FIN 5352 CH2

A misclassification of a $100 investment expense as an operating expense will cause ______. an understatement of investing cash flow no change in total cash flow a change in total cash flow an overstatement of operating cash flow a major change in total cash flow

-an understatement of investing cash flow -no change in total cash flow -an overstatement of operating cash flow

How are assets on a balance sheet listed? -in order of time taken by an ongoing firm to convert them to cash -in random order -in order of capital invested in them starting with the maximum -in order by date of acquisition

-in order of time taken by an ongoing firm to convert them to cash

Which of the following cash flows appear in the financing activities section of the accounting statement of cash flows? payment of interest repurchase of stock retirement of long-term debt payment of dividends

-repurchase of stock -retirement of long-term debt -payment of dividends

When a customer purchases an item on credit, the purchase amount is recorded in the books of the seller in which one of these accounts? Cash Accrued Expense Accounts Payable Accounts Receivable

Accounts Receivable

o The ________ ______ is a snapshot of the firm

Balance sheet

o A current liability is listed ______ long-term liabilities

Before

________ refers to the quickness and ease with which assets can be converted to ________.

Blank 1: Liquidity Blank 2: cash

Earnings per share is equal to __________ income divided by the number of outstanding _________ of a firm's common stock.

Blank 1: after-tax or net Blank 2: shares

o The net spending on fixed assets is referred to as

Capital spending

o The difference between the number of dollars that came in and the number that went out is known as:

Cash flow

Which of these will result from a firm using cash to buy inventory? Net working capital would increase Inventory would increase Net working capital would decreased. Cash would decrease

Cash would decrease. Inventory would increase.

o Equity holders are only entitled to the residual value, the portion left after __________ are paid

Creditors

o Liabilities are classified as:

Current Long-term

o Assets are classified as ________ or ______

Current or fixed

o Total dividends/ Total shares outstanding=

Dividends per share

Which one of the following calculates cash flow from operations? Multiple choice question. EBIT + Depreciation − Taxes Net income + Depreciation + Taxes EBIT − Depreciation + Taxes EBIT − Depreciation − Taxes

EBIT + Depreciation − Taxes

o _________ associated with the firms financing of its assets are not included because they are not operating expenses

Expenses

True or false: For financial analysis, financial statements and accounting numbers are more important than cash flows.

False

True or false: Net income equals cash flow.

False: Noncash expenses are one reason why net income varies from cash flow.

o The use of debt in a firm's capital structure is called

Financial leverage

o Cash flow from assets sometimes goes by a different name

Free cash flow

o Under Generally Accepted Accounting Principles (GAAP) audited financial statements in the United States generally show assets at

Historical cost

o Fixed assets are relatively _______

Illiquid

o Intangible assets are _______

Illiquid

o Revenues-Expenses=

Income

o The ______ _________ measures performance over some period of time, usually a quarter of a year

Income statement

o ________ is probably the least liquid of the current assets

Inventory

o Assets are normally listed on the balance sheet in order of decreasing ___________

Liquidity

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

Liquidity

o A debt that is not due in the coming year is classified as a

Long term liability

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. The expense should be recorded in Blank______, and the income should be reported in Blank______. March; April March, May April; May March; March

March; April

o The extra tax you would pay if you earned one more dollar is your:

Marginal tax rate

o The true value of any assets is its

Market value

o Assets are recorded at what the firm paid for them _____ ____________ ____________, no matter how long ago they were purchased or how much they are worth today

Minus accumulated depreciation

______ income is earnings after interest and taxes. Net Operating Gross Nonoperating

Net

o Earnings per share=

Net income/total shares outstanding

o The difference between a firm's current assets and current liabilities is called

Net working capital

o A current asset has a life less than

One year

o Current liabilities have a life for less than

One year

o The first thing reported on an income statement is usually _______ and ________ from the firm's principal operations

Revenues and expenses

o The difference between total assets and total liabilities is

Shareholders' equity

o Fixed assets can be:

Tangible Intangible

o Any new cash flows are taxed at

The marginal rate

o The Recognition principle is to recognize revenue when:

The value of an exchange is known

True or false: An increase in depreciation expense lowers net income.

