Fin 3200, Chapter 2

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

Book

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

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

Earnings management

The GAAP matching principle requires revenues to be matched with:

Expenses

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

Market

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

Stockholder's equity is always shown on the _____________ of the balance sheet.

Right side

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

Shareholder's equity

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

Shareholders

What is the purpose of the income statement?

To measure performance over a set period of time

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

True

True of False: Operating cash flow does not include depreciation or interest

True

Current assets ______________ exceed current liabilities in a healthy firm.

Usually

Financial leverage refers to a firm's ______________.

use of debt in its capital structure

According to the originators of the current U.S. corporate tax code, the only rates are:

15%, 25%, 34%, 35%

What does stockholder's equity represent?

A residual claim against the firm's total assets

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

Net earnings refer to income earned _________________

After interest and taxes

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

All variable

The cash flow identity states that cash flows from ________________ should equal cash flows to creditors and equity investors.

Assets

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

$115 100-(10-25)= $115

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

If the Federal marginal tax bracket is 34%, 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?

(1-0.34-0.05-0.01) x 1,000,000 = $600,000

If interest paid is $100 and net new borrowing is $150, then cash flow to creditors equals:

-$50

A company's _______________ tax rates 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

1. Average 2. Marginal

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

1. Buildings 2. Equipment 3. Land

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

1. Cash equivalences 2. Accounts receivable 3. Inventory 4. Plant and equipment

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

1. Cash versus non-cash items 2. GAAP 3. Time and costs

Assets can be categorized as:

1. Current and fixed assets 2. tangible and intangible assets

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

1. Equipment 2. Fixed assets

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

1. Historical costs 2. Book value

Which of these questions can be answered by reviewing a firm's balance sheet?

1. How much debt is used to finance the firm? 2. What is the total amount of assets the firm owns?

Marginal tax rates are the most important tax rates because:

1. Incremental cash flows are taxed at marginal tax rates 2. Financial decisions are usually based on new cash flows

For a mature firm, operating cash flow:

1. Is usually positive 2. is a sign of trouble if negative over a long period of time

Non-cash items are expenses that directly affect _______________ but do not directly affect __________________.

1. Net income 2. Cash flow

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

1. Operating cash flow 2. Change in net working capital 3. Capital spending

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

1. When the earnings process is virtually complete 2. When the value of an exchange of goods or services is known or reliably determined