Principles of Finance Test 1

Which of the following are sources of cash? (Check all that apply.)

An increase in notes payable A decrease in accounts receivable

Which three of the following are most apt to create problems when comparing financial statements for multiple firms?

Differing fiscal years Differing accounting methods Seasonality

True or false: There is only one method for preparing the statement of cash flows.

False

Which of the following are traditional financial ratio categories?

Market value ratios Profitability ratios Asset management ratios

______ income is money earned after interest and taxes.

Net

________ financial statements provide for comparison of firms that differ in currency type.

Standardized

The statement of cash flows summarizes the sources and uses of cash, though which of the following is true of the statement?

There are different methods of preparing it.

Long-term liabilities are not due in the current year (from the date of the balance sheet).

True

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

True

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?

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

accounting

Because we are almost always unable to obtain all of the market information we want, we rely on ______ numbers for much of our financial information.

accounting

Although _________ __________ are often poor reflections of reality, they are often the best information available.

accounting numbers

Net income refers to money earned ______.

after interest and taxes

In the long run, ________ are variable.

all costs

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

book

Under GAAP, U.S. firms must carry assets at:

book value

The total of cash flow to creditors and cash flow to stockholders is called _____.

cash flow from assets

When combining common-size and common-base year analysis, the effect of overall growth in assets can be eliminated by first forming the:

common-size statements

When combining common-size and common-base year analysis, the effect of overall growth in assets can be eliminated by first forming the: Multiple choice question.

common-size statements

The current ratio shows the relationship between ____.

current assets and current liabilities

An important accounting goal is to report financial information to users in a way that is useful for _____.

decision making

The matching principle of GAAP requires revenues be matched with _____.

expenses

Whenever ___________ information is available, it should be used instead of accounting data.

market

The price-earnings (PE) ratio is a ______ ratio.

market value

Net working capital equals current assets ______ current liabilities.

minus

By combining common-size and base year analysis, we eliminate the effect of the _____.

overall growth

At the most fundamental level, firms generate cash and:

spend it

True or false: In one way or another, the basic problem with financial statement analysis is that there is no underlying theory to help us identify which quantities to look at and to use in establishing benchmarks.

true

The cash flow identity reflects the fact that:

- cash flow from the firm's assets equals the total of cash 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.

What does a balance sheet reflect about a firm?

Accounting value on a specific date

Which of the following are uses of cash? (Check all that apply.)

Decreases in accounts payable Increases in property, plant and equipment Increases in inventory

________ ________ are the prime source of information about a firm's financial health.

Financial statements

Which of the following are uses of cash?

Increases in property, plant and equipment Decreases in accounts payable Increases in inventory

Which one of the following represents what a firm owns at a given point in time?

Its assets

_____ refers to the speed and ease with which an asset can be converted to cash.

Liquidity

_______ financial statements provide for comparison of firms that differ in size.

Standardized

Which is true of taxes?

They can be one of the largest cash outflows a firm experiences.

The more debt a firm has, the greater its:

degree of financial leverage

The information needed to compute the profit margin can be found on the ____.

income statement

A(n) ________ in net profit margin will increase ROE.

increase

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

Cash flow to stockholders is dividends paid ______ (minus/plus) net new equity raised.

minus

Noncash items are expenses that directly affect _____ but do not directly affect ______.

net income; cash flow

Assets can be described as items that _____.

provide market value to the firm, generate revenue, a firm owns

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

statement of cash flows

Most importantly, assets provide ______ to the firm.

value

In the long run, all costs are _____.

variable

Another name for short-term financial management is ___ management.

working capital

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

10 Reason: Average tax rate = $200/$2,000 = 0.1, or 10%

The Tax Cuts and Jobs Act of 2017 set the corporate tax rate to be ______ regardless of the level of taxable income.

21%

The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way.

DuPont

The use of financial leverage can:

Increase the chance of financial distress and business failure. Increase the potential reward for investors. Greatly magnify both gains and losses.

Which one of the following is one way in which financial managers use a common-size balance sheet?

To track changes in a firm's capital structure

Which of the following is the correct representation of the total debt ratio?

Total assets - Total equity)/(Total assets)

How is the average income tax rate computed?

Total tax bill/Total taxable income

Liquidity refers to the ease of changing _____.

assets to cash

A useful way of standardizing financial statements is to choose a ____ and then express each item relative to the _____. Multiple choice question.

base year; base amount

The statement of cash flow explains changes in _____.

cash and equivalents

Noncash items do not affect _____.

cash flow

A long-term liability represents a(n) _____.

debt that is not due in the coming year

Cash flow to stockholders equals ____.

dividends paid minus net new equity raised

A common-base year financial statement presents items relative to a certain base, which is the _____.

dollar amount of each item during a common base year

The passage of the Tax Cuts and Jobs Act of 2017 was to make the federal corporate tax rate in the United States a _____ tax.

flat

Which of the following are sources of cash?

A decrease in accounts receivable An increase in notes payable

How is the price-earnings (PE) ratio computed?

Market price per share/Earnings per share

Common-size statements are used for comparing firms with differing ____.

sizes