FIN 3060 Ch 2

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

-GAAP -time and costs -cash versus noncash items

Select all that apply Which of these questions can be answered by reviewing a firm's balance sheet?

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

Assets can be categorized as:

-tangible and intangible assets. -current and fixed assets.

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

21

U.S. corporations pay tax at a rate of _______ percent.

21

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

Operating cash flow, capital spending, change in NWC.

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

Period costs

According to GAAP, when is income reported?

When it is earned or accrued

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

Cash flow refers to _____.

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

Financial leverage refers to a firm's ______.

use of debt in its capital structure

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

assets

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

changed

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

depreciation

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

dividends

Cash flow to stockholders= ____.

dividends paid - net new equity raised

The common set of standards and procedures by which audited financial statements are prepared are called:

generally accepted accounting principles (GAAP)

cash flow to creditors=

interest paid - net new borrowing

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

interval of time

For a mature firm, operating cash flow:

is usually positive and a sign of trouble if negative over a long period of time

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

net income

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

overstate; understate

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

plus depreciation

Physical assets are termed ______ assets.

tangible

The market value of an item is:

the cash value you'd get if you sold it

Changes in capital spending can be negative if:

the firm sold more assets than it purchased

What is the purpose of the income statement?

to measure performance over a set period of time

What is depreciation??

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

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

noncash items

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

operating cash flows

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

pay everyday cash outflows.

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

product; period

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

shareholders' equity.

Non-cash items do not affect:

cash flow

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

COGS

Net capital spending is equal to the change in net fixed assets plus:

Depreciation

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

True

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

True

______ changes as the output of the firm changes.

Variable cost

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

minus

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

shareholders

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

total assets; total liabilities

Free cash flow is better described as ____.

total distributable cash flow

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

assets

Liquidity refers to the ease of changing ______.

assets to cash

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

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

both fixed and variable

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

cash flows

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

creditors and stockholders

Non-cash items are ______ that ____ cash flow.

expenses; do not directly affect

Marginal tax rates are the most important tax rates because:

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

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

fixed commitments.

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

minus

In the long-run, costs may be considered as ________.

All Variable

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

Big ol FALSE

True or false: 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.

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

False

Net capital spending is negative when:

a firm sold off more assets than it purchased

What is depreciation?

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

A balance sheet reflects a firm's:

accounting value on a specific date

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

accounts receivable

Which one of these is considered to be the most liquid?

accounts receivable

Net earnings refers to income earned ______.

after interest and taxes

The short run is ______.

an imprecise period of time

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

are less than

Liabilities can be classified as ______ or long-term.

current

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

marginal tax rate

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