Chapter 2 LearnSmart Questions

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What does stockholders' equity represent?

A residual claim against the firm's total assets

What is depreciation

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

Net earnings refers to income earned

After interest and taxes

Under GAAP, assets are generally carried on a firm's balance sheet at

Book value Historical cost

Rank the ease (easiest to hardest) of turning the following assets into cash

Cash equivalents Accounts receivable Inventory Plant and equipment

The more debt a firm has, the greater its:

Degree of financial leverage

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

Depreciation

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

Non-cash items are expenses that do not directly affect

Example: depreciation

What does GAAP stand for?

Generally accepted accounting principles

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

__?__ are expenses that directly affect net income but do not directly affect cash flow

Non-cash items

__?__ are the costs that are allocated to a specific interval of time

Period costs

Assets can be categorized as

Tangible and intangible assets Current and fixed assets

Assets can be categorized as

Tangible or intangible Current or fixed

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?

In the long-run, costs may be considered as

all variable

On the balance sheet, assets are listed at their

book value

On a balance sheet, assets are listed at their

book values

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

fixed commitments

The short run is an

imprecise period of time

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

market value

What is depreciation?

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

A balance sheet reflects a firm's

Accounting value on a specific date

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

True

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

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

Liquidity refers to the ease of changing assets to

cash

Non-cash items are expenses that

do not directly affect cash flow

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

marginal tax rate

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

Accounts payable Long term debt

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

Accounts payable Long-term debt

Net working capital =

current assets - current liabilities

Financial leverage refers to a firm's use of

debt in its capital structure


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