Chapter 2 Learnsmart 2

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

Shareholders

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

$50

Which of the following are CURRENT assets?

*Inventory *Accounts Receivable

Which of the following are fixed assets?

*Land *Plant *Patents

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

*Sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period. *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. *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 (from easiest to hardest) of turning the following assets into cash.

1 Cash Equivalents 2 Accounts Receivable 3 Inventory 4 Plant and Equipment

Long-term liabilities represent obligations of the firm lasting over ___.

1 year

Net income refers to money earned ___.

After interest and taxes

Net working capital plus current liabilities equal ___.

Current assets

The last (residual) claimants to be paid by the firm are the ___.

Stockholders

Which of the following is true about the U.S. modified-rate tax system?

The tax rate becomes flat at very high income levels

Most importantly, assets provide ___ to the firm.

Value

The use of financial leverage can:

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

Which of the following complies with GAAP?

Matching revenues with expenses

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.)

Liquidity refers to the ease of changing ___.

Assets to cash

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

Expenses

Non-cash items do not affect ___.

Cash flow

Depreciation is the accountant's estimate of the cost of ___ used up in the production process.

Equipment

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 and Marginal

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

*Accumulated depreciation *Trademarks

Which of the following are period costs?

*Administrative expenses *General expenses *Selling costs

Which of these items are NOT shown on a balance sheet?

*Favorable economic conditions *Good management *Knowledge that has no patent

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

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

*Rent *Bond interest

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

*Notes Payable *Accounts Payable

Which are true concerning product costs?

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

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

*Property taxes *Management salaries *Rent payments for a warehouse

The short run for a firm is the period of time during which ___?

*Some costs are fixed *Output can vary

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

*Time and costs *Cash vs. non-cash assets *GAAP

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 customer has yet to pay the bill for products purchased on credit. This debt is recorded 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

Which of the following are examples of non-cash items on an income statement?

Depreciation

Costs that so not change in the short run because of ___.

Fixed commitments

What does GAAP stand for?

Generally accepted accounting principals

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

Interval of time

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

Market

The accounting equation shows that stockholders' equity equals assets ___ liabilities.

Minus

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

Raw materials used in production

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

Shareholders' equity