FIN 315 CHAPTER 2

RANK THE FOLLOWING ASSETS FROM MOST LIQUID TO LEAST LIQUID

1)CASH EQUIVALENTS 2)ACCOUNTS RECEIVABLE 3)INVENTORY 4)PLANT AND EQUIPMENT

WHICH SHOULD YOU KEEP IN MIND WHEN EXAMINING AN INCOME STATEMENT

1)GAAP 2)TIME AND COSTS 3) CASH VERSUS NON-CASH ITEMS

TRUE OR FALSE:LONG TERM LIABILITIES ARE NOT DUE IN CURRENT YEAR

TRUE

WHICH OF THE FOLLOWING ARE EXAMPLES OF SHORT-RUN FIXED COSTS

1)bond interest 2)rent

THE TAX REFORM ACT OF 1986 AND THE BUDGET RECONCILIATION ACT OF 1993 CREATED ___ ACTUAL TAX RATES

6

WHAT DOES GAAP STAND FOR

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

ASSETS ARE LISTED ON BALANCE SHEET IN WHICH ORDER

IN ORDER OF DECREASING LIQUIDITY

WHY IS IT IMPORTANT FOR ACCOUNTING STANDARDS TO BECOME MORE COMPARABLE ACROSS COUNTRIES

INCREASE GLOBALIZATION OF BUSINESS MAKES IT NECESSARY TO UNDERSTAND FINANCIAL REPORTING BY FIRMS THAT FOLLOW OTHER ACCOUNTING STANDARDS

A DECREASE IN DEPRECIATION EXPENSE___ EARNINGS PER SHARE

INCREASES

ASSETS ARE RECORDED AT HISTORICAL COST, NOT MARKET VALUE BECAUSE

IT IS HARD TO KEEP UP WITH THE MARKET VALUE

----- COSTS CHANGE AS THE OUTPUT CHANGES

VARIABLE

THE CASH FLOW IDENTIFY REFLECTS THE FACT THAT

1) CASH FLOW FROM THE FIRMS ASSETS EQUALS THE TOTAL OF CASH FLOW TO CREDITORS AND CASH FLOW TO STOCKHOLDERS 2) A FIRM GENERATES CASH THROUGH ITS VARIOUS ACTIVITES 3)CASH IS EITHER USED TO PRODUCE THE PRODUCT OR SERVICE, PAY OUT TO THE OWNERS OF THE FIRM

THE USE OF FINANCIAL LEVERAGE CAN

1) GREATLY MAGNIFY BOTH GAINES AND LOSSES 2)INCREASE THE POTENTIAL REWARD FOR INVESTORS 3)INCREASE THE CHANCE FOR FINANCIAL DISTRESS AND BUSINESS FAILURE

