FINANCE CH 3
EBITDA stands for earnings before interest, taxes, debt, and assets. True/False
False
Free cash flow is the amount of cash that if withdrawn would harm the firm's ability to operate and to produce future cash flows. True/False
False
If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow. False/True
False
If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change. False/True
False
If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant. True/False
False
The amount shown on the December 31, 2012, balance sheet as "retained earnings" is equal to the firm's net income for 2012 minus any dividends it paid. True/False
False
The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision. True/False
False
The operating margin measures operating income per dollar of assets. False/True
False
An increase in accounts payable represents an increase in net cash provided by operating activities just like borrowing money from a bank. An increase in accounts payable has an effect similar to taking out a new bank loan. However, these two items show up in different sections of the statement of cash flows. False/True
True
Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books. True/False
True
Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations. True/False
True
Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations. True/False
True
Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. If the firm has sufficient retained earnings, it can purchase assets and pay for them with cash from retained earnings. False/True
True
On the balance sheet, total assets must always equal the sum of total liabilities plus equity. True/False
True
Question 40 The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term debt obligations. False/True
True
The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders' equity. True/False
True
The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of the stockholders' claims against the firm's existing assets. Put another way retained earnings are stockholders' reinvested earnings. True/False
True
Two metrics that are used to measure a company's financial performance are net income and cash flow. Accountants emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on cash flows as they do on net income. True/False
True
Typically, the statement of stockholders' equity starts with total stockholders' equity at the beginning of the year, adds net income, subtracts dividends paid, and ends up with total stockholders' equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, and will result in a substantial amount of retained earnings shown on the balance sheet. True/False
True
