Business Finance Chapter 2

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Current assets are defined as assets that can be turned into cash within ______ months.

12

Which of these questions can be answered by reviewing a firm's balance sheet?

How much debt is used to finance the firm? What is the total amount of assets the firm owns?

______ changes as the output of the firm changes.

Variable cost

A company's ______ tax rate is its tax bill divided by its total taxable income, and its ______ tax rate is the tax rate it pays on the next dollar of income.

average; marginal

Interest paid _____ (Plus/Minus) net new borrowing equals cash flow to creditors.

minus

The last item (or "bottom line") on the income statement is typically the _________.

net income

Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm.

overstate; understate

Ending net fixed assets minus beginning net fixed assets _____ depreciation equals net investment in fixed assets.

plus

Net capital spending is equal to ending net fixed assets minus beginning net fixed assets ____.

plus depreciation

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value

On a balance sheet, total assets must always equal total liabilities plus:

shareholders' equity

Physical assets are termed ______________ assets.

tangible

The market value of an item is:

the cash value you'd get if you sold it

Cash flow refers to _____.

the difference between the number of dollars that came in and the number that went out

Changes in capital spending can be negative if

the firm sold more fixed assets than it purchased

Free cash flow is better described as ____.

total distributable cash flow

Financial leverage refers to a firm's _________.

use of debt in its capital structure

U.S. corporations pay tax at a rate of _________ of 1 percent. (Enter number only.)

21

A balance sheet reflects a firm's:

accounting value on a specific date

Net earnings refers to income earned ______.

after interest and taxes

Liquidity refers to the ease of changing _____.

assets to cash

The short run is a period when there are ______ costs.

both fixed and variable

In finance, the value of a firm depends on its ability to generate ______.

cash flows

The more debt a firm has, the greater its:

degree of financial leverage

Costs that do not change in the short run arise because of ______.

fixed commitments

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 flows

What is depreciation?

A systematic expensing of an asset based on the asset's estimated life

Which one of these is considered to be the most liquid?

Accounts receivable

Which of the following is the balance sheet equation?

Assets equal liabilities plus stockholders' equity.

Which of the following are components of cash flow from assets?

Capital spending Operating cash flow Change in net working capital

Which of the following is an example of a non-cash item on an income statement?

Depreciation

True or false: Current assets plus current liabilities equals net working capital.

False

True or false: Ending net fixed assets plus beginning net fixed assets minus depreciation equals net investment in fixed assets.

False

True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.

False

Which of the following is NOT a component of cash flow from assets?

Finance expenses

According to GAAP, when is income reported?

When it is earned or accrued

In the long-run, costs may be considered as ________.

all variable

Non-cash items do not affect:

cash flow

Product costs are usually shown on the income statement under the heading of _________________ .

cost of goods sold

Cash flow to stockholders equals ____.

dividends paid minus net new equity raised

True or false: Interest paid minus net new borrowing equals cash flow to creditors.

true

The short run is ______.

an imprecise period of time

When a firm smooths earnings to please investors, it is called ________.

earnings management

For financial decision-making purposes, the most important tax rate is the ______ tax rate.

marginal

Operating cash flow (Select all that apply.)

tells us whether or not a firm's cash inflows from its operations are sufficient to cover its everyday cash outflows is a sign of trouble if negative over a long period of time

Long-term liabilities represent obligations of the firm lasting more than _____.

1 yr

How is the average income tax rate computed?

Total tax bill/Total taxable income

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

True

True or false: Free cash flow is also known as cash flow from assets.

True

True or false: Operating cash flow does not include depreciation or interest.

True

According to GAAP, when is revenue recognized on an income statement?

When the earnings process is virtually completed When the value of an exchange of goods or services is known or reliably determined

Depreciation is the accountant's estimate of the cost of ______ used in the production process matched with the benefits produced from owning it.

equipment fixed assets

Cash flow to creditors equals:

interest paid minus net new borrowing

Period costs are the costs that are allocated to a specific ______.

interval of time

Which of the following is a current asset?

inventory

The ______ tax rate is the tax rate paid on the next dollar of income.

marginal

The price at which willing buyers and sellers would trade is called ______ value.

market

Current assets __________ (plus/minus) current liabilities equals NWC.

minus

The cash flow that results from the firm's day-to-day activities of producing and selling is called:

operating cash flow

A positive operating cash flow indicates that the firm is generating enough cash to:A positive operating cash flow indicates that the firm is generating enough cash to:

pay everyday cash outflows.

Assets can be categorized as (select all that are appropriate)

tangible and intangible assets current and fixed assets


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