MARGINAL TAX RATES ARE THE MOST IMPORTANT TAX RATES BECAUSE

1) INCREMENTAL CASH FLOWS ARE TAXED AT MARGINAL TAX RATES 2) FINANCIAL DECISIONS ARE USUALLY ON NEW CASH FLOWS

WHICH OF THESE ARE GENERALLY CONSIDERED TO BE SHORT RUN FIXED COSTS

1) PROPERTY TAXES 2)RENT PAYMENTS FOR A WAREHOUSE 3) MANAGEMENT SALARIES

WHAT ARE TRUE CONCERNING PRODUCT COSTS

1)PRODUCT COSTS ARE REPORTED AS COSTS OF GOODS SOLD 2)PRODUCT COSTS CONTAIN BOTH FIXED AND VARIABLE COSTS

WHICH ARE TRUE CONCERNING PRODUCTS COSTS

1)PRODUCT COSTS CONTAIN BOTH FIXED AND VARIABLE 2)PRODUCT COSTS ARE REPORTED AS COSTS OF GOODS SOLD

WHICH OF THE FOLLOWING ARE TRUE CONCERNING PRODUCT COSTS

1)PRODUCTS COSTS CONTAIN BOTH FIXED AND VARIABLE COSTS 2)PRODUCT COSTS ARE REPORTED AS COSTS OF GOODS SOLD

COSTS THAT DO NOT CHANGE IN THE SHORT RUN ARISE BECAUSE OF ___

FIXED COMMITMENTS

WHY IS POSITIVE NET WORKING CAPITAL IMPORTANT

IT MEANS THE FIRM SHOULD HAVE SUFFICIENT CASH TO MEET ITS CURRENT OBLIGATIONS

WHOSE RESPONSIBILITY IS IT TO CREATE VALUE FOR A FIRM

MANAGEMENT

FOR FINANCIAL DECISION-MAKING PURPOSES, THE MOST IMPORTANT TAX RATE IS THE ___TAX RATE

MARGINAL

SINCE NEW CASH FLOWS ARE TAXED AT___ TAX RATES, THOSE TAX RATES ARE MOST IMPORTANT

MARGINAL

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

FREE CASH FLOW IS BETTER DESCRIBED AS___

TOTAL DISTRIBUTEABLE CASH FLOW

TRUE OR FALSE: AN INCREASE IN DEPRECIATION EXPENSE LOWERS NET INCOME

TRUE

TRUE OR FALSE: FREE CASH FLOW IS THE TOTAL OF CASH FLOW TO CASH FLOW TO STOCKHOLDERS

TRUE

AN OFFICIAL ACCOUNTING STATEMENT THAT HELPS TO EXPLAIN THE CHANGE IN CASH AND CASH EQUIVALENTS IS CALLED THE___

STATEMENTS OF CASH FLOWS

THE LAST RESIDUAL CLAIMANTS TO BE PAID BY A FIRM ARE THE___

STOCKHOLDERS

WHAT IS THE MOST IMPORTANT ITEM THAT CAN BE EXTRACTED FROM FINANCIAL STATEMENT

THE FIRMS ACTUAL CASH FLOWS

ON WHICH SIDE OF THE BALANCE SHEET DO LIABILITIES APPEAR

THE RIGHT SIDE

WHICH OF THE FOLLOWING IS TRUE ABOUT THE US MODIFIED FLAT-RATE TAX SYSTEM

THE TAX RATE BECOMES FLAT AT VERY HIGH INCOME LEVELS

WHAT IS THE EFFECT OF THE TAX REFORM ACT OF 1986 AND THE OMINBUS BUDGET RECONCILIATION ACT OF 1993 ON CORPORATE TAX RATES

THERE ARE SIX MARGINAL TAX RATES

TRUE OR FALSE: TAXES CAN BE A LARGE CASH OUTFLOW FOR A CORPORATION

TRUE

INCREASING ITS NON-CASH LIQUID ASSETS WILL ENABLE A FIRM TO DO WHICH OF THE FOLLOWING

1)INCREASE ITS ABILITY TO AVOID FINANCIAL DISTRESS 2)INCREASE ITS ABILITY TO MEET SHORT TERM OBLIGATIONS

WHICH OF THESE ITEMS DO NOT APPEAR ON A BALANCE SHEET

1)KNOWLEDGE THAT HAS NO PATENT 2)GOOD MANAGEMENT 3) FAVORABLE ECONOMIC CONDITIONS

WHICH OF THE FOLLOWING WILL BE FOUND IN THE LIABILITIES SECTION OF A FIRMS BALANCE SHEET

1)LONG TERM BONDS 2)NOTES PAYABLE

THE SHORT RUN FOR A FIRM IS THE PERIOD OF TIME DURING WHICH

1)OUTPUT CAN VERY 2)SOME COSTS ARE FIXED

WHICH OF THE FOLLOWING ARE FIXED ASSETS

1)PLANT 2)PATENTS 3)LAND

RESIDUAL VALUE IS THE AMOUNT LEFT OVER AFTER PAYING___

1)PREFERRED STOCKHOLDERS 2)OTHER DEBT HOLDERS 3)ACCOUNTS PAYABLE 4)BONDHOLDERS

WHAT ARE THE TWO CLASSIFICATIONS USED BY FINANCIAL ACCOUNTANTS

1)PRODUCT COSTS 2) PERIOD COSTS

WHEN IS REVENUE RECOGNIZED ON AN INCOME STATEMENT

1)WHEN THE EARNINGS PROCESS IS VIRTUALLY COMPLETED 2) WHEN THE VALUE OF AN EXCHANGE OF GOODS OR SERVICES CAN BE RELIABLY DETERMINED

WHEN REVENUE RECOGNIZED ON AN INCOME STATEMENT

1)WHEN THE EARNINGS PROCESSED IS VIRTUALLY COMPLETED 2) WHEN THE VALUE OF AN EXCHANGE OF GOODS OR SERVICES CAN BE RELIABLY DETERMINE

