FIN 330 Chapter 2

Which of the following is the balance sheet equation?

Assets equal liabilities plus stockholders' equity.

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

Capital spending, Operating cash flow, Change in net working capital

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

False

Which of the following is NOT a component of cash flow from assets?

Financing expenses

True or false: Operating cash flow does not include depreciation or interest.

True

According to GAAP, when is income reported?

When it is earned or accrued

A balance sheet reflects a firm's:

accounting value on a specific date

Net earnings refers to income earned ______.

after interest and taxes

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

all variable

Non-cash items do not affect:

cash flow

Cash flow to stockholders equals ____.

dividends paid minus net new equity raised

When a firm smooths earnings to please investors, it is called ________.

earnings management

Cash flow to creditors equals:

interest paid minus net new borrowing

The price at which willing buyers and sellers would trade is called ______ value.

market

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

minus

current assets ______ current liabilities equals Net Working Capital

minus

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

net income

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

operating cash flow

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

overstate; understate

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

pay everyday cash outflows.

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value

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

shareholders' equity

Physical assets are termed ______________ assets.

tangible

Operating cash flow (Select all that apply.)

tells us whether or not a firm's cash inflows from its operations are sufficient to cover its everyday cash outflows. is a sign of trouble if negative over a long period of time

The market value of an item is:

the cash value you'd get if you sold it

Financial leverage refers to a firm's _________.

use of debt in its capital structure

Which of the following is an example of a non-cash item on an income statement?

Depreciation

Cash flow refers to

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

According to GAAP, when is revenue recognized on an income statement?

When the value of an exchange of goods or services is known or reliably determined. When the earnings process is virtually completed.

The short run is ______.

an imprecise period of time

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

cash flows

Assets can be categorized as (select all that are appropriate)

current and fixed. tangible and intangible.

The more debt a firm has, the greater its:

degree of financial leverage

Which of these questions can be answered by reviewing a firm's balance sheet? Multiple select question. What is the total amount of assets the firm owns? How much debt is used to finance the firm? How much net income has the firm earned this period? How much of the firm's net income was paid out in dividends?

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

Liquidity refers to the ease of changing _____.

assets to cash