Chapter 2 questions

Net earnings refers to income earned _____.

after interest and taxes

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

all variable

Net working capital will be negative when current assets _____ current liabilities.

are less than

Which of the following is shown on the left hand side of the balance sheet?

assets

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

book

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

cash flows

Tax rates for proprietorships, partnerships, and LLCs _____ with the passage of the Tax Cuts and Jobs Act of 2017.

changed

T/F: For financial analysis, financial statements and accounting numbers are more important than cash flows.

false

Current assets are classified as relatively _____; these assets can be converted to cash within the next 12 months.

liquid

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

marginal

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

marginal

Interest paid _____ net new borrowing equals cash flow to creditors.

minus

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

net income

A primary reason that accounting income differs from cash flow is that an income statement contains _____.

non-cash items

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

one year

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

operating cash flow

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

pay everyday cash outflows

Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as:

period costs

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 market value of an item is:

the cash value you'd get if you sold it

On which side of the balance sheet do liabilities appear?

the right side

Free cash flow is better described as _____.

total distribution cash flow

T/F: Operating cash flow does not include depreciation or interest.

true

According to GAAP, when is income reported?

when it is earned or accrued

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

Which of the following are classified as fixed assets on the balance sheet?

- buildings - equipment - trademark

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

- change in net working capital - capital spending - operating cash flow

Assets can be categorized as:

- current and fixed assets - tangible and intangible assets

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?

Operating cash flow:

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

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

- long-term debt - accounts payable

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

_____ changes as the output of the firm changes.

Variable cost

A balance sheet reflects a firm's:

accounting value on a specific date

A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts?

accounts receivable

Liquidity refers to the ease of changing _____.

assets to cash

The more debt a firm has, the greater its:

degree of financial leverage

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

depreciation

What does GAAP stand for?

generally accepted accounting principles

Cash flow to creditors equals:

interest paid minus net new borrowing

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

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

- fixed assets - equipment

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

- historical cost - book value

US corporations pay tax at a rate of _____ percent.

21

Net capital spending is negative when:

a firm sold off more assets than it purchased

What does shareholders' 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

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

both fixed and 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

Liabilities can be classified as _____ or long-term.

current

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

earnings management

The GAAP matching principle requires revenues to be matched with:

expenses

T/F: Current assets plus current liabilities equals net working capital.

false

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

fixed commitments

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

generally accepted accounting principles (GAAP)

Which of the following is a current asset?

inventory

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

market

The _____ principle or 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

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

overstate; understate

In practice, accountants tend to classify costs as either _____ costs or _____ costs.

product; period

Physical assets are termed _____ assets.

tangible

Cash flow refers to:

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

What is the purpose of the income statement?

to measure performance over a set period of time

common stockholders are entitled to the difference between _____ and _____.

total assets; total liabilities

T/F: Free cash flow is also known as cash flow from assets.

true

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

true

Financial leverage refers to a firm's _____.

use of debt in its capital structure

The three most important items to keep in mind when reviewing an income statement are:

GAAP, cash vs. non-cash items, and time and costs

Amounts not yet collected from customers on sales already made are called:

accounts receivable