FIN 101 CH 2

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

Shareholders

Net income refers to money earned ____________.

After interest and taxes

Long-term liabilities represent obligations of the firm lasting over_____.

1 year

Fixed costs are costs that will not change due to ___

fixed commitments over a stated period of time

hat are two classifications of cost used by financial accountants?W

Period Cost Product Cost

Which of the following is true?

Cash flows can be derived from financial statements

How are assets on a Blanche sheet listed?

in order of decreasing liquidity

A fixed asset

is one that has a relatively long life

why is positive net working capital important?

it means the firm should have sufficient cash to meet its current obligations

Book value of assets is generally:

not what the assets are actually worth

intangible fixed assets

such as a trademark or patent.

in the long run, all costs are___

variable

if the federal marginal tax bracket is 215 the state marginal tax bracket is 5%, and the local marginal tax bracket is 1%, how much money will a corporation keep if it makes another $1,000,000 in taxable income?

730,000 Check notes pg 2

suppose your company's table income was $235,000 in 2017. using table 2.3, calculate the income tax due , the average tax rate, and the marginal tax rate. round average tax rate to the nearest whole number.

79,900; 34%, 39%

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

Bond Interest Rent

The statement of cash flows explains changes in ____________.

Cash and equivalents

Interest paid $70 - Net new borrowing 46

Cash flow to creditors $24

Which of the following will be found in the liabilities section of the firms balance sheet?

- Accounts payable- -Notes payable -long term bonds issued by the firm

Which of these items do NOT appear on a balance sheet?

- Knowledge that has no patent .- Favorable economic conditions. - Good management.

if the federal marginal tax bracket is 21%, the state marginal tax bracket is 5%, and the local marginal tax bracket is 1%, the overall marginal tax rate for the company will be________%

27 add it up

The short run is _____________.

An imprecise period of time

The cash flow identity states that cash flow from assets equals cash flows to ____________.

Creditors and stockholders

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

Marginal

If Dividends are $100, Stock sold is $10, and stock repurchased is $25, what is the cash flow to stockholders?

$115= (100-10)+25

What of the following are fixed assets?

- Land - Patents - Plant

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

what should you keep in mind when examining an income statement?

- time and costs - cash vs non cash -GAAP

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

a. Cash equivalents b. accounts receivable c. inventory d. Plant and equipment

residual value is the amount left over after paying___

bondholders- other debt holders- Accounts Payable

on the balance sheet, assets are listed at their_____ value.

book

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

cash equivalents accounts receivable inventory plant and equipment

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

Shareholders' equity

the last (residual) claimants to be paid by a firm are the_____.

Stockholders

tangible fixed assets

Such as a truck or a computer

cash flow to stockholders

dividends paid less net new equity raised

Assets are classified as

either current or fixed assets.

why is it important for accounting standards to become more comparable across countries?

increasing globalization of business makes it necessary to understand financial reporting by firms that follow other accounting standards

assets are recorded at historical cost, not market value because...

it is hard to keep up with market value

An income statement reflects activity that occurs _____ while a balance sheet reflects values _____

over a period of time; as of a specific date

what is an example of a variable cost in the short run?

raw materials used in production

Liquidity

refers to the speed and ease with which an asset can be converted to cash.

Free Flow Cash is better described as

total distributable cash flow

free cash flow is better described as

total distributable cash flow

Operating cash flow includes capital spending and working capital requirements.

False

The corporate tax code is simplistic and makes good economic sense.

False (the corporate tax code is complex)

If dividends are $100, stock sold is $10, and stock repurchased is $25, what is the cash flow to stockholders?

$115

On which side of the balance sheet do liabilities appear?

The right side

What is depreciation?

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

If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the change in capital spending is ___.

$50 (NET CAPITAL SPENDING = ENDING NET FIXED ASSETS - BEGINNING NET FIXED ASSETS + DEPRECIATION)

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

$50 **(200-150)

when is revenue recognized on an income statement?

-when the exchange of goods and services is completed - when the earnings process is virtually completed

The difference between average and marginal tax rates can best be illustrated with an example. Suppose our corporation had a taxable income of $200,000 in 2017. What was the tax bill? Using Table 2.3, we can figure our tax bill: .15($50,000) = $ 7,500.25($75,000 − 50,000) = 6,250.34($100,000 − 75,000) = 8,500.39($200,000 − 100,000) = 39,000 $61,250

Our total tax was $61,250. In our example, what is the average tax rate? We had a taxable income of $200,000 and a tax bill of $61,250, so the average tax rate is $61,250/$200,000 = 30.625 percent. What is the marginal tax rate? If we made one more dollar, the tax on that dollar would be 39 cents, so our marginal rate is 39 percent.

