Chapter 2 Financial Statements, Taxes, and Cash Flow
Long-term liabilities represent obligations of the firm lasting over _____.
1 year
U.S. corporations pay tax at a rate of _ percent. (Enter number only.)
21
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
Which of the following are components of cash flow from assets?
Change in net working capital Operating cash flow Capital spending
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?
Financing expenses
True or false: Interest paid minus net new borrowing equals cash flow to creditors.
True
True or false: Operating cash flow does not include depreciation or interest.
True
Which of the following are classified as fixed assets on the balance sheet?
Equipment Buildings Trademark
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?
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
______ changes as the output of the firm changes.
Variable cost
Physical assets are termed ______________ assets.
tangible
Operating cash flow
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
What is the purpose of the income statement?
to measure performance over a set period of time
Which one of these is considered to be the most liquid? Land Equipment and machines Inventory Accounts receivable
Accounts receivable
How is the average income tax rate computed?
Total tax bill/Total taxable income
Non-cash items do not affect:
cash flow
The ______ tax rate is the tax rate paid on the next dollar of income.
marginal
The last item (or "bottom line") on the income statement is typically the _________.
net income
A positive operating cash flow indicates that the firm is generating enough cash to:
pay everyday cash outflows.
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
The purpose of a(n) ______ is to measure performance over a set period of time.
income statement
A balance sheet reflects a firm's:
accounting value on a specific date
The short run is ______.
an imprecise period of time
Cash flow to creditors equals:
interest paid minus net new borrowing
The price at which willing buyers and sellers would trade is called ______ value.
market
The cash flow that results from the firm's day-to-day activities of producing and selling is called:
operating cash flow
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
In the long-run, costs may be considered as ________.
all variable
Interest paid (Plus/Minus) net new borrowing equals cash flow to creditors.
minus
Free cash flow is better described as ____.
total distributable cash flow
Which of the following is an example of a non-cash item on an income statement? Retained earnings Costs Depreciation Dividends
Depreciation
For financial decision-making purposes, the most important tax rate is the ______ tax rate.
marginal
Period costs are the costs that are allocated to a specific ______.
interval of time
Current assets are defined as assets that can be turned into cash within ______ months.
twelve
Financial leverage refers to a firm's _________.
use of debt in its capital structure
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
Net capital spending is equal to the change in net fixed assets plus:
depreciation
When a firm smooths earnings to please investors, it is called ________.
earnings management
Marginal tax rates are the most important tax rates because:
financial decisions are usually based on new cash flows incremental cash flows are taxed at marginal tax rates
Costs that do not change in the short run arise because of ______.
fixed commitments
Current assets (plus/minus) current liabilities equals NWC (net working capital)
minus
The balance sheet identity shows that stockholders' equity equals assets ______ liabilities.
minus
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
True or false: Current assets plus current liabilities equals net working capital.
False
In finance, the value of a firm depends on its ability to generate ______.
cash flows
Product costs are usually shown on the income statement under the heading of _________________ .
cost of goods sold
The more debt a firm has, the greater its:
degree of financial leverage
Cash flow to stockholders equals ____.
dividends paid minus net new equity raised
Assets can be categorized as (select all that are appropriate)
current and fixed assets tangible and intangible assets
According to GAAP, when is income reported?
When it is earned or accrued
Net earnings refers to income earned ______.
after interest and taxes
Liquidity refers to the ease of changing _____.
assets to cash
Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm.
overstate; understate
