ENT4900 Chapter 10

Operating expenses consist of all of the following EXCEPT: a. depreciation. b. marketing and selling expenses. c. cost per number of item sold. d. general and administrative expenses.

cost per number of item sold

Operating expenses consist of all of the following EXCEPT:(marketing and selling expenses.general and administrative expenses.depreciation.)

cost per number of item sold.

Operating expenses are

costs related to marketing and selling a firm's product or service, general and administrative expenses, and depreciation.

Financial statements (accounting statements) are

reports of a firm's financial performance and resources, including an income statement, a balance sheet, and a cash flow statement.

Gross profit are

sales less the cost of goods sold.

Accounts receivable are

the amount of credit extended to customers that is currently outstanding

Interest expense are

the cost of borrowed money.

Cost of goods sold are

the cost of producing or acquiring goods or services to be sold by a firm.

Liquidity is

the degree to which a firm has working capital available to meet maturing debt obligations.

Financial leverage is

the impact (positive or negative) of financing with debt rather than with equity

Working capital cycle is

the process of converting inventory to cash.

Accumulated depreciation is

total (cumulative) depreciation expense taken over an asset's life.

Total asset turnover equal sales divided by: a. total assets. b. total debt. c. debt ratio. d. operating profits.

total assets

Total asset turnover equal sales divided by

total assets.

The return on owner's equity can be calculated as net profits divided by _____.

total owners' equity

Having positive net profits in an income statement does not necessarily mean that a firm has generated positive cash flows. a. True b. False

true

Total assets less outstanding debt must always equal ownership equity. a. True b. False

true

Total assets less outstanding debt must always equal ownership equity.

True

Having positive net profits in an income statement does not necessarily mean that a firm has generated positive cash flows.

True. Correct. Cash flows from operations are calculated by adding back the depreciation expense to the net profits and then subtracting (or adding) any increase (or decrease) in accounts receivable and inventory, or any decrease (or increase) in accounts payable.

A profitable company does not necessarily have positive cash flows.

True. Correct. The profits shown on a company's income statement are not the same as its cash flows and even profitable companies can exhaust their cash and go out of business.

the more debt and less equity they use, the more owners' return on equity will be. This is called ________ . a. return on equity b. profit margins c. financial leverage d. total asset turnover

financial leverage

Debt is

financing provided by creditors.

Net fixed assets are

gross fixed assets less accumulated depreciation.

Which of the following shows the profits and losses of a firm's operations over a period of time?

income statement

Other assets are

intangible assets, such as patents, copyrights, and goodwill

An example of current assets is:

inventories.

Fixed assets include all of the following EXCEPT: a. machinery. b. land. c. trucks. d. inventory

inventory

Fixed assets include all of the following EXCEPT:

inventory.

The best financial ratio to determine a company's ability to pay debt as it come due is the ______ ratio.

liquidity

Long-term debt are

loans from banks or other sources with repayment terms of more than 12 months.

Accrued expenses are

operating expenses that have been incurred but not paid.

Interest expense is deducted from the _____ to arrive at the company's profits before taxes.

operating profits

Cash flow activities are

operating, investing, and financing activities that result in cash inflows or outflows

Accounts payable are

outstanding credit payable to suppliers

The amount of the business owner's initial investment, owner's later investment in the business, and retained earnings comprise

owner's equity capital.

The amount of the business owner's initial investment, owner's later investment in the business, and retained earnings comprise:

owner's equity capital.

The amount of the business owner's initial investment, owner's later investment in the business, and retained earnings comprise

owners equity capital

Ownership equity is

owners' investments in a company plus cumulative net profits retained in the firm.

Fixed assets (property, plant and equipment [PPE]) are

physical assets that will be used in the business for more than one year, such as equipment, buildings, and land.

Profit margins are

profits as a percentage of sales.