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

IF THE FEDERAL MARGINAL TAX BRACKET IS 34% THE STATE MARGINAL TAX BRACKET IS 5% AND THE LOCAL MARGINAL TAX BRACKET 1% HOW MUCH MONEY WILL A CORPORATION KEEP IF IT MAKES ANOTHER 1,00,000 IN A TAXABLE INCOME

600,000

SUPOSE YOUR COMPANY TAXABLE INCOME IS 235,000 CALCULATE THE INCOME TAX DUE THE AVERAGE TAX RATE AND THE MARGINAL TAX RATE

74,900; 32%; 39%

THE___ TAX RATE IS THE RATE PAID ON THE NEXT DOLLAR INCOME

MARGINAL

WHICH ONE OF THE FOLLOWING COMPLIES WITH GAAP

MATCHING REVENUES WITH EXPENSES

____ INCOME IS MONEY EARNED AFTER INTEREST AND TAXES

NET

NON-CASH ITEMS ARE EXPENSES THAT DIRECTLY AFFECT___ BUT DO NOT DIRECTLY AFFECT___

NET INCOME; CASH FLOW

A POSITIVE OPERATING CASH FLOW INDICATES THAT THE FIRM IS GENERATING ENOUGH CASH TO

PAY OPERATING COSTS

ON A BALANCE SHEET, TOTAL ASSETS MUST ALWAYS EQUAL TOTAL LIABILITIES PLUS___

SHAREHOLDERS EQUITY

IF A FIRMS NET WORKING CAPITAL GOES FROM 150 IN 2013 TO 130 TO 2014 THEN THE CHANGE IN NET WORKING CAPITAL IS

-20

IF INTEREST PAID IS 100 AND NET NEW BORROWING IS 150 THEN CASH FLOW TO CREDITORS EQUALS

-50

ASSETS CAN BE DESCRIBED AS ITEMS THAT

1) A FIRM OWNS 2)GENERATE REVENUE 3)PROVIDE MARKET VALUE TO THE FIRM

WHICH OF THE FOLLOWING ARE CURRENT ASSETS

1) ACCOUNTS 2)INVENTORY

WHICH OF THE FOLLOWING ARE INCLUDED IN THE FIXED ASSET PORTION OF A BALANCE SHEET

1) ACUMULATED DEPREICATION 2)TRADEMARKS

WHICH OF THE FOLLOWING ARE PERIOD COSTS

1) ADMINISTRATIVE EXPENSES 2)GENERAL EXPENSES 3)SELLING COSTS

WHICH OF THE FOLLOWING IS TRUE ABOUT THE DIFFERENCE BETWEEN THE INCOME STATEMENT AND CASH INFLOWS AND OUTFLOWS

1) SALES ON CREDIT ARE ACCOUNTS RELIVABLE RATHER THAN CASH INFLOWS UNTIL THEY ARE COLLECTED WHICH MAY BE IN A DIFFERENT PERIOD 2) INCOME TAXES ARE OFTEN DEFERRED SO THE AMOUNT ON THE INCOME STATEMENT MAY NOT REPRESENT THE AMOUNT OF THE CHECK TO THE IRS 3) 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

UNDER A FLAT-RATE TAX, ALL INCOME LEVELS ARE TAXED AT___

1) THE SAME MARGINAL RATE 2) THE SAME AVERAGE RATE

WHICH OF THE FOLLOWING CAN BE ANSWERED BY REVIEWING A FIRMS BALANCE SHEET

1) WHAT IS THE TOTAL AMOUNT OF ASSETS THE FIRM OWNS 2)HOW MUCH DEBT IS USED TO FINANCE THE FIRM

WHICH OF THE FOLLOWING ARE EXAMPLES OF SHORT RUN FIXED COSTS

1)BOND INTEREST 2) RENT

IF YOUR TAX BILL IS 200 AND YOUR TAXABLE INCOME IS 2000 THEN YOUR AVERAGE TAX RATE IS___ PERCENT

10

GIVEN THE 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 ON A TAXABLE INCOME OF 60,000

