SB chapter 2

the common set of standards and procedures by which audited financial statements are prepared are called

GAAP

residual value is the amount left over after paying

accounts payable, other debt holders and bondholders

a customer has yet to pay the bill for products purchased on credit. the seller records this debt in which balance sheet account?

accounts receivable

what are considered period costs

administrative expenses, general expense, and selling costs

what a firm owns at a given point in time?

asset

the difference between the total assets and total liabilities is shareholders equity. also called

common equity or owners equity

the cash flow identity states that cash flow from assets equals cash flows to

creditors and stockholders

the matching principle of GAAP requires revenues be matched with

expenses

costs that do not change in the short run arise because of

fixed commitments

assets can be described as items that

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

on a balance sheet, total assets must always equal total liabilities plus

shareholders equity

the last (residual) claimants to be paid by a firm are the

stockholders

marginal tax rate

the tax rate paid on the next dollar of income

what is true of taxes

they can be one of the largest cash outflows a firm experiences

who is entitled to the residual value of a firms cash flow?

shareholders

matching 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

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

21%

cash flow identity reflects

a firm generates cash through its various activities. Cash flow from the firms 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.

the short run

a period when there are both fixed and variable costs

what does stockholders equity represents

a residual claim against the book value of the firms assets

in the long run

all costs are variables

examples of short-run fixed costs

bond interest and rent

on the balance sheet, assets are listed at their __ value

book

the statement of cash flow explains changes in

cash and equivalents

rank the ease of turning the following assets into cash

cash equivalents, accounts receivable, inventory, plant and equipment

Which of the following is true?

cash flows can be derived from financial statements

what should you keep in mind when examining an income statement

cash vs noncash items, GAAP, time and costs

cash flow to creditors is equal to

interest paid less net new borrowing

taxes can be a large cash flow outflow for a corporation

true

true or false, financial statements are frequently a key source of information for financial decisions

true

another name for short-term financial management is

working capital management

cash flow to stockholders equals

dividends paid minus net new equity raised

assets are listed on a balance sheet in which order?

in order of decreasing liquidity

how are assets on a balance sheet listed?

in order of decreasing liquidity

product costs

include such things as raw materials, direct labor, expense, and manufacturing overhead

increasing its noncash liquid assets will enable a firm to do which of the following?

increase its ability to avoid financial distress and to meet short-term obligations

the use of financial leverage can:

increase the potential reward for investors, greatly magnify both gains and losses, and increase the chance of financial distress and business failure

a decrease in depreciation expense ___ earnings per share

increases

why is it important for accounting standards to become more comparable across countries?

increasing globalization 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

why is positive net working capital important?

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

holding too many liquid assets can be harmful for a firm because such assets are generally

less profitable

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

liquidity

what is a primary concern for a bank lending funds to a business for the short term

liquidty

generally considered to be short-run fixed costs

management salaries, property taxes, rent payments for a warehouse

for financial managers, the accounting value of the stock is not an especially important concern; it is ___ that matters

market value

accountants usually distinguish between

product costs and period costs

a variable cost in the short-run

raw materials used in production

differences between the income statement and cash inflows/outflows?

sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period. 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.

how is the average income tax rate computed

total tax bill/total taxable income

true or false, long-term liabilities are not due in the current year

true

when is net working capital positive?

when the current assets exceed current liabilities

what will be found in the liabilities section of a firms balance sheet?

notes payable, long-term bonds issued by the firm

liquidity refers to the ease of changing

assets to cash

what is depreciation

a systematic expensing of an asset based on the assets estimated life