Retained earnings are

profits less dividends paid over the life of a business

_____ consist of payments due from a firm's customers.

Accounts receivable

A profit and loss statement is a financial report that shows the sources of a firm's cash and its uses of the cash.

False. Correct. A profit and loss statement, or income statement, indicates the amount of profits or losses generated by a firm over a given time period.

_____ are the shares that represent investor ownership in a firm.

Common stock

________ is the cash that has been invested in a firm by its owners. a. Total assets b. Owner's equity c. Retained earning d. Common stock

Common stock

_____ equals current assets divided by current liabilities.

Current ratio

The best financial ratio to determine a company's ability to pay debt as it come due is the debt ratio. True or False

False

Total assets less outstanding debt must always equal ownership equity. True or False

False

The income statement and the cash flow statement complement each other to give an overall picture of the firm's financial situation.

False. Correct. An income statement is not a measure of cash flows because it is calculated on an accrual basis rather than a cash basis.

You do not need to know a firm's financial position at the beginning of the year to fully understand how that firm performed during that year.

False. Correct. Three financial reports are needed to evaluate a firm's performance over a given time: a balance sheet showing a firm's financial position at the beginning of a year, a balance sheet for the end of the year, and an income statement spanning the time between the two balance sheets.

Balance sheet is

a financial report showing a firm's assets, liabilities, and ownership equity at a specific point in time.

Cash flow statement is

a financial report showing a firm's sources of cash as well as its uses of cash.

Income statement (profit and loss statement) is

a financial report showing the amount of profits or losses from a firm's operations over a given period of time.

Current ratio is

a measure of a company's relative liquidity, determined by dividing current assets by current liabilities.

Return on assets are

a measure of a firm's profitability relative to the amount of its assets, determined by dividing operating profits by total assets.

Total asset turnover is

a measure of how efficiently a firm is using its assets to generate sales, calculated by dividing sales by total assets.

Operating profit margin

a measure of how well a firm is controlling its cost of goods sold and operating expenses relative to sales, determined by dividing operating profits by sales.

Return on equity is

a measure of the rate of return that owners receive on their equity investment, calculated by dividing net profits by ownership equity.

Debt ratio is

a measure of what percentage of a firm's assets is financed by debt, determined by dividing total debt by total assets.

Long-term notes are

agreements to repay cash amounts borrowed from banks or other lending sources for periods longer than 12 months.

Short-term notes are

agreements to repay cash amounts borrowed from banks or other lending sources within 12 months or less.

Cash-basis accounting is

an accounting method of recording profits when cash is received and recording expenses when they are paid.

Accrual-basis accounting is

an accounting method of recording profits when earned and expenses when incurred, whether or not the profit has been received or the expense paid.

Current assets (working capital) are

assets that can be converted into cash relatively quickly.

Current debt (short-term liabilities) are

borrowed money that must be repaid within 12 months.

The best financial ratio to determine a company's ability to pay debt as it come due is the _____ ratio.

current

Assets that are relatively liquid are classified as:

current assets.

The type of assets that can quickly be converted into cash are called

current assets.

The value of a depreciable asset a. Increases over time b. Is constant over time c. Increases with each use of the asset d. Decreases over time

decreases over time

The value of a depreciable asset

decreases over time.

Gross fixed assets are

depreciable assets at their original cost, before any depreciation expense has been taken.

To convert the company's income statement from accrual basis to cash basis, we take two steps: 1) add back _____ to net profits and 2) subtract any uncollected sales and payments for inventory.

depreciation

To convert the company's income statement from accrual basis to cash basis, we take two steps: 1) add back ________ to net profits and 2) subtract any uncollected sales and payments for inventory. a. cash flows b. total assets c. retained earnings d. depreciation

depreciation

Profits before taxes (taxable profits) are

earnings after operating expenses and interest expenses but before taxes

Operating profits are

earnings after operating expenses but before interest and taxes are paid.

Net profits are .

earnings that may be distributed to the owners or reinvested in the company