finan 450 Ch.2

WOTF is shown on the left hand side of the balance sheet?

assets

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

market

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

shareholders

changes in capital spending can be negative if

the firm sold more assets than it purchased

The three most important items to keep in mind when reviewing an income statement are:

GAAP, cash versus noncash items, and time and costs

What does GAAP stand for?

Generally Accepted Accounting Principles

WOTF is a current asset? A/P Inventory Equipment Accrued Expense

Inventory

T or F : Interest paid minus net new borrowing equals cash flow to creditors.

True

According to GAAP, when is income reported?

When it is earned or accrued

What is depreciation?

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

Cash flow to creditors equals:

interest paid minus net new borrowing

Stockholders' equity is always shown on the ______ of the balance sheet

right side

Purpose of Income Statement

to measure performance over a set period of time

What is the purpose of the income statement?

to measure performance over a set period of time

a balance sheet reflects a firm's:

accounting value on a specific date

The more debt a firm has, the greater its:

degree of financial leverage

_____ paid minus net new equity raised equals cash flow to stockholders.

dividends

The purpose of a(n) _____ is to measure the performance over a set period of time.

income statement

The purpose of a(n) ______ is to measure performance over a set period of time.

income statement

costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as:

period costs

T or F : Free cash flow is also known as cash flow from assets.

true

T or F: Operating cash flow does not include depreciation or interest.

true

Non-cash items do not affect

cash flow

The last term (or "bottom line") on the income statement is typically the _____.

net income

long-term liabilities represent obligations of the firm lasting over ________.

1 year

Interest paid _____ net new borrowing equals cash flow to creditors.

minus

The balance sheet identity shows that stockholders' equity equals assets ________ liabilities.

minus

Net working capital will be negative when current assets _____ current liabilities.

are less than

net working capital will be negative when current assets _____ current liabilities.

are less than

the short run is a period when there are ______ costs.

both fixed and variable

What does shareholders' equity represent?

a residual claim against the firm's total assets

shareholders' equity equals __________.

assets minus liabilities

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

Current assets are classified as relatively _____; these assets can be converted to cash within the next 12 months.

liquid

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

Liquidity refers to the ease of changing _____

assets to cash

what is depreciation

a systematic expensing of an asset based on the assets estimated life

the cash flow identity states that cash flows from ______ should equal cash flows to creditors and equity investors

assets

Ending net fixed assets minus beginnings net fixed assets _____ depreciation equals net investment in fixed assets.

plus

For a mature firm, operating cash flow:

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

components of cash flow from assets

1. Operating cash flow 2. Capital spending 3. Additions to net working capital

components of cash flow from assets?

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

amounts not yet collected from customers on sales already made are called:

accounts receivable

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

cash flows

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

cash versus non-cash items time and costs GAAP

product costs are usually shown on the income statement under the heading of ______.

cost of goods sold

the cashflow identity states that cash flow from assets equals cash flows to ______

creditors and stockholders

Liabilities can be classified as ______ or long-term.

current

Assets can be categorized as

current and fixed assets tangible and intangible assets

WOTF is an example of a non-cash item on an income statement? dividends costs depreciation retained earnings

depreciation

Cash flow to stockholders equals _____.

dividends paid minus net new equity raised

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

earnings management

WOTF are classified as fixed assets on the balance sheet?

equipment buildings trademark

depreciation is the accountant's estimate of ______ used in the production process matched with the benefits produced from owning it.

equipment fixed assets

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

equipment fixed assets

WOTF are classified as fixed assets on the balance sheet? equipment buildings trademark cash

equipment, buildings, trademark (cash is a current asset)

the GAAP matching principle requires revenues to be matched with:

expenses

T or F: ending net fixed assets plus beginning net fixed assets minus depreciation equals net investments in fixed assets.

false

T or F: current assets plus current liabilities equals net working capital.

false (minus)

WOTF is NOT a component of cash flow from assets?

financing expenses

costs that do not change in the short-run arise because of ______.

fixed commitments

The common set of standards and procedures by which audited financial statements are prepared are called:

generally accepted accounting principles (GAAP)

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

historical cost book value

period costs are the costs that are allocated to a specific ______.

interval of time

WOTF are classified as liabilities on a firm's balance sheet?

long-term debt A/P

The ______ principle of GAAP states that the costs associated with a good or service should be recorded at the same time as the revenue from selling that food or service

matching

current assets ________ current liabilities equals NWC.

minus

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

shareholders' equity

The market value of an item is:

the cash value you'd get if you sold it

cash flow refers to ______.

the difference between the number of dollars that came in and the number that went out

On which side of the balance sheet do liabilities appear?

the right side

common stockholders are entitled to the difference between _____ and _____.

total assets; total liabilities

common stockholders are entitled to the difference btw _______ and _______

total assets; total liabilities

Free cash flow is better described as _____.

total distributable cash flow

Which one of these is considered to be the most liquid? Accounts Receivable Inventory Land Equipment and machines

accounts receivable

a primary reason that accounting income differs from cash flow is that an income statement contains ______.

noncash items

the cash flow that results from the firm's day to day activities of producing and selling is called:

operating cash flow

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

pay everyday cash outflows

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

plus depreciation

in practice, accountants tend to classify costs as either ______ costs or ______ costs.

product; period

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value

Physical assets are termed _________ assets.

tangible

Net earnings refers to income earned _____.

after interest and taxes

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

net income; cash flow

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

true

Financial leverage refers to a firm's ______.

use of debt in its capital structure

______ changes as the output of the firm changes

variable cost

What questions can be answered by reviewing a firm's balance sheet?

what is the total amount of assets the firm owns? how much debt is used to finance the firm?

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

when the value of an exchange of goods or services is known or reliably determined. when the earnings process is virtually completed.

the short run is ______.

an imprecise period of time

earnings management is a controversial practice in which corporations ______ or ______ their earnings to "smooth out" dips and surges and keep investors calm

overstate; understate

T or F : Dividends paid minus net new equity raised equals cash flow to stockholders.

true