Fin week 2

The use of financial leverage can:

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

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?

A decrease in depreciation expense ______ earnings per share.

Increase

Increasing its noncash liquid assets will enable a firm to do which of the following?

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

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

Shareholders

When looking at the income statement, the financial manager should keep in mind GAAP, cash versus noncash items, and ______ and costs

TIME

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

True

Assets can be described as items that _____.

a firm owns generate revenue provide market value to the firm

Liquidity refers to the ease of changing _____.

assets to cash

Noncash items do not affect _____.

cash flow

In finance, the value of a firm depends on its ability to generate ______.

cashflows

The more debt a firm has, the greater its:

degree of financial leverage

Depreciation is the accountant's estimate of the cost of ______ used up in the production process.

equipment

For a ______ asset, it would be purely a coincidence if the actual market value were equal to its book value.

fixed

The shareholders are the _____ in line to receive payment when a firm is forced to sell assets to pay off debt.

last

Holding too many liquid assets can be harmful for a firm because such assets are generally _____.

less profitable

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

liquidity

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

liquidity

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

market

Net working capital equals current assets ______ current liabilities.

minus

The accounting equation shows that stockholders' equity equals assets ______ liabilities.

minus

On which side of the balance sheet do liabilities appear?

right

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

stockholders

Most importantly, assets provide ______ to the firm.

value

Another name for short-term financial management is ___ management.

working capital

What is depreciation?

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

What does a balance sheet reflect about a firm?

Accounting value on a specific date

Which of the following are examples of noncash items on an income statement?

Depreciation

Operating cash flow includes capital spending and working capital requirements. True false question.

False

The fact that the balance sheets are listed at _____ means that there is no necessary connection between the total assets and the value of the firm.

at cost

Noncash items are expenses that directly affect _____ but do not directly affect ______.

net income; cash flow

Book value of assets is generally

not what the assets are actually worth

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

time and costs GAAP cash versus noncash items

Which of the following is an example of a noncash item on an income statement?

Depreciation

A supplier may look at the size of _____ to see how promptly the firm pays its bills.

accounts payable

Residual value is the amount left over after paying ________________.

accounts payable other debt holders bondholders