FIN 101 CH 2
Who is entitled to the residual value of a firm's cash flows?
Shareholders
Net income refers to money earned ____________.
After interest and taxes
Long-term liabilities represent obligations of the firm lasting over_____.
1 year
Fixed costs are costs that will not change due to ___
fixed commitments over a stated period of time
hat are two classifications of cost used by financial accountants?W
Period Cost Product Cost
Which of the following is true?
Cash flows can be derived from financial statements
How are assets on a Blanche sheet listed?
in order of decreasing liquidity
A fixed asset
is one that has a relatively long life
why is positive net working capital important?
it means the firm should have sufficient cash to meet its current obligations
Book value of assets is generally:
not what the assets are actually worth
intangible fixed assets
such as a trademark or patent.
in the long run, all costs are___
variable
if the federal marginal tax bracket is 215 the state marginal tax bracket is 5%, and the local marginal tax bracket is 1%, how much money will a corporation keep if it makes another $1,000,000 in taxable income?
730,000 Check notes pg 2
suppose your company's table income was $235,000 in 2017. using table 2.3, calculate the income tax due , the average tax rate, and the marginal tax rate. round average tax rate to the nearest whole number.
79,900; 34%, 39%
Which of the following are examples of short-run fixed costs?
Bond Interest Rent
The statement of cash flows explains changes in ____________.
Cash and equivalents
Interest paid $70 - Net new borrowing 46
Cash flow to creditors $24
Which of the following will be found in the liabilities section of the firms balance sheet?
- Accounts payable- -Notes payable -long term bonds issued by the firm
Which of these items do NOT appear on a balance sheet?
- Knowledge that has no patent .- Favorable economic conditions. - Good management.
if the federal marginal tax bracket is 21%, the state marginal tax bracket is 5%, and the local marginal tax bracket is 1%, the overall marginal tax rate for the company will be________%
27 add it up
The short run is _____________.
An imprecise period of time
The cash flow identity states that cash flow from assets equals cash flows to ____________.
Creditors and stockholders
For financial decision-making purposes, the most important tax rate is the_______ tax rate.
Marginal
If Dividends are $100, Stock sold is $10, and stock repurchased is $25, what is the cash flow to stockholders?
$115= (100-10)+25
What of the following are fixed assets?
- Land - Patents - Plant
marginal tax rates are the most important tax rates because
- incremental cash flows are taxed at marginal tax rates -financial decisions are usually based on new cash flows
what should you keep in mind when examining an income statement?
- time and costs - cash vs non cash -GAAP
Rank the ease (from easiest to hardest) of turning the following assets into cash.
a. Cash equivalents b. accounts receivable c. inventory d. Plant and equipment
residual value is the amount left over after paying___
bondholders- other debt holders- Accounts Payable
on the balance sheet, assets are listed at their_____ value.
book
Rank the ease (from easiest to hardest) of turning the following assets into cash
cash equivalents accounts receivable inventory plant and equipment
On a balance sheet, total assets must always equal total liabilities plus:
Shareholders' equity
the last (residual) claimants to be paid by a firm are the_____.
Stockholders
tangible fixed assets
Such as a truck or a computer
cash flow to stockholders
dividends paid less net new equity raised
Assets are classified as
either current or fixed assets.
why is it important for accounting standards to become more comparable across countries?
increasing globalization of business makes it necessary to understand financial reporting by firms that follow other accounting standards
assets are recorded at historical cost, not market value because...
it is hard to keep up with market value
An income statement reflects activity that occurs _____ while a balance sheet reflects values _____
over a period of time; as of a specific date
what is an example of a variable cost in the short run?
raw materials used in production
Liquidity
refers to the speed and ease with which an asset can be converted to cash.
Free Flow Cash is better described as
total distributable cash flow
free cash flow is better described as
total distributable cash flow
Operating cash flow includes capital spending and working capital requirements.
False
The corporate tax code is simplistic and makes good economic sense.
False (the corporate tax code is complex)
If dividends are $100, stock sold is $10, and stock repurchased is $25, what is the cash flow to stockholders?
$115
On which side of the balance sheet do liabilities appear?
The right side
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the change in capital spending is ___.
$50 (NET CAPITAL SPENDING = ENDING NET FIXED ASSETS - BEGINNING NET FIXED ASSETS + DEPRECIATION)
If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals ___.
$50 **(200-150)
when is revenue recognized on an income statement?
-when the exchange of goods and services is completed - when the earnings process is virtually completed
The difference between average and marginal tax rates can best be illustrated with an example. Suppose our corporation had a taxable income of $200,000 in 2017. What was the tax bill? Using Table 2.3, we can figure our tax bill: .15($50,000) = $ 7,500.25($75,000 − 50,000) = 6,250.34($100,000 − 75,000) = 8,500.39($200,000 − 100,000) = 39,000 $61,250
Our total tax was $61,250. In our example, what is the average tax rate? We had a taxable income of $200,000 and a tax bill of $61,250, so the average tax rate is $61,250/$200,000 = 30.625 percent. What is the marginal tax rate? If we made one more dollar, the tax on that dollar would be 39 cents, so our marginal rate is 39 percent.
