FIN 201 - Online: Chapter 2 (LearnSmart)
Rank the ease (from easiest to hardest) of turning the following assets into cash.
1) Cash Equivalents 2) Accounts Receivable 3) Inventory 4) Plants and Equiptment
The Tax Cuts and Jobs Act of 2017 set the corporate tax rate to be _____ regardless of the level of taxable income
21%
Fixed costs are costs that will not change due to _____
fixed commitments over a stated period of time
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 can be reliably determined
Which of these items do NOT appear on a balance sheet?
-knowledge that has no patent -good management -favorable economic conditions
If a firm's current assets equal $200 and its current liabilities equal $150, then its NWC =
$50
If ending net fixed assets are $100, beginning net fixed assets are $40, and depreciation is $10, then the change in capital spending is ______.
$70
The short run for a firm is the period of time during which
-output can vary -some costs are fixed
Long-Term liabilities represent obligations of the firm lasting over
1 year
Under GAAP, US firms must carry assets at
book value
Assets are recorded at historical cost, not market value, because
it is hard to keep up with the market value
In the long run all costs are
variable
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
Net Capital Spending is equal to the change in *Net Fixed Assets* +
Depreciation
Which of the following is true about the US modified flat-rate tax system?
the tax rate is flat at all income levels
Which of the following are included in the fixed asset portion of the balance sheet?
-accumulated depreciation -trademarks (intangible fixed asset)
The cash flow identity reflects that ________
-cash is either used to produce the product/service, pay creditors, or pay out to the owners of the firm -cash flow from the firm's assets equals the total cash flows to creditors and cash flow to stockholders -a firm generates cash through its various activities
What does 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.)
The _____ tax rate is the tax rate paid on the next dollar of income.
marginal
Book value of assets is *generally*
not what the assets are actually worth
A company's ______ cash flows reflect whether its cash flows from business operations can coveri ts everyday cash outflows
operating
What is the purpose of the income statement?
to measure performance over a set period of time
Free cash flow is better described as
total distributable cash flow
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%
The US tax rate becomes a flat-rate tax in practice at approximately what corporate income level?
$0
If a firm's net working capital goes from $150 in 2013 to $130 in 2014, then the change in the NWC is:
-$20
If interest paid is $100 and net new borrowing is $150, then cash flow to creditors equals:
-$50
Which of the following are period costs?
-selling costs, general expenses, administrative expenses
Residual value is the amount left over after paying ______
Accounts Payable, Bondholders, Other Debt Holders, Preferred Stockholders
Liquidity refers to the ease of changing _________.
Assets to cash
For financial analysis, financial statements and accounting numbers are more important than cash flows
False *financial analysis relies on cash flows, not accounting or book numbers*
Operating cash flow includes capital spending and working capital requirements?
False -operating cash flow is the cash flow generated by business activities, excluding financing, capital spending, or changes in Net Working Capital
How is the average income tax rate computed?
Total tax bill/Total taxable income
Taxes can be a large cash outflow for a corporation
True
According to GAAP, when is income reported?
When it is earned or accrued
A customer has yet to pay the bill for products purchased from Firm A on credit. The seller records this debt in which balance sheet account
accounts receivable
net income refers to money earned
after interest and taxes
The cash flow identity states that cash flows from _____ should equal cash flows to creditors and equity investors.
assets
The short run is a period when there are ________ costs
both fixed and variable
The statement of cash flows explains changes in ______
cash and equivalents
in finance, the value of a firm depends on its ability to generate
cash flows
New working capital plus current liabilities equal ______
current assets
Which of the following is an example of a non-cash item on an income statement?
depreciation
The matching principle of GAAP requires revenues be matched with
expenses
Assets are listed on a balance sheet in which order?
in order of DECREASING liquidity
A decrease in depreciation expense __________ earnings per share.
increases
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
Changes in capital spending can be negative when the acquisition of fixed assets is ______ the sale of fixed assets
less than Capital Spending = Acquisition of Fixed Assets - Sale of Fixed Assets
What is a primary concern for a bank lending funds to a business for the short term?
liquidity
Whose responsibility is it to create value for a firm?
management
Since new cash flows are taxed at ________ tax rates, those tax rates are the most important
marginal
An income statement reflects activity that occurs ______ while a balance sheet reflects values ______
over a period of time; as of a specific date
On a balance sheet, total assets must always equal total liabilities plus
shareholder's equity
The last (residual) claimants to be paid by a firm are the
stockholders
_______ costs change as the output of the firm changes.
variable
If dividends are $100, stock sold is $10, and stock repurchased is $25, what is the cash flow to stockholders?
$115
Given the corporate 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 if it had taxable income of $90,000?
$18,850 =(.15)(50,000) + (.25)(25,000) + (.34)(90,000-75,000)
If you make an extra $1000 in income and your marginal tax rate is 30% while your average tax rate is 20% you will pay an extra
$300 (taxed on every additional dollar (.30*1000)
Suppose our company's taxable income was $235,000 in 2017. Using Table 2.3 calculate the income tax due, the average tax rate, and the marginal tax rate.
$74,900; 32%; 39%
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?
Increasing its non-cash liquid assets will enable a firm to do which of the following?
-Increase its ability to meet short-term obligations -increase its ability to avoid financial distress
What are 2 classifications of costs used by financial accountants
-Product Costs -Period Costs
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 these are generally considered to be short-run fixed costs?
-Property taxes -Management Salries -Rent Payments for a Warehouse
The corporate tax code is simplistic and makes good economic sense
False *the tax code is complex*
What does GAAP stand for?
Generally Accepted Accounting Principles
Which of the following are current assets?
Inventory and accounts receivable
Why is positive net working capital important?
It means the firm should have sufficient cash to meet its current obligations.
Which of the following are classified as liabilities on a firms balance sheet?
-accoounts paable -notes payable
Which of the following are examples of short-run fixed costs?
-bond interest -rent
Which of the following is true about the difference between the income statement and cash inflows/outflows?
-Sales on credit are accounts receivable rather than cash inflows until they are clollected, which may be in a different period. -Income taxes are often deffered, 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 in a different period.
Assets can be described as items that:
-generate revenue -provide market value to the firm -a firm own's
Marginal tax rates are the most important tax rates because:
-incremental cash flows are taxed at marginal rates -financnial decisions are usually based on new cash flows
Under a flat-rate tax, all income levels are taxed at _____.
-the same marginal rate -the same average rate
What should you keep in mind when examining an income statement?
-time and costs -GAAP -cash versus non-cash items