True

True or false: Bondholders have a higher claim to a firm's cash flow than stockholders do.

True

True or false: Taxes can be a large cash outflow for a corporation.

True

True or false: There is a correlation between future cash flows and the economic value of an asset.

True

o T/F an Income statement contains noncash items

True

o True or false: Free cash flow is very similar to cash flow from assets

True

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

True

True or false: Free cash flow is the total of cash flow to creditors and cash flow to stockholders.

True. Free cash flow is another name for cash flow from assets, which must equal cash flow to creditors plus cash flow to stockholders. It does not include cash flows necessary to operate the firm, such as increases in net working capital and fixed assets (capital expenditures).

True or False: Long-term liabilities are not due in the current year (from the date of the balance sheet).

True: Long-term liabilities are not due for more than 1 year from the date of the balance sheet.

What is inventory an example of? Multiple choice question. a current liability a long-term liability a current asset a non-current asset

a current asset

Identify the current asset(s) in the list below. -property -accounts receivable -accounts payable -plant

accounts receivable

Which of the following are included in the fixed asset portion of a balance sheet? cash and equivalents capital surplus accumulated depreciation trademarks

accumulated depreciation & trademarks

Which of the following are included in the fixed asset portion of a balance sheet? cash and equivalents accumulated depreciation trademarks capital surplus

accumulated depreciation trademarks

Operating cash flow differs from total cash flow in that the latter makes adjustments for Blank______. Multiple select question. net income retained earnings additions to net working capital capital spending

additions to net working capital capital spending

Net working capital will be negative when current assets ______ current liabilities. are greater than are less than equal

are less than

Stockholders' equity is defined as Blank______. -liabilities − assets -assets + liabilities -assets − liabilities -assets

assets − liabilities

EBIT stands for earnings Blank______ and taxes. between investing before investing before interest between interest

before interest

Order the following groups in order of highest claim to lowest claim on a firm's cash flow: bondholders stockholders

bondholders stockholders

Which of the following will change fixed assets? issuing new bonds buying a new machine selling a plant amortizing goodwill

buying a new machine selling a plant

If a firm defaults on its bond contract, the bondholders Blank______. can sue the firm must take the loss quietly can force the firm into bankruptcy

can sue the firm can force the firm into bankruptcy

The statement of cash flow explains changes in _____. retained earnings net income non-cash items cash and equivalents

cash and equivalents

In determining the economic and financial condition of a firm, ______ is more revealing than net income. operating income cash flow retained earnings total assets

cash flow

Noncash items do not affect Blank______. earnings per share cash flow net income retained earnings

cash flow

Taxes represent which of the following Blank______. cash inflow cash outflow accrued interest

cash outflow

Net capital spending is equal to the change in net fixed assets plus ______. dividends notes payable depreciation retained earnings

depreciation

Which of the following do not directly affect cash flow? cash sales interest payments wages depreciation

depreciation

Accounting profit Blank______ cash flow. is identical to differs from is always larger than

differs from

The actual economic value of an asset varies ______ the asset's future cash flows. indirectly with directly with independent of

directly with

The acronym EBIT stands for Blank______. earnings before income taxes equity by investing talent earnings before interest and taxes earnings after interest and taxes

earnings before interest and taxes

A corporation's earnings divided by number of outstanding shares of a firm's common stock is called Blank______. g.e. ratio earnings per share benchmark ratio price-earnings ratio

earnings per share

If a company buys back $100 worth of stock, this increases the cash flow to the stockholders by ______. less than $100 more than $100 exactly $100

exactly $100

The activity of making net payments to creditors and owners (excluding interest) is called a(n) ______ activity in the accounting statement of cash flows. borrowing operating financing investing

financing

Which of the following are included in a firm's inventory? fixed assets finished goods work in progress raw materials to be used in production

finished goods work in progress raw materials to be used in production

Selling a firm's plant and equipment results in a change in ______. goodwill current liabilities intangible assets fixed assets