FREE CASH FLOW IS THE TOTAL OF CASH FLOW TO CREDITORS AND CASH FLOW TO STOCKHOLDERS
TRUE
Which of the following is true about the U.S. flat-rate tax system?
The Tax rate is flat at all income levels
What is the most important item that can be extracted from financial statements?
The firms actual cash flow
Under Flat-rate tax, alll income levels are taxed at
The same average rate The same marginal rates
An increase in depreciation expense lowers net income
True
Free Cash flow is the total of cash flow to creditors and cash flow to stock holders
True
taxes can be a large cash outflow for a corporation
True
Most importantly assets provided __ to the firm
Value
which one of the following complies with GAAP?
matching revenues with expenses
Increasing its non-cash liquid assets will enable a firm to do which of the following?
Increase its ability to avoid financial distress. Increase its ability to meet short-term obligations.
Cashflow to Creditors=
Interest Paid-Net new Borrowing
A customer has yet to pay the bill for products purchased on credit. The debt is recorded on the balance sheet as...
accounts receivable
networking capital equals
current assets-current liabilities
which of the following is a non cash item on an income statement
depreciation
Cash flow to stockholders=
dividends paid - net new equity raised
a decrease in depreciation expense_______earnings per share.
increases
Non-cash items are expenses that directly affect __________ but do not directly affect _________.
net income; cash flow
the tax cut and jobs act of 2017 set the corporate tax rate to be_______ regardless of the level of taxable income
21%
Net working capital plus current liabilities equals _____________.
Current assets
Change in NWC=
Ending NWC- Beginning NWC
Depreciation is the accountant's estimates of the cost of _____ used up in the production process.
Equipment
balance sheet
Financial statement showing a firm's accounting value on a particular date. It is a convenient means of organizing and summarizing what a firm owns (its assets), what a firm owes (its liabilities), and the difference between the two (the firm's equity) at a given point in time.
Changes in capital spending can be negative when the acquisition of fixed assets is _____ the sale offered assets
Less than
whose responsibility is it to create value for a firm?
Management
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
a company's ____ cash flows reflect whether its cash flows from business operations can cover its everyday cash outflows.
Operating
current asset
has a life of less than one year. This means that the asset will convert to cash within 12 months.
what is a primary concern for a bank lending funds to a business for the short term?
liquidity
Current assets are defined as assets that can be turned into cash within________ months.
twelve
Which of the following is true about the difference between the income statement and cash 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 material purchases on credit are AP rather than cash outflows until they are paid, which many 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 are true concerning product costs?
- Product costs are reported as costs of goods sold - Product costs contain both fixed and variable costs
Which of the following are examples of short-run fixed costs?
- Rent payments for a warehouse - Property Taxes - Management Salaries
which of the following are period costs?
- Selling costs - General expenses - Administrative expenses
If you make an extra $1,000 in income and your marginal tax rate is 30 percent while your average tax rate is 20 percent, then the extra income is taxable at ______.
30% (300)
given the corporate tax rate of 15% on income from $0 to %50,000, 25% on income from $50,001 to $75,000, and 34% on income from $75,001 to $ 100,000, approximately how much tax would a company pay if it had taxable income of $90,000?
= (.15)(50,000)(.25)(25,000)/ (.34)(90,000-75000)=$18,850
Assets
= Liabilities + Shareholders' equity
The U.S. tax rate becomes a flat-rate tax in practice at approximately what corporate income level?
$0
Given the tax rates of 15% on Income from $0 to $50,000, 25% on income from $50,001 to $75,000, and 34% on income from $75,001 to $100,000, approximately how much tax would a company pay on a taxable income of $60,000?
(.15)(50,000)+(.25)(10,000) = $10,000
The cash flow identity reflects the fact that
- Cash flows from the firms's assets equal the total of cash flow to creditors and cash flow to stock holders - 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.
What does GAAP stand for?
Generally Accepted Accounting Principles
The more debt a firm has, the greater its:
Degree of financial leverage
Net capital spending is equal to ending net fixed assets minus beginning net fixed assets_____.
Depriciation
Liquidity refers to the ease of changing ____________.
Assets to cash
what does Stockholders equity represent?
- a residual claim against the firms liabilities (the BV of the firms assets less the BV of its current assets) - a claim against all the firms assets- a residual claim against the book value of the firms assets (the BV of the firms assets less the book value of its liabilities) - a fixed claim against the firms liabilities