Finance 331 chapter 2
The use of financial leverage can:
- Increase the chance of financial distress and business failure - Greatly magnify both gains and losses - Increase the potential reward for investors
What does GAAP stand for?
Generally Accepted Accounting Principles
Which of these are generally considered to be a short run fixed costs?
-Property taxes -Rent payments for a warehouse -Management salaries
Which of the following are fixed assets?
land, plant, patents
(blank) income is money earned after interest and taxes
net
On which side of the balance sheet do liabilities appear?
the right side
In the long run, all costs are (blank)
variable
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 statement of cash flow examples changes in (blank)
Cash and equivalents
Marginal tax rates are the most important tax rates because:
- Incremental cash flows are taxed at marginal tax rates - Financial decisions are usually based on new cash flowsQASEZXWD
Cash flow to stockholders equals (blank)
Dividends paid minus net new equity raised
According to GAAP, when is income reported?
When it is earned or accrued
The short run is a period when there are (blank) costs
both fixed and variable
Why is positive net working capital important?
It means the firm should have sufficient cash to meet its current obligations.
Which of the following is a variable cost in the short run?
Raw materials used in production
When a customer purchases an item on credit, the purchase amount is recorded by the seller in which one of these accounts?
accounts receivable
Liquidity refers to the ease of changing (blank)
assets to cash
Non-cash items do not affect (blank)
cash flow
Which of the following are period costs?
-Administrative expenses -General expenses -Selling costs
Which of the following is true about the difference between the income statement and cash inflows and outflows?
-Income taxes are often deferred, 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 -Sales on credit are accounts receivable rather than inflows until they are collected, which may be in a different period
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
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 (blank) in taxes
$300 in taxes
Assets can be described as items that:
- A firm owns - Provide market value to the firm - Generate revenue
Which of the following are classified as liabilities on a firm's balance sheet?
-Notes payable -Accounts payable
Costs that do not change in the short run arise because of (blank)
Fixed commitments
Whose responsibility is it to create value for a firm?
Management
Which are true concerning product costs?
Product costs are reported as costs of goods sold. Product costs contain both fixed and variable costs.
Current assets are defined as assets that can be turned into cash within (blank) months
Twelve
Who is entitled to the residual value of a firm's cash flows?
shareholders
An official accounting statement that helps to explain the change in cash and cash equivalents is called the (blank)
statement of cash flows
Residual value is the amount left over after paying (blank)
-Accounts payable -Other debt holders -Bondholders
Which of these are generally considered to be short-run fixed costs?
-Management salaries -Rent payments for a warehouse -property taxes
The more debt a firm has, the greater its:
Degree of financial leverage
The matching principle of GAAP requires revenues be matched with (blank)
Expenses
How are assets on a balance sheet listed?
In order of decreasing liquidity
What is a primary concern for a bank lending funds to a business for the short term?
Liquidity
If a firm's current assets equal $200 and its current liabilities equals $150, then its net working capital equals (blank)
Working capital - $200 = $150 $50 = working capital
A long term liability represents a(n) (blank)
debt that is not due in the coming year
Accounting profit (blank) cash flow
differs from
Fixed costs are costs that will not change (blank)
in the short run
Which of the following will be found in the liabilities section of a firm's balance sheet?
-Long term bonds issued by the firm -notes payable
The short run for a firm is the period of time during which (blank)
-Some costs are fixed -Output can vary
Rank the ease (from easiest to hardest) of turning the following assets into cash.
1. cash equivalents 2. Accounts receivable 3. inventory 4. plant and equipment
Which of the following do not directly affect cash flow?
Depreciation
Book value of assets is generally:
Not what the assets are actually worth
Net working capital plus current liabilities equals (blank)
current assets
Depreciation is the accountant's estimate of the cost of (blank) used up in the production process
equipment
The price at which willing buyers and sellers would trade is called (blank) value
market
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
The cash flow identity reflects the fact that
- Cash flow from the firm's assets equals the total flow to creditors and cash flow to stockholders -Cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm -A firm generates cash through its various activities
Which of the following are included in the fixed asset portion of a balance sheet?
-Buildings -Trademarks
Which of these items do not appear on a balance sheet?
-Favorable economic conditions -Knowledge that has no patent -Good management
What should you keep in mind when examining an income statement?
-GAAP -Time and costs -Cash versus non-cash items