fixed assets

Assets are listed on a balance sheet in which order? -in order of time it would take an ongoing firm to convert them into cash -in no particular order -in decreasing order of time to convert them into cash -in order of account value from smallest to largest

in order of time it would take an ongoing firm to convert them into cash

Revenue minus expenses is the accounting definition of Blank______. Multiple choice question. working capital income net fixed assets shareholders' equity

income

Revenue minus expenses is the accounting definition of Blank______. shareholders' equity net fixed assets income working capital

income

The purpose of a(n) Blank______ is to measure performance over a set period of time. statement of cash flows income statement prospectus balance sheet

income statement

Which of the following reflects financial information over a period of time? income statement balance sheet

income statement

Increasing its liquid assets will enable a firm to do which of the following? increase its ability to avoid financial distress increase its rate of return increase its ability to meet short-term obligations reduce its investment in receivables and inventory

increase its ability to avoid financial distress increase its ability to meet short-term obligations

A decrease in depreciation expense Blank______ earnings per share. decreases does not affect increases

increases

A stock buyback Blank______ cash flow to stockholders. increases or decreases has no effect on

increases

Stockholders' equity Blank______ when retained earnings increase. decreases increases is unaffected

increases

When a firm pays out fewer dividends, it ___the accounting value of its retained earnings.

increases

Raw materials are classified as which of the following? accounts receivable cash and equivalents inventory fixed assets

inventory

Cash flows from the acquisition and sale of fixed assets are located in the ______ activities section of the accounting statement of cash flows. financing operating investing retained earnings

investing

The second step in compiling the accounting statement of cash flows is to calculate the ______. investing activities financing activities operating activities taxes and insurance expenses

investing activities

Holding too many liquid assets can be harmful for a firm because such assets are generally Blank______. too profitable less profitable more profitable than less liquid assets

less profitable

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

less than

o A fixed asset is one that has a relatively ____ life

long

The cash flows from financing activities include changes in ______. long-term debt accounts payable taxes common stock

long-term debt common stock

Since new cash flows are taxed at Blank______ tax rates, those tax rates are the most important. marginal equal reduced average

marginal

The price at which willing buyers and sellers would trade is called Blank______ value. market carrying accounting book

market

A firm is in trouble if its operating cash flow is ________ for a long period of time.

negative

If the acquisition of fixed assets is $10,000,000 and the sale of fixed assets is $15,000,000, capital spending will be Blank______. negative positive zero

negative

Noncash items are expenses that directly affect Blank______ but do not directly affect Blank______. cash flow; revenue cash flow; net income net income; cash flow cash flow; taxes

net income; cash flow

Which of the following are examples of financing activities? federal tax payments net payments to owners interest expense payments net payments to creditors

net payments to owners net payments to creditors

The first step in calculating cash flow from operating activities is to adjust net income for ______. any changes in retained earnings noncash items and net working capital changes changes in taxes and interest financing and investment activities

noncash items and net working capital changes

Cash flow and net working capital are ______. not the same the same

not the same

The total cash flow of the firm includes ______. -only capital and net working capital cash flows -operating, capital spending, and net working capital cash flows -only operating and net working capital cash flows -only operating and capital cash flows

operating, capital spending, and new working capital cash flows

An income statement reflects activity that occurs Blank______, while a balance sheet reflects values Blank______. on a specific date; as of the same date over a period of time; over the same period of time on a specific date; that occur over a period of time over a period of time; as of a specific date

over a period of time; as of a specific date

Which of the following are tangible fixed assets? patents plant land accounts receivable

plant land

When more cash becomes available than will be paid out over the next 12 months, net working capital is ______. zero positive negative

positive

Which of these are generally considered to be short-run fixed costs? property taxes overhead expenses income taxes management salaries

property taxes overhead expenses management salaries

Which of the following is a variable cost in the short run? raw materials used in production monthly rent on the plant property taxes bond interest

raw materials used in production

Which of the following are examples of short-run fixed costs? Multiple select question. sales commissions material costs rent bond interest

rent bond interest

How is income defined? retained earnings minus dividends revenue plus expenses change in cash and equivalents revenue minus expenses

