Chp 2. Financial Statements Taxes and Cash flow

Tax rates for propietorships, partnerships, and LLCs __________ with the passage of the Tax Cuts and Jobs Act of 2017.

changed

Product costs are usually shown on the income statement under the heading of

cost of goods sold

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

creditors and stockholders

Which of the following is an example of a noncash item on an income statement?

depreciation

Cash flow to stockholders equals ____.

dividends paid - net new equity raised

_________ changes as the output of the firm changes.

variable cost

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

Earnings management

Stockholders's equity is always shown on the ____________ of the belence sheet.

Right-hand side

How is the average income tax rate computed?

Total tax bill/Total taxable income

According to GAAP, when is income reported?

When it is earned or accrued

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

The more debt a firm has, the greater its:

degree of financial leverage

The GAAP matching principle requires revenues to be matched with:

expenses

Operating cash flow_______

tells us whether or not a firm's cash inflows from its operations are sufficient to cover its everyday cash outflows, is a sign of trouble is negative over a long period of of time

Cash flow refers to _____.

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

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

Long-term debt Accounts payable

Net working capital will be negative when current assets ___________ current liabilities.

are less than

For financial decision-making purposes, the most important tax rate is the ______ tax rate.

marginal

paid minus net new equity raised equals cash flow to stockholders.

Dividends

Depreciation is the accountant's estimate of the cost of __________ used in the production process matched with the benefits produced from owning it.

Equipment, fixed assets

Noncash items are __________ that __________ cash flow.

Expenses; do not directly affect

Net capital spending is equal to:

net change in fixed assets plus depreciation

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

net income

A primary reason that accounting income differs from cash flow is that an income statement contains __________.

noncash items

What is the purpose of the income statement?

to measure performance over a set period of time

Which of the following are classified as fixed assets on the balance sheet?

- Buildings - Patents - Trademarks -equipment

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

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

pay everyday cash outflows.

Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as __________.

period costs

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

shareholders' equity

Physical assets are termed ______________ assets.

tangible

The market value of an item is:

the cash value you'd get if you sold it

Long-term liabilities represent obligations of the firm lasting more than ____________.

1 year

U.S. corporations pay tax at a rate of

21

True or false: Ending net fixed assets plus beginning net fixed assets minus depreciation equals net investment in fixed assets.

False

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

overstate; understate

Rank the ease (from easiest to hardest) of turning the following assets into cash.

1. cash equivalents 2. accounts receivable 3. inventory 4. plant and equipment

According to the current U.S. corporate tax code the corporate tax rate in effect for 2021 is _________ percent.

21

What does shareholder's equity represent

A residual claim against the firm's total assets

What is depreciation?

A systematic expensing of an asset based on the asset's estimated life

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

Cash flows

Which one of the following is true?

Cash flows can be derived from financial statements.

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?

Current assets are classified as relatively ____________; there assets can be converted to cash within the next 12 months.

Liquid

A balance sheet reflects a firm's:

Accounting value on a specific date

Which of the following is the balance sheet equation?

Assets equal liabilities plus stockholders' equity.

Liquidity refers to the ease of changing _____.

Assets to cash

Under GAAP, assets are generally carried on a firm's balance sheet at ____.

Book value, historical cost

Which of the following are components of cash flow from assets?

Capital spending Operating cash flow Change in net working capital

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

Cash versus non-cash items Time and costs GAAP

True or false: For financial analysis, financial statements and accounting numbers are more important then cash flows.

False

True or false: Current assets plus current liabilities equals net working capital.

False (CA minus CL equals NWC.)

True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.

False; reduced

Marginal tax rates of the most important tax rates because:

Financial decisions are usually based on new cash flows, incremental cash flows are taxed at marginal tax rates

Which of the following is not a component of cash flow from assets?

Financing expenses

Costs that to not change in the short run arise because of ___________.

Fixed commitments

Shareholders' equity equals ____________.

Total assets minus total liabilities

The short run is a period when there are ______ costs.

both fixed and variable

Net capital spending is equal to

ending net fixed assets minus beginning net fixed assets plus depreciation.

The cash flow that results from the firm's day-to-day activities of producing and selling is called:

operating cash flow

Ending net fixed assets minus beginning net fixed assets ______ depreciation equals net investment in fixed assets.

plus

In practice, accountants tend to classify costs as either ______ costs or _______ costs.

product and period

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

shareholders

The three most important items to keep in mind when reviewing an income statement are:

GAAP, cash versus noncash items, and time and costs

The common set of standards and procedures by which audited financial statements are prepared is known as the:

Generally Accepted Accounting Principles (GAAP)

Liabilities can be classified as _______ or long-term.

current

Assets can be categorized as

current and fixed assets tangible and intangible assets

Noncash items do not affect _____.

Cash flow

Current assets __________ (plus/minus) current liabilities equals NWC.

minus

Interest paid _____ (Plus/Minus) net new borrowing equals cash flow to creditors.

minus

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value

Free cash flow is better described as

total distributable cash flow

Net income refers to income earned _________.

after interest and taxes

Common stockholders are entitled to the difference between __________ and _________.

Total assets; total liabilities

True or false: Free cash flow is also known as cash flow from assets.

True

True or false: Interest paid minus net new borrowing equals cash flow creditors.

True

True or false: Operating cash flow does not include depreciation or interest

True

True or false: long-term liabilities are not due in the current year (from the date of the balance sheet).

True

Financial leverage refers to a firm's ________.

Use of debt in its capital structure

Net capital spending is negative when

a firm sold off more assets than it purchased

A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts?

accounts receivable

Amounts not yet collected from customers on sales already made are called:

accounts receivable

The short run is __________.

an imprecise period of time

The cash flow identity states that cash flows from ______ should equal cash flows to creditors and equity investors.

assets

Which of the following is shown on the left-hand side of the balance sheet?

assets

The purpose of a ___________ is to measure performance over a set period of time.

income statement

Cash flow to creditors equals

interest paid - net new borrowing

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

interval of time

Which of the following is a current asset?

inventory

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

market

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