FIN 780 exam 1 chapter 2 concepts

Cash flow from investing activities includes which of the following?

-sales of fixed assets -changes in capital assets -acquisition of fixed assets

Rank the ease (from easiest to hardest) of turning the following assets into cash.

1. cash equivalent 2. account receivable 3. inventory 4. plant and equipment

________ is the price at which willing buyers and sellers would trade the assets.

Market Value

The short run is ______.

an imprecise period of time

In March, Al purchased 10 video games for his store's inventory. In April, he sold five games on credit and received the payment in May. The income should be reported in the month of

april

Liquidity refers to the ease of changing _____.

assets to cash

In determining the economic and financial condition of a firm, ______ is more revealing than net income.

cash flow

Stockholders' equity ______ when retained earnings increase.

increases

Debt service implies paying ____.

interest and principal

Which one of the following calculates cash flow from operations?

EBIT + Depreciation - Taxes

Which one of these is the most illiquid?

fixed assets

Accounting ______ refers to the speed and ease with which assets can be converted to cash.

liquidity

Financial accountants do not distinguish between _____ and _____.

variable costs; fixed costs

What does it mean when the firm has positive net working capital?

It means the firm should have sufficient cash to meet its current obligations.

If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the change in capital spending is ____.

$100 - 60 + 10 = $50

If a firm's current assets are $100 and its current liabilities are $80, then its net working capital is:

$20

If ending net fixed assets are $100, beginning fixed assets are $40, and depreciation is $10, then the change in capital spending is _____.

$70

Which of these are generally considered to be short-run fixed costs?

-Property taxes -Management salaries -Overhead expenses

Current assets are defined as assets that can be turned into cash within ______ months.

12

Which one of the following is true?

Cash flows can be derived from financial statements.

Which of the following do not directly affect cash flow?

Depreciation

The_______ tax rate is the tax paid on each extra dollar of income while the _______ tax rate is the percentage of income paid in taxes.

Marginal; Average

What does the operations section of an income statement report?

Revenues and expenses from principal operations

Which of the following increases a firm's cash flow that can be used for capital spending?

Sale of fixed assets

What is treasury stock?

Stock the firm has repurchased

What is the most important item that can be extracted from financial statements?

The firm's actual cash flows

How is the average income tax rate computed?

Total tax bill/Total taxable income

When is the appreciation on property recognized as a gain?

When the property is sold

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

creditors and stockholders

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

depreciation

The actual economic value of an asset varies ______ the asset's future cash flows.

directly with

Cash flow to stockholders equals ____.

dividends paid minus net new equity raised

To smooth its earnings, a firm is more apt to sell appreciated property and realize the income on that sale when its other earnings are _____.

down

EPS stands for

earnings per share

Depreciation is the accountant's estimate of the cost of ______ used up in the production process.

equipment

The activity of making net payments to creditors and owners (excluding interest) is called a(n) ______ activity in the accounting statement of cash flows.

financing

Selling a firm's plant and equipment results in a change in ____.

fixed assets

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

fixed assets

The purpose of a(n) ______ is to measure performance over a set period of time.

income statement

Cash flows from the acquisition and sale of fixed assets are located in the _______ activities section of the accounting statement of cash flows.

investing

Cash flow to stockholders is the amount of cash that a company pays to its stockholders less any cash received from

issuing new shares of stock

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

marginal

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

market

The accounting equation shows that stockholders' equity equals assets ______ liabilities.

minus

______ income is earnings after interest and taxes.

net

The first step in calculating cash flow from operating activities is to adjust net income for ____.

non-cash items and net working capital changes

The total cash flow of the firm includes ____.

operating, capital spending, and net working capital cash flows

An income statement reflects activity that occurs _____ while a balance sheet reflects values ____.

over a period of time; as of a specific date

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

pay operating costs

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

plus depreciation

Net cash flow is _______ when current assets are greater than current liabilities.

positive

Debt service means repaying ____.

principal and interest

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

shareholders equities

Negative capital spending would mean more fixed assets were______than_______

sold; purchased

Who owns treasury stock?

the issuer of the stock

Financing activities involve cash flows:

to and from creditors

What is the purpose of the income statement?

to measure performance over a set period of time

Operating cash flow, capital spending, and additions to net working capital are the components of _______

total cash flow

Free cash flow is better described as ____.

total distributable cash flow

True or false: Free cash flow is the total of cash flow to creditors and cash flow to stockholders.

true

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; Additional tax = (.30)($1,000)

What is depreciation?

