Financial Management Chapter 2
if a firms net working capital goes from $150 in 2013 to $130 in 2014, then the change in net working capital is
-$20
Long-term liabilities represent obligations of the firm lasting over __
1 year
Which of these items do NOT appear on a balance sheet?
1. Good management 2. favorable economic conditions 3. talented employees
Which of the following are examples of short-run fixed costs?
1. building insurance 2. office rent
An income statement reflects activity that occurs __ while a balance sheet reflects values __
1. over a period of time 2. as of a specific date
What does stockholders equity represent?
A residual claim against the book value of the firms assets. (The book value of the firm's assets less the book value of its liabilities)
Net working capital equals __
current assets minus current liabilities
The more debt a firm has, the greater its:
degree of financial leverage
accounting profit __ cash flow
differs from
Depreciation is the accountant's estimate of the cost of __ used up in the production process
equipment
Which one of the following is shown on the left-hand side of the balance sheet?
fixed assets
costs that do not change in the short run arise because of __
fixed commitments
What does GAAP stand for?
generally accepted accounting principles
Assets are listed on a balance sheet in which order?
in order of decreasing liquidity
for financial decision-making purposes, the most important tax rate is the __ tax rate
marginal
which one of the following complies with GAAP?
matching revenues with expenses
Which of the following are included in the fixed asset portion of a balance sheet?
trademarks
Most importantly, assets provide __ to the firm.
value
The total __ costs change as the output of the firm changes
variable
If a firm's current assets are $100 and its current liabilities are $80, then its net working capital
$20
Which of the following are classified as liabilities on a firms balance sheet?
1. Notes Payable 2. Accounts Payable
What should you keep in mind when examining an income statement?
1. cash versus non-cash items 2. time and costs 3. GAAP
non-cash items are __ that __ cash flow
1. expenses 2. do not directly affect
suppose your company's taxable income is $235,000. Using table 2.3, calculate the income tax due, the avg tax rate, and the marginal tax rate
1.income tax due 74,900 50000 x .15=7500 25000 x .25=6250 25000 x .34=8500 135,000 (235-100)x .39=52,650 2. average tax rate 32% 74,900/235,000 3. marginal tax rate 39%
if your tax bill is $200 and your taxable income is $2000, then your average tax rate is __ percent
10
If you make an extra $1000 in income and your marginal tax rate is 30 percent while your average tax rate is 20 percent, then the extra income is taxable at __
30%
if you earn an extra $100 of taxable income this year and owe taxes of $34 on that income, then your marginal tax rate is __ percent
34
Why is positive net working capital important?
It means the firm should have sufficient cash to meet its current obligations
When a customer purchases an item on credit, the purchase amount is recorded by the seller in which one of these accounts?
accounts receivable
Which one of these is considered to be the most liquid?
accounts receivable
in the long run, __ are variable
all costs
the cash flow identity states that cash flows from __ should equal cash flows to creditors and equity investors
assets
Liquidity refers to the ease of changing __
assets to cash
Which of the following are examples of non-cash items on an income statement?
depreciation
T or F. in the short run, all costs are fixed
false
T or F. operating cash flows includes capital spending and working capital requirements
false
The purpose of a(n) __ is to measure performance over a set period of time
income statement
A decrease in depreciation expense __ earnings per share
increases
why is it important for accounting standards to become more comparable across countries?
increasing globalization of business makes it necessary to understand financial reporting by firms that follow other accounting standards
Assets are recorded at historical cost, not market value, because:
it is hard to keep up with the market value
What is a primary concern for a bank lending funds to a business for the short term?
liquidity
Whose responsibility is it to create value for a firm?
management
since new cash flows are taxed at __ tax rates, those tax rates are the most important
marginal
The __ principle of GAAP states that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service
matching
book value of assets is generally
now what the assets are actually worth
a positive operating cash flow indicates that the firm is generating enough cash to __
pay operating costs
what are two classifications of costs that, in practice, financial accountants tend to classify
period and product costs
How is income defined?
revenues minus expenses
Who is entitled to the residual value of a firms cash flows?
shareholders
On a balance sheet, total assets must always equal total liabilities plus __
shareholders equity
an official accounting statement that helps to explain the change in cash and cash equivalents is called the __
statement 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 statements
the firms actual cash flows
Current assets are defined as assets that can be turned into cash within __ months
twelve
