Chapter Two Financial Statements,Taxes, and Cash Flows

Financial leverage refers to a firm's _________.

use of debt in its capital structure

For a mature firm, operating cash flow:

- is a sign of trouble if negative over a long period of time - is usually positive

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

1 year

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

1. True

U.S. corporations pay tax at a rate of ________percent.

21

Which one of these is considered to be the most liquid?

Accounts receivable

Which of the following is the balance sheet equation?

Assets equal liabilities plus stockholders' equity.

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

Change in net working capital Capital spending Operating cash flow

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

Depreciation

4. True or false: Current assets plus current liabilities equals net working capital.

False

Which of the following is NOT a component of cash flow from assets?

Financing expenses

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?

Which of the following is a current asset?

Inventory

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

Operating cash flow Change in net working capital Capital spending

______ changes as the output of the firm changes.

Variable cost

According to GAAP, when is income reported?

When it is earned or accrued

A balance sheet reflects a firm's:

accounting value on a specific date

net earnings refers to income earned

after interest and taxes

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

all variable

The short run is ______.

an imprecise period of time

Liquidity refers to the ease of changing _____.

assets to cash

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

both fixed and variable

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

cash flows

Assets can be categorized as (select all that are appropriate)

current and fixed assets tangible and intangible assets

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

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

fixed commitments

Cash flow to creditors equals:

interest paid minus net new borrowing

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

marginal

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

market

Current assets ____________current liabilities equals NWC.

minus

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

operating cash flow

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

overstate; understate

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

Physical assets are termed ______________ assets.

tangible

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

Cash flow refers to:

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

Changes in capital spending can be negative if

the firm sold more assets than it purchased

Free cash flow is better described as ____

total distributable cash flow

Free cash flow is better described as ____.

total distributable cash flow

2. True or false: Current assets plus current liabilities equals net working capital.

2. False, CA minus CL equals NWC.

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

3. True

5. True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.

5. False

6. True or false: Operating cash flow does not include depreciation or interest.

6. True

7. True or false: Free cash flow is also known as cash flow from assets.

7. True

How is the average income tax rate computed?

Total tax bill / Total taxable income

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

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; marginal

Non-cash items do not affect

cash flow

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

earnings management

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.