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

What does the acronym EBIT stand for?

Earnings before interest and taxes

The cash flow from operating activities results from which of the following?

Normal business activities such as producing and selling goods and services

True or false: The realization (timing) of income can be useful to a firm.

True

A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts?

accounts receivable

When a customer purchases an item on credit, the purchase amount is recorded in the books of the seller in which one of these accounts?

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

In the long-run, ________ are variable.

at all costs

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

EBIT stands for earnings ______ and taxes.

before interest

On the balance sheet, assets are listed at their _____ value.

book

Assets are listed on a US firm's balance sheet at ________.

cost

True or false: Stockholders' equity appears on the left-hand side of the balance sheet.

false

When a firm pays out fewer dividends, it ______ the accounting value of its retained earnings.

increases

True or false: Revenue includes both cash and credit sales of goods and services.

true

True or false: Taxes can be a large cash outflow for a corporation.

true

Which of the following are included in a firm's inventory according to GAAP?

-Finished goods -Work in progress -Raw materials

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?

Liabilities usually involve which of these?

-obligations of the firm -require a cash payout within a stated period of time

The short run for a firm is the period of time during which _______

-output can vary -some costs are fixed

Which of these are reported in the operations section of an income statement?

-Expenses from principal operations -Revenues from principal operations

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

assets

A balance sheet reflects a firm's ______ value on a particular date.

accounting

Stockholder's equity is the residual difference between _________.

assets and liabilities

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

both fixed and variable

Which of the following is NOT a component of operating cash flow?

capital spending

The statement of cash flow explains changes in _____.

cash and equivalents

Non-cash items do not affect:_______

cash flow

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

cash flows

Net income expressed per share of common stock is known as

earnings per share

Non-cash items are ______ that ____ cash flow.

expenses; do not directly affect

True or false: For financial analysis, financial statements and accounting numbers are more important than cash flows

false

True or false: In the short run, all costs are fixed.

false

Revenue minus expenses measures a firm's ______

income

Which of the following shows performance during the year?

income statement

Raw materials, work in process, and finished goods are examples of _______.

inventory

Changes in capital spending can be negative when the acquisition of fixed assets is ______ the sale of fixed assets.

less than

Non-cash items are expenses that directly affect _____ but do not directly affect ______.

net income; cash flow

What impact will the collection of cash from a firm's credit customers have on its net working capital?

no effect

Which section of the income statement reports a firm's operating revenues and expenses?

operations section

Accountants usually distinguish between ______ costs and ______ costs.

product; period

How is income defined?

revenue minus expenses

An official accounting statement that helps to explain the change in cash and cash equivalents is called the _____.

statement of cash flows

Cash flow from operations is calculated by adding depreciation to EBIT and ______ current taxes.

subtracting

The amount of taxes paid on a firm's earnings is determined by the set of rules known as the _____________

tax code

Operating cash flow reflects which one of these?

tax payments

True or false: A balance sheet shows what a firm owns and how it is financed.

true

True or false: Contract liabilities put the firm at risk of default.

true

True or false: There is a correlation between future cash flows and the economic value of an asset.

true

In the long run, all costs are ______.

variable

GAAP requires that income is reported:

when it is accrued, regardless of payment status

If your tax bill is $200 and your taxable income is $2,000, then your average tax rate is _____ percent.

10

What does stockholders' equity represent?

A residual claim against the firm's assets

Which one of these is a correct version of the balance sheet equation?

Assets = Liabilities + Stockholders' equity

If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals ______.

$200 - 150 = $50

True or false: Net income equals cash flow.

False

True or false: Operating cash flow includes capital spending and working capital requirements.

False

What does GAAP stand for?

Generally accepted accounting principles

Why would negative operating cash flow indicate trouble for a firm?

If operating cash flow is negative, it means that the firm is not generating enough cash to pay operating costs.

Which of the following are examples of short-run fixed costs?

-Bond interest -Rent

Which of these will result from a firm using cash to buy inventory?

-Inventory would increase -Cash would decrease

Which of the following are found on an income statement?

-The operations section -The non-operating section

Operating cash flow differs from total cash flow in that the latter makes adjustments for

-additions to net working capital -capital spending