revenue minus expenses

Which of the following are included in cash flow from investing activities? retirement of long-term debt sales of fixed assets acquisition of fixed assets depreciation

sales of fixed assets acquisition of fixed assets

An official accounting statement that helps to explain the change in cash and cash equivalents is called the ______. statement of cash flows income statement cash and equivalents report balance sheet

statement of cash flows

Cash flow from operations is calculated by adding depreciation to EBIT and ______ current taxes. subtracting adding multiplying by dividing by

subtracting

If a firm default on its bond contracts, bondholders can do which of the following to get their money back? automatically assume ownership of the firm recover their losses from the federal government appeal to their state or provincial government for reimbursement sue the firm in court

sue the firm in court

o If dividends are $100, stock sold is $10, and stock repurchased is $25, what is the cash flow to stockholders? $85 $115 $65 $135

• $115

o If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals ________. $200 $150 $350 $50

• $50

o Long-term liabilities represent obligations of the firm lasting over _______. 1 month 6 months 1 year 90 days

• 1 year

o According to the originators of the current U.S. corporate tax code, the only rates are: (4) 34% 25% 40% 35% 15%

• 34% • 25% • 35% • 15%

o What does stockholders' equity represent? A fixed claim against the firm's assets A residual claim against the firm's liabilities A residual claim against the firm's assets A fixed claim against the firm's liabilities

• A residual claim against the firm's assets

o A balance sheet reflects a firms: Income over a specific time period Economic value at a specific time Accounting value on a specific date Earnings per share over an unspecified time

• Accounting value on a specific date

o Which of the following are classified as liabilities on a firm's balance sheet? (2) Marketable securities Accounts receivable Accounts payable Long-term debt

• Accounts payable • Long-term debt

o 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? Stockholders' equity Retained earnings Accounts receivable Accounts payable

• Accounts receivable

o Net earnings refers to income earned _________. Net of operating and administrative costs Before interest and taxes After interest and taxes Prior to taxes

• After interest and taxes

o In the long-run, costs may be considered as _________ All variable All fixed Some fixed and some variable

• All variable

o Which of the following is the balance sheet equation? Assets equal liabilities plush stockholders equity Stockholders' equity equals assets plus liabilities Liabilities equal assets plus stockholders' equity Assets equal stockholders' equity minus liabilities

• Assets equal liabilities plus stockholders equity

o Shareholders equity equals_______ Assets minus liabilities Current assets minus current liabilities Total assets minus long-term debt Assets+liabilities

• Assets minus liabilities

o Liquidity refers to the ease of changing _________. Cash to liabilities Cash in to other assets Assets to cash Liabilities to assets

• Assets to cash

o 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 Marginal; average Median; average Average; marginal Average; median

• Average; marginal

o On the balance sheet, assets are listed at their _____ value Book Market Economic Estimated

• Book

o Under GAAP, assets are generally carried on a firm's balance sheet at ______ (2) Book value Market value Historical cost Salvage value

• Book value • Historical cost

o The short run is a period when there are _____ costs Only fixed Both fixed and variable Only variable Only cash

• Both fixed and variable

o Rank from easiest to hardest of turning the following assets into cash Inventory Cash equivalents Accounts receivable Plant and equipment

• Cash equivalents • Accounts receivable • Inventory • Plant and equipment

o In finance, the value of a firm depends on its ability to generate ______. Cash flows Net working capital Earnings per share Net income

• Cash flows

o Which one of the following is true? Cash flows can be derived from financial statements The income statement explicitly shows cash flows Cash flows always exceed earnings Earnings, net income, and cash flows are identical

• Cash flows can be derived from financial statements

o Which of the following are components of cash flow from assets? (3) Change in net working capital Operating cash flow Net new borrowing Net new equity Capital spending

• Change in net working capital • Operating cash flow • Capital spending

o The cash flow identity states that cash flow from assets equals cash flows to _____ Equity investors and stockholders Creditors and stockholders Equity investors and the government Creditors and bondholders

• Creditors and stockholders

o Net working capital equals ___________. Total assets minus total liabilities Fixed assets minus long-term liabilities Current liabilities minus current assets Current assets minus current liabilities

