FIN 390- Chapter 2 Learnsmart

What does GAAP stand for?

Generally Accepted Accounting Principles

The use of financial leverage can:

1. Greatly magnify both gains and losses. 2. Increase the potential reward for investors 3. Increase the chance of financial distress and business failure

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

1. Increase its ability to meet short-term obligations 2. Increase its ability to avoid financial distress

Under a flat-rate tax, all income levels are taxed at _____.

1. the same marginal rate 2. the same average rate

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% 21% + 5% + 1 % = 27%

What is the purpose of the income statement?

to measure performance over a set period of time

If a firms net working capital goes from $150 in 2013 to $130 in 2014, then the change in net working capital is

- $20

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

- $50

The Tax Cuts and Jobs Act of 2017 set the corporate tax rate to be __ regardless of the level of taxable income.

21%

Cash flow to stockholders equals

dividends paid minus net new equity raised

What are the two classifications of costs used by financial accountants?

Period costs, Product costs

Cash flows can be derived from financial statements

true

Taxes can be a large cash outflow for a corporation

true

A long-term liability represents an _

debt that is not due in the coming year.

Which are true concerning product costs?

1. product costs contain both fixed and variable costs 2. product costs are reported as costs of good sold

Which of these can be answered by reviewing a firms balance sheet?

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

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

over a period of time; as a specific date

Free cash flow is better described as

total distributable cash flow

Net working capital plus current liabilities equal

current assets

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

The cash flow identity reflect the fact that

1. cash flow from the firms assets equals the total of cash flow to creditors and cash flow to stockholders. 2. cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm 3. a firm generates cash through its various acitivities

__ costs change as the output of the firm changes

variable

Which of the following are examples of non-cash items on an income statement?

Depreciation

Which of the following do not directly affect cash flow?

Depreciation

Operating cash flow includes capital spending and working capital requirements

False

Stockholders' equity appears on the left hand side of the balance sheet

False

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

False

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.

Why is positive net working capital important?

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

Which of the following is a variable cost in the short run?

Raw materials used in production

On the balance sheet, assets are listed at their __ value

book

The statement of cash flow explains changes in ___

cash and equivalents

Non-cash items do not affect

cash flow

The matching principle of GAAP requires revenues be matched with ___

expenses

Which of the following are fixed assets?

land, plant, buildings

The last (residual) claimants to be paid by a firm are the __

stockholders

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

The tax rate is flat at all income levels

How is the average income tax rate computed?

Total tax bill/Total taxable income

What does a balance sheet reflect about a firm?

accounting value on a specific date

If a firms net working is $120 in 2014 and $100 in 2013, then the change in net working capital is

+ $20

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

1. Bond interest 2. Rent

Which of the following can be answered by a firms balance sheet?

1. what is the total amount of assets the firm owns 2. how much debt is used to finance the firm

the cash flow identity selects the fact that

1.a firm generate cash through its various activities 2.cash flow from the firms assist equals the total cash flow to creditors and cash flow to stockholders 3.cash is either used to produce the product or service, pay creditors, or pay out the owners of the firm

What does stockholders' equity represent?

A residual claim against the book value of the firms assets. (The book value of the firms assets less the book value of its liabilites)

In March, Al's paid cash for a video game for the store's inventory. In April, it sold the game on credit. In May, Al's received payment for the sale. Based on matching principle, the expense should be recorded in __ and the income should be reported in __.

April; April

Assets can be described as items that:

1. Generate revenue 2. Provide market value to the firm 3. a firm owns

The short run is __

an imprecise period of time

For financial analysis, financial statements and accounting numbers are more important than cash flows

false

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

fixed commitments

Fixed costs are costs that will not change in the __

short run

Fixed costs are costs that will not change in the ___

short run

Why is revenue recognized on an income statement?

1. When the value of an exchange of goods or services can be reliably determined 2. When the earnings process is virtually completed

The cash flow identity states that cash flow from assets equals cash flows to __

creditors and stockholders

Depreciation is the accountants estimate of the cost of __ used up in the product process

equipment

Assets are recorded at historical cost, not market value, because:

It is hard to keep up with the market value

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

Liquidity

Whose responsibility is it to create value for a firm?

Management

__ income is money earned after interest and taxes

Net

___income is money earned after interest and taxes

Net

___costs change as the output of the firm changes

Variable

According to GAAP, when is income reported?

When it is earned or accrued

When a customer purchases an item on credit, the purchase amount is recorded by the seller in which one of these accounts

accounts receivable

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

assets

Liquidity refers to the ease of changing _________.

assets to cash

in finance, the value of a firm depends on its ability to generate

cash flows

Changes in capital spending can be negative when the acquisition of fixed assets is ___ the sale of fixed assets.

less than

For financial decisions making purposes, the most important tax rate is __ tax rate.

marginal

the price at which willing buyers and sellers would trade is called ___ value

market

The ___ principles of GAAP states that costs associated with a good or service should be recorded at the same time was the revenue from selling that good or service.

matching

The accounting equations that shows that stockholders equity equal asset __ liabilities

minus

most importantly, assets provide __ to the firm.

value

In the long run, all costs are ___.

variable

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

1. time and costs 2. GAAP 3. cash vs. non cash items

Current assets are defined as assets that can be turned into cash within __ months

12

If you earn an extra $100 of taxable income this year and owe taxes of $34 on that income, then your marginal tax rate is __ percent.

34

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?

$10,000

If a company paid $100 dividends, it additionally issued stocks for $10, and repurchase its own stocks for $25, what is the company's cash flow to stockholders?

$115 100-10+25= 115

If you make an extra $1000 in income and your marginal tax rate is 30 percent while your average tax rate is 20 percent, then you will pay an extra __ in taxes.

$300

If a firms current assets equal $200 and its current liabilities equal $150, then its net working capital equals__

$50

If the Federal marginal tax bracket is 21%, 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 (1-0.21-0.05-0.01)x $1 mil= $730,000

Suppose your company's taxable 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 the average tax rate to the nearest whole number.

$74,900, 32%, 39%

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

pay operating costs

Assets are listed on the balance sheet in order of:

decreasing liquidity

When is revenue recognized on an income statement

1. When the value of an exchange of goods or services can be reliably determined 2. When the earnings process is virtually completed.

Residual value is the amount left over after paying __

1. accounts payable 2. other debt holders 3. bondholders

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

1. cost of raw materials purchased on credit are accounts payable rather than cash outflows until they are paid, which maybe in a different period. 2. Income taxes are often deferred, so the amount on the income statement may not represent the amount of the check to the IRS. 3. Sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period.

Marginal tax rates are the most important tax rates because:

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

Which of the following are current assets?

1. inventory 2. accounts recievable

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

1. knowledge that has no patent 2. good management 3. favorable economic conditions

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

1. notes payable 2. long-term bonds issued by the firm

The short run for a firm is the period of time during which __

1. output can vary 2. some costs are fixed

Which of these are generally considered to be short-run fixed costs?

1. rent payments for a warehouse 2. management salaries 3. property taxes

Which of the following are period costs?

1. selling costs 2. general expenses 3. Administrative expenses