Corporate Finance - Chapter 2

The GAAP matching principle requires revenues to be matched with:

Expenses

Financial leverage refers to a firm's _______.

use of debt in its capital structure

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

Earnings Management

According to GAAP, when is revenue recognized on an income statement? a) When the earnings process is virtually completed b) After the related expenses are paid in full c) When the value of an exchange of goods or services is known or reliably determined d) Only when cash has been received for the sale

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

Marginal tax rates are the most important tax rates because: a) incremental cash flows are taxed at marginal tax rates b) because the IRS says so c) financial decisions are usually based on new cash flows d) financial decisions are usually based on previous changes in cash flows

a) incremental cash flows are taxed at marginal tax rates c) financial decisions are usually based on new cash flows

If dividends are $100, stock sold is $10 and stock repurchased is $25, what is the cash flow to stockholders?

$115

Assets can be categorized as

Current and fixed assets

Costs that do not change in the short run arise because of _______.

Fixed Commitments

The purpose of a(n) ______ is to measure performance over a set period of time.

Income Statement

Cash flow to creditors equals:

Interest paid minus net new borrowing

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

Interval of Time

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

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

Minus

Cash flow refers to ______.

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

For a mature firm, operating cash flow: a) is usually negative b) cannot be positive for long periods c) is usually positive d) is a sign of trouble if negative over a long period of time

c) is usually positive d) is a sign of trouble if negative over a long period of time

If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals _______.

$50

If interest paid is $100 and net new borrowing is $150, then cash flow to creditors equals:

-$50

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

Assets

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

Fixed Assets Equipment

According to the originators of the current U.S. corporate tax code, the tax rates in effect for 2015 are: a) 35% b) 15% c) 25% d) 40% e) 34%

a) 35% b) 15% c) 25% e) 34%

Which of the following are classified as fixed assets on the balance sheet? a) Equipment b) Cash c) Buildings d) Trademark

a) Equipment c) Buildings d) Trademark

Which of the following are classified as liabilities on a firm's balance sheet? a) Accounts receivable b) Marketable securities c) Long-term debt d) Accounts payable

c) Long-term debt d) Accounts payable

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

Accounts Receivable

Net working capital will be negative when current assets _____ current liabilities

Are less than

The ______ tax rate is the tax rate paid on the next dollar of income.

Marginal

What should you keep in mind when examining an income statement? a) GAAP b) Cash versus non-cash items c) Asset composition d) Time and costs

a) GAAP b) Cash versus non-cash items d) Time and costs

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

True

Physical assets are termed _________ assets.

Tangible

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

False

Which of the following is NOT a component of cash flow from assets? a) capital spending b) change in net working capital c) operating cash flow d) financial expenses

financial expenses

Net working capital equals _____.

Current assets minus current liabilities

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

Historical Cost Book Value

Long-term liabilities represent obligations of the firm lasting over _____.

1 year

True or False: Operating cash outflow does not include depreciation or interest.

True

If net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10. then the capital spending on fixed assets during the period is ________.

$50

According to GAAP, when is income reported?

When it is earned or accrued

What does shareholders' 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

A balance sheet reflects on a firm's

Accounting value on a specific date

Which of the following is shown on the left hand side of the balance sheet? a) Stockholders' equity b) Assets c) Liabilities

Assets

Liquidity refers to the ease of changing ______.

Assets to cash

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

Both fixed and variable

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

Depreciation

What does GAAP stand for?

Generally Accepted Accounting Principles

Which of these questions can be answered by reviewing a firm's balance sheet? a) How much debt is used to finance the firm? b)How much of the firm's net income was paid out in dividends? c) How much net income has the firm earned this period? d) What is the total amount of assets the firm owns?

a) How much debt is used to finance the firm? d) What is the total amount of assets the firm owns?

Which of the following are components of cash flow from assets? a) capital spending b) operating cash flow c) net new borrowing d) net new equity e) change in net working capital

a) capital spending b) operating cash flow e) change in net working capital

What is the purpose of the income statement?

To measure performance over a set period of time

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

Net Income

Common stockholders are entitled to the difference between ______ and _______.

Total Assets Total Liabilities

Free cash flow is better described as ______.

Total distributable cash flow

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

Noncash items

Net capital spending is equal to ending net fixed assets minus beginning net fixed assets _______.

Plus depreciation