FREE CASH FLOW IS THE TOTAL OF CASH FLOW TO CREDITORS AND CASH FLOW TO STOCKHOLDERS

TRUE

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

The Tax rate is flat at all income levels

What is the most important item that can be extracted from financial statements?

The firms actual cash flow

Under Flat-rate tax, alll income levels are taxed at

The same average rate The same marginal rates

An increase in depreciation expense lowers net income

True

Free Cash flow is the total of cash flow to creditors and cash flow to stock holders

True

taxes can be a large cash outflow for a corporation

True

Most importantly assets provided __ to the firm

Value

which one of the following complies with GAAP?

matching revenues with expenses

Increasing its non-cash liquid assets will enable a firm to do which of the following?

Increase its ability to avoid financial distress. Increase its ability to meet short-term obligations.

Cashflow to Creditors=

Interest Paid-Net new Borrowing

A customer has yet to pay the bill for products purchased on credit. The debt is recorded on the balance sheet as...

accounts receivable

networking capital equals

current assets-current liabilities

which of the following is a non cash item on an income statement

depreciation

Cash flow to stockholders=

dividends paid - net new equity raised

a decrease in depreciation expense_______earnings per share.

increases

Non-cash items are expenses that directly affect __________ but do not directly affect _________.

net income; cash flow

the tax cut and jobs act of 2017 set the corporate tax rate to be_______ regardless of the level of taxable income

21%

Net working capital plus current liabilities equals _____________.

Current assets

Change in NWC=

Ending NWC- Beginning NWC

Depreciation is the accountant's estimates of the cost of _____ used up in the production process.

Equipment

balance sheet

Financial statement showing a firm's accounting value on a particular date. It is a convenient means of organizing and summarizing what a firm owns (its assets), what a firm owes (its liabilities), and the difference between the two (the firm's equity) at a given point in time.

Changes in capital spending can be negative when the acquisition of fixed assets is _____ the sale offered assets

Less than

whose responsibility is it to create value for a firm?

Management

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

a company's ____ cash flows reflect whether its cash flows from business operations can cover its everyday cash outflows.

Operating

current asset

has a life of less than one year. This means that the asset will convert to cash within 12 months.

what is a primary concern for a bank lending funds to a business for the short term?

liquidity

Current assets are defined as assets that can be turned into cash within________ months.

twelve

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

- Income taxes are often deferred so the amount on the income statement may not represent the amount of the check to the IRS - Cost of raw material purchases on credit are AP rather than cash outflows until they are paid, which many be a different period - Sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period

Which are true concerning product costs?

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

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

- Rent payments for a warehouse - Property Taxes - Management Salaries

which of the following are period costs?

- Selling costs - General expenses - Administrative expenses

If you make an extra $1,000 in income and your marginal tax rate is 30 percent while your average tax rate is 20 percent, then the extra income is taxable at ______.

30% (300)

given the corporate tax rate of 15% on income from $0 to %50,000, 25% on income from $50,001 to $75,000, and 34% on income from $75,001 to $ 100,000, approximately how much tax would a company pay if it had taxable income of $90,000?

= (.15)(50,000)(.25)(25,000)/ (.34)(90,000-75000)=$18,850

Assets

= Liabilities + Shareholders' equity

The U.S. tax rate becomes a flat-rate tax in practice at approximately what corporate income level?

$0

Given the tax rates of 15% on Income from $0 to $50,000, 25% on income from $50,001 to $75,000, and 34% on income from $75,001 to $100,000, approximately how much tax would a company pay on a taxable income of $60,000?

(.15)(50,000)+(.25)(10,000) = $10,000

The cash flow identity reflects the fact that

- Cash flows from the firms's assets equal the total of cash flow to creditors and cash flow to stock holders - A firm generates cash through its various activities - Cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm.

What does GAAP stand for?

Generally Accepted Accounting Principles

The more debt a firm has, the greater its:

Degree of financial leverage

Net capital spending is equal to ending net fixed assets minus beginning net fixed assets_____.

Depriciation

Liquidity refers to the ease of changing ____________.

Assets to cash

what does Stockholders equity represent?

- a residual claim against the firms liabilities (the BV of the firms assets less the BV of its current assets) - a claim against all the firms assets- a residual claim against the book value of the firms assets (the BV of the firms assets less the book value of its liabilities) - a fixed claim against the firms liabilities