• Current assets minus current liabilities

o Period costs are incurred during a particular time period and might be reported as Selling general Administrative expenses Earnings Management

• Earnings management

o Depreciation is the accountant's estimate of the cost of _(2)___ used in the production process matches with the benefits produced from owning it Equipment Fixed assets Inventory Cash

• Equipment • Fixed assets

o Which of the following is shown on the left-hand side of the balance sheet? Stockholders' equity Fixed Assets Current Liabilities Long-Term Debt

• Fixed Assets

o What should you keep in mind when examining an income statement? (3) GAAP Cash versus non-cash items Asset composition Time and costs

• GAAP • Cash versus non-cash items • Time and costs

o What does GAAP stand for? General accounting and auditing procedures Generally accepted auditing principles Generally accepted accounting principles Generally appreciated accounting procedures

• Generally accepted accounting principles

o Which of these questions can be answered by reviewing a firm's balance sheet? How much net income has the firm earned this period? How much of the firm's net income was paid out in dividends? How much debt is used to finance the firm? What is the total amount of assets the firm owns?

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

o Marginal tax rates are the most important tax rates because: (2) Incremental cash flows are taxed at marginal tax rates Financial decisions are usually based on new cash flows Because the IRS says so Financial decisions are usually based on previous changes in cash flows

• Incremental cash flows are taxed at marginal tax rates • Financial decisions are usually based on new cash flows

o Cash flow to creditors equals: Stock repurchased plus interest paid Interest paid minus net new borrowing Interest paid plus net new borrowing Interest plus dividends paid

• Interest paid minus net new borrowing

o Which of the following is a current asset? Inventory Equipment Accounts payable Accrued expense

• Inventory

o For a mature firm, operating cash flow: (2) Is usually positive Is usually negative Is a sign of trouble over a long period of time Cannot be positive for long periods

• Is usually positive • Is a sign of trouble if negative over a long period of time

o The price at which willing buyers and sellers would trade is called __________ value Book Carrying Market Accounting

• Market

o 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 Tax Historic Matching Revenue

• Matching

o The last item on the income statement is typically the __________. Net income Gross income Operating income Operating cash flow

• Net income

o A positive operating cash flow indicates that the firm is generating enough cash to: Create valuable projects Pay out a dividend Repurchase stock Pay operating costs

• Pay operating costs

o Net capital spending is equal to ending net fixed assets minus beginning net fixed assets ____ Plus the change in inventory Minus the change in inventory Plus depreciation Minus depreciation

• Plus depreciation

o Liquidity has two dimensions which are the ability to: Quickly convert assets into cash without significant loss in value Convert assets into cash so that value is maximized Quickly convert assets into cash regardless of loss in value

• Quickly convert assets into cash without significant loss in value

o Physical assets are termed ____________ assets Long-term Current Tangible Intangible

• Tangible

o What is the most important item that can be extracted from financial statements? Total dividends per year The firms total net income The firm's total sales The firm's actual cash flows

• The firm's actual cash flows

o What is the purpose of the income statement? To show the accumulation of assets and liabilities To identify the amount of cash spent on various expenses To measure performance over a set period of time To identify the cash inflows and outflows

• To measure performance over a set period of time

o Common stockholders are entitled to the difference between _____ and ______ Total assets; long-term debt Current assets; current liabilities Total assets; total liabilities

• Total assets; total liabilities

o Free cash flow is better described as ________. Fixed asset investment Total distributable cash flow Non-cash expenses Dividend and interest payments

• Total distributable cash flow

o Financial leverage refers to a firm's ____________. Net working capital Use of debt in its capital structure Organizational structure

• Use of debt in its capital structure

o Current assets ________ exceed current liabilities in a healthy firm Always Usually Never

• Usually

o ________ costs change as the output of the firm changes Overhead Fixed Variable Depreciation

• Variable

o According to GAAP, when is income reported? When cash payment is received When it is first anticipated Whenever the firm decided to report it When it is earned or accrued

• When it is earned or accrued