the firm? What is the total amount of assets the firm owns?
Which of the following are period costs?
Selling costs, General expenses and administrative expenses
___costs change as the output of the firm changes
Variable
a customer has yet to pay the bill for products purchased on credit. the seller records this debt in which balance sheet account?
accounts recievable
correct version of the balance sheet equation?
assets = liabilities + stockholder equity
the short run is a period when there are ___ costs
both fixed and variable
statement of cash flow explains changes in
cash and cash equivalents
net working capital equals
current assets minus current liabilites
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 firms ___
financial statements
how are assets on a balance sheet listed?
in order of decreasing liquidity
the price at which willing buyers and sellers would trade is called ___ value
market
non-cash items are expenses that directly affect ___ but do not directly affect ___
net income cash flow
a positive operating cash flow indicates that the firm is generating enough cash to ___
pay operating costs
net capital spending is equal to ending net fixed assets minus beginning net fixed assets ___
plus depreciation
which of the following is a variable cost in the short run?
raw materials used in production
how is income defined?
revenue minus expenses
purpose of the income statement?
to measure performance over a set period of time
in the long run all costs are ___
variable
according to GAAP, when is income reported?
when it is earned or accured
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life.
what doe 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.)
liquidity refers to the ease of changing ___
assets to cash
costs that do not change in the short run arise because of ___
fixed commitments
can be found in the liabilities section of a firms balance sheet?
-notes payable -long term bonds issued by the firm
the short run for a firm is the period of time during which ___
-output can vary -some costs are fixed
what are two classifications of costs used by financial accountants?
-period costs -product costs
Cash flow to stockholders equals _______
Dividends paid minus net new equity raised
a long term liability represents a ?
debt that is not due in the coming year
the matching principle of GAAP requires revenues by matched with ___
expenses
Which of these is NOT shown on a balance sheet?
-Good management -Favorable economic conditions -Proprietary assets -knowledge that has no patent
Which are true concerning product costs?
-Product costs are reported as costs of goods sold. -Product costs contain both fixed and variable costs.
residual value is the amount left over after paying
-accounts payable -bondholders -other debt holders
cash flow identity states that cash flow from assets equals cash flows to ___ and ____
-creditors -stockholders
the use of financial leverage can
-greatly magnify both gain and losses -increase the potential reward for investors -increase the chance of financial distress and business failure
the cash flow identity reflects the fact that
-Cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders. -A firm generates cash through its various activities -Cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm.
which of the following is true about the difference between the income statement and ash inflows and outflows?
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 a different period. - Sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period.
Which of the following is an example of a non-cash item on an income statement?
Depreciation
