chapter 2

Which of these items do NOT appear on a balance sheet?

Favorable economic conditions Knowledge that has no patent Good management

The common set of standards and procedures by which audited financial statements are prepared are called _____.

GAAP

What should you keep in mind when examining an income statement?

GAAP cash versus noncash items time and costs

What does GAAP stand for?

Generally Accepted Accounting Principles

In recent years, U.S. accounting standards have become more closely tied to:

IFRS.

Assets are listed on a balance sheet in which order?

In order of decreasing liquidity

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

Increase its ability to meet short-term obligations Increase its ability to avoid financial distress

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.

Why is positive net working capital important?

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

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

Liquidity

Which of the following will be found in the liabilities section of a firm's balance sheet?

Long-term bonds issued by the firm Notes payable

Whose responsibility is it to create value for a firm?

Management

______ income is money earned after interest and taxes.

Net

What are two classifications of costs used by financial accountants?

Period costs Product costs

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

Product

Which are true concerning product costs?

Product costs are reported as costs of goods sold. Product costs contain both fixed and variable costs.

Which of the following is a variable cost in the short run?

Raw materials used in production.

If you make an extra $1,000 in income and your marginal tax rate is 30 percent while your average tax rate is 20 percent, then you will pay an extra ______ in taxes.

Reason: Additional tax = (.30)($1,000)

Which of these are generally considered to be short-run fixed costs?

Rent payments for a warehouse Management salaries Property taxes

Who is entitled to the residual value of a firm's cash flows?

Shareholders

When looking at the income statement, the financial manager should keep in mind GAAP, cash versus noncash items, and _______ and costs.

TIME and costs

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

______ costs change as the output of the firm changes.

Variable

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

accounting

What does a balance sheet reflect about a firm?

accounting value on a specific date

A supplier may look at the size of _____ to see how promptly the firm pays its bills.

accounts payable

Residual value is the amount left over after paying:

accounts payable. bondholders. other debt holders.

In the long run, ________ are variable.

all costs

The short run is ______.

an imprecise period of time

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

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

book

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

book value

Which one of these is the most liquid? Marketable securities Inventory Fixed assets Cash

cash

Noncash items do not affect _____.

cash flow

The difference between the total assets and total liabilities is shareholders' equity, also called ____ equity or ____ equity.

common; owner

The fact that the balance sheets are listed at _____ means that there is no necessary connection between the total assets and the value of the firm.

cost

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

debt that is not due in the coming year

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

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

expenses

The corporate tax code is _____.

extremely complicated

James is an owner of J & Jo Company. If he wants to find out the cash flow of his bakery, he should look into the firm's _____.

financial statements

For a ______asset, it would be purely a coincidence if the actual market value were equal to its book value.

fixed

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

fixed commitments

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

If you think of the balance sheets as a snapshot, then the _____ can be thought of as a video covering the period between before and after pictures.

income statement

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

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

interval of time

Which of the following is a current asset?

inventory

Which of the following are fixed assets?

land, plant, buildings

The shareholders are the _____ in line to receive payment when a firm is forced to sell assets to pay off debt.

last

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

For financial managers, the accounting value of the stock is not an especially important concern; it is the ______ value that matters.

market

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

Which one of the following complies with GAAP?

matching revenues with expenses

Net working capital equals current assets ______ current liabilities.

minus

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

net income; cash flow

Book value of assets is generally:

not what the assets are actually worth

An income statement reflects activity that occurs _____ while a balance sheet reflects values ____.

over a period of time; as of a specific date

Net working capital is (negative/positive) when current assets exceed current liabilities.

positive

Accountants usually distinguish between _____ costs and _____ costs.

product; period

How is income defined?

revenue minus expenses

In general, revenue should be recognized at the time of _________, which is not necessarily the same time as the money is collected.

sale

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 purpose of the income statement?

to measure performance over a set period of time

In the long run, all costs are _____.

variable

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

working capital

If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals ______.

$ 50 Reason: $200 - 150 = $50

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 can be reliably determined

Assets can be described as items that _____.

- a firm owns - generate revenue - Provide market value to the firm

The use of financial leverage can:

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

Which of the following are period costs?

-Administrative expenses -General expenses -Selling costs

Which of the following is true about the difference between the income statement and cash inflows and outflows?

-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. -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.

Rank the ease of turning the following assets into cash. (Place the asset that is the easiest to turn into cash at the top.)

1. cash equivalents 2. accounts receivable 3. inventory 4. plant and equipment

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

10

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

12 (twelve)

If a firm's current assets are $100 and its current liabilities are $80, then its net working capital is:

20 Reason: $100 - 80 = $20

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

21%

Which of the following are examples of noncash items on an income statement?

Depreciation

Which of the following do not directly affect cash flow?

Depreciation

Which of the following is an example of a noncash item on an income statement?

Depreciation

The corporate tax code is simplistic and makes good economic sense.

False

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

What does stockholders' equity represent?

A residual claim against the book value of the firm's assets. (The book value of the firm's assets less the book value of its liabilities.)

What is depreciation?

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

Which of the following are classified as liabilities on a firm's balance sheet?

Accounts payable Notes payable

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

When a customer purchases an item on credit, the purchase amount is recorded by the seller in which one of these accounts?

Accounts receivable

In March, Al's paid cash for a video game for the store's inventory. In April, it sold the game on credit. In May, Al's received payment for the sale. Based on matching principle, the expense should be recorded in ___ and the income should be reported in ____. Multiple choice question.

April; April

Which one of these is a correct version of the balance sheet equation?

Assets = Liabilities + Stockholders' equity

Which of the following are examples of short-run fixed costs?

Bond interest Rent

Which of the following are included in the fixed asset portion of a balance sheet?

Buildings Trademarks