Chp 2. Financial Statements Taxes and Cash flow
Tax rates for propietorships, partnerships, and LLCs __________ with the passage of the Tax Cuts and Jobs Act of 2017.
changed
Product costs are usually shown on the income statement under the heading of
cost of goods sold
The cash flow identity states that cash flow from assets equals cash flows to
creditors and stockholders
Which of the following is an example of a noncash item on an income statement?
depreciation
Cash flow to stockholders equals ____.
dividends paid - net new equity raised
_________ changes as the output of the firm changes.
variable cost
When a firm smooths earnings to please investors, it is called ________.
Earnings management
Stockholders's equity is always shown on the ____________ of the belence sheet.
Right-hand side
How is the average income tax rate computed?
Total tax bill/Total taxable income
According to GAAP, when is income reported?
When it is earned or accrued
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
The more debt a firm has, the greater its:
degree of financial leverage
The GAAP matching principle requires revenues to be matched with:
expenses
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 is negative over a long period of of time
Cash flow refers to _____.
the difference between the number of dollars that came in and the number that went out
Which of the following are classified as liabilities on a firm's balance sheet?
Long-term debt Accounts payable
Net working capital will be negative when current assets ___________ current liabilities.
are less than
For financial decision-making purposes, the most important tax rate is the ______ tax rate.
marginal
paid minus net new equity raised equals cash flow to stockholders.
Dividends
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
Noncash items are __________ that __________ cash flow.
Expenses; do not directly affect
Net capital spending is equal to:
net change in fixed assets plus depreciation
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 __________.
noncash items
What is the purpose of the income statement?
to measure performance over a set period of time
Which of the following are classified as fixed assets on the balance sheet?
- Buildings - Patents - Trademarks -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; marginal
On the balance sheet, assets are listed at their _________ value.
book
A positive 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
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
Long-term liabilities represent obligations of the firm lasting more than ____________.
1 year
U.S. corporations pay tax at a rate of
21
True or false: Ending net fixed assets plus beginning net fixed assets minus depreciation equals net investment in fixed assets.
False
Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm.
overstate; understate
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
According to the current U.S. corporate tax code the corporate tax rate in effect for 2021 is _________ percent.
21
What does shareholder's 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
In finance, the value of a firm depends on its ability to generate ______.
Cash flows
Which one of the following is true?
Cash flows can be derived from financial statements.
What does GAAP stand for?
Generally Accepted Accounting Principles
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?
Current assets are classified as relatively ____________; there assets can be converted to cash within the next 12 months.
Liquid
A balance sheet reflects a firm's:
Accounting value on a specific date
Which of the following is the balance sheet equation?
Assets equal liabilities plus stockholders' equity.
Liquidity refers to the ease of changing _____.
Assets to cash
Under GAAP, assets are generally carried on a firm's balance sheet at ____.
Book value, historical cost
Which of the following are components of cash flow from assets?
Capital spending Operating cash flow Change in net working capital
What should you keep in mind when examining an income statement?
Cash versus non-cash items Time and costs GAAP
True or false: For financial analysis, financial statements and accounting numbers are more important then cash flows.
False
True or false: Current assets plus current liabilities equals net working capital.
False (CA minus CL equals NWC.)
True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.
False; reduced
Marginal tax rates of 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 is not a component of cash flow from assets?
Financing expenses
Costs that to not change in the short run arise because of ___________.
Fixed commitments
Shareholders' equity equals ____________.
Total assets minus total liabilities
The short run is a period when there are ______ costs.
both fixed and variable
Net capital spending is equal to
ending net fixed assets minus beginning net fixed assets plus depreciation.
The cash flow that results from the firm's day-to-day activities of producing and selling is called:
operating cash flow
Ending net fixed assets minus beginning net fixed assets ______ depreciation equals net investment in fixed assets.
plus
In practice, accountants tend to classify costs as either ______ costs or _______ costs.
product and period
Who is entitled to the residual value of a firm's cash flows?
shareholders
The three most important items to keep in mind when reviewing an income statement are:
GAAP, cash versus noncash items, and time and costs
The common set of standards and procedures by which audited financial statements are prepared is known as the:
Generally Accepted Accounting Principles (GAAP)
Liabilities can be classified as _______ or long-term.
current
Assets can be categorized as
current and fixed assets tangible and intangible assets
Noncash items do not affect _____.
Cash flow
Current assets __________ (plus/minus) current liabilities equals NWC.
minus
Interest paid _____ (Plus/Minus) net new borrowing equals cash flow to creditors.
minus
Liquidity has two dimensions which are the ability to:
quickly convert assets into cash without significant loss in value
Free cash flow is better described as
total distributable cash flow
Net income refers to income earned _________.
after interest and taxes
Common stockholders are entitled to the difference between __________ and _________.
Total assets; total liabilities
True or false: Free cash flow is also known as cash flow from assets.
True
True or false: Interest paid minus net new borrowing equals cash flow creditors.
True
True or false: Operating cash flow does not include depreciation or interest
True
True or false: 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
Net capital spending is negative when
a firm sold off more assets than it purchased
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
Amounts not yet collected from customers on sales already made are called:
accounts receivable
The short run is __________.
an imprecise period of time
The cash flow identity states that cash flows from ______ should equal cash flows to creditors and equity investors.
assets
Which of the following is shown on the left-hand side of the balance sheet?
assets
The purpose of a ___________ is to measure performance over a set period of time.
income statement
Cash flow to creditors equals
interest paid - net new borrowing
Period costs are the costs that are allocated to a specific ___________.
interval of time
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 of 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