10,000

IF DIVIDENDS ARE 100 STOCK SOLD IS 10 AND STOCK REPURCHASED IS 25 WHAT IS THE CASH FLOW TO STOCKHOLDERS

115

THE US TAX RATE BECOMES A FLAT RATE TAX IN PRACTICE AT APPROXIMATELY WHAT CORPORATE INCOME

18 MILLION

IF A FIRMS CURRENT ASSETS ARE 100 AND ITS CURRENT LIABILITIES ARE 80 THEN ITS WORKING CAPITAL IS

20

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 YOU WILL PAY AN EXTRA ___ IN TAXES

300

ACCORDING TO US TAX CODE MARGINAL AND AVERAGE TAX RATES EQUALIZE AT A FINAL TAX RATE OF ___ PERCENT

35

IF THE FEDERAL MARGINAL TAX BRACKET IS 34% 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 ___%

40

WHAT DOES STOCKHOLDERS EQUITY REPRESENT

A RESIDUAL CLAIM AGAINST THE BOOK VALUE OF THE FIRMS ASSETS

WHAT IS DEPRECIATION

A SYSTEMATIC EXPENSING OF AN ASSET BASED ON THE ASSETS ESTIMATED LIFE

WHEN A CUSTOMER PURCHASES AN ITEM ON CREDIT, THE PURCHASE AMOUNTS IS RECORDED BY THE SELLER IN WHICH ONE OF THESE ACCOUNTS

ACCOUNTS RECIEVABLE

IN THE LONG RUN___ ARE VARIABLE

ALL COSTS

THE SHORT RUN IS___

AN IMPRECISE PERIOD OF TIME

LIQUIDITY REFERS TO THE EASE OF CHANGING___

ASSETS TO CASH

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

WHICH OF THE FOLLOWING IS TRUE

CASH FLOWS CAN BE DERIVED FROM FINANCIAL STATEMENTS

THE CASH FLOWS IDENTIFY STATES THAT CASH FLOW FROM ASSETS EQUALS CASH FLOWS TO

CREDITORS AND STOCKHOLDERS

NET WORKING CAPITAL EQUALS___

CURRENT ASSETS MINUS CURRENT LIABILITIES

THE MORE DEBT A FIRM HAS, THE GREATER ITS

DEGREE OF FINANCIAL LEVERAGE

NET CAPITAL SPENDING IS EQUAL TO THE CHANGE IN NET FIXED ASSETS PLUS

DEPRECIATION

WHICH OF THE FOLLOWING ARE EXAMPLES OF NON-CASH ITEMS ON AN INCOME STATEMENT

DEPRECIATION

ACCOUNTING PROFIT___CASH FLOW

DIFFERS FROM

DEPRECIATION IS THE ACCOUNTANTS ESTIMATE OF THE COST OF___ USED UP IN THE PRODUCTION PROCESS

EQUIPMENT

THE MATCHING PRINCIPLE OF GAAP REQUIRES REVENUE BE MATCHED WITH___

EXPENSES

TRUE OR FALSE: OPERATING CASH FLOW INCLUDES CAPITAL SPENDING AND WORKING CAPITAL REQUIREMENTS

FALSE

TRUE OR FALSE: THE 39 PERCENT TAX BRACKET IS AN OFFICIAL US TAX CODE BRACKET

FALSE

TRUE OR FALSE: THE CORPORATE TAX CODE IS SIMPLISTIC AND MAKES GOOD ECONOMIC SENSE

FALSE

TRUE OR FALSE: FOR FINANCIAL ANALYSIS, FINANCIAL STATEMENTS AND ACCOUNTING NUMBERS ARE MORE IMPORTANT THAN CASH FLOWS

FASLE

COSTS THAT DO NOT CHANGE IN THE SHORT RUN ARISE BECAUSE OF

FIXED COMMITMENTS

BOOK VALUE OF ASSETS IS GENERALLY

NOT WHAT THE ASSETS ARE ACTUALLY WORTH

AN INCOME STATEMENT REFLECTS ACTIVITY OCCURS___ WHILE A BALANCE SHEET REFLECTS VALUES___

OVER A PERIOD OF TIME; AS OF A SPECIFIC DATE

HOLDING TOO MANY LIQUID ASSETS CAN BE HARMFUL FOR A FIRM BECAUSE SUCH ASSETS ARE GENERALLY

LESS PROFITABLE

WHAT IS A PRIMARY CONCERN FOR BANK LENDING FUNDS TO A BUSINESS FOR THE SHORT TERM

LIQUIDITY