Finance 450: Exam 1- Chapter 2 Book Questions
accounting value on a specific date
A balance sheet reflects a firm's: - income at a specific time - economic value over a specified time period - earnings per share over an unspecified time - accounting value on a specific date
Accounts receivable
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 - Stockholders' equity - Accounts payable - Retained earnings
Current; fixed
Assets are classified as either: 1) 2)
- is usually positive - is a sign of trouble if negative over a long period of time
For a mature firm, operating cash flow: - is usually negative - cannot be positive for long periods - is usually positive - is a sign of trouble if negative over a long period of time
Product; period
In practice, accountants tend to classify costs as either ____________________ costs or _____________________ costs.
Tangible
Physical assets are termed ______________ assets.
True
T/F: Long-term liabilities are not due in the current year (from the date of the balance sheet).
degree of financial leverage
The more debt a firm has, the greater its: - degree of financial leverage - retained earnings - degree of operating leverage - book value
Variable costs
____________________ changes as the output of the firm changes.
Decreasing
Assets are normally listed on the balance sheet in order of ___________________ liquidity, meaning the most liquid assets are listed first.
Equals
The balance sheet "balance" because the value of the left-hand side always _____________ the value of the right-hand side.
Given point in time
The balance sheet represents a __________________________.
Shareholders
If a firm sells its assets and pays its debts, whatever cash is left over belongs to ___________________. -> shareholder's equity
COGS
Product costs are usually shown on the income statement under the heading of _________________ .
- cash versus non-cash items -GAAP - time and costs
What should you keep in mind when examining an income statement? - cash versus non-cash items -GAAP - time and costs - asset composition
Current
_________________ liabilities, like current assets, have a life of less than one year (meaning they must be paid within the year), and they are listed before long-term liabilities.
Noncash items; depreciation
___________________ are expenses charged against revenue that do not affect cash flow. - most important is _______________________
Net capital spending
___________________ is money spent on fixed assets less money received from the sale of fixed assets.
Inventory
___________________ is probably the least liquid of the current assets, at least for many business.
Book value
___________________ is the balance sheet value of the assets, liabilities, and equity. - generally not what the assets are actually worth
Market value
___________________ is the true value; the price at which the assets, liabilities, or equity can actually be bought or sold.
Publicly
___________________ traded companies must file regular reports with the Securities and Exchange Commission. - these reports are usually filed electronically
Period costs
_____________________ are incurred during a particular time period and might be reported as selling, general, and administration expenses. - some of these costs might be fixed and others may be variable
Liquidity Ex: gold
_____________________ is the speed and ease of conversion to cash without significant loss of value.
Current
A ________________ asset has a life of less than one year. - meaning it will normally convert to cash within 12 months Ex: inventory, cash, and A/R
Fixed
A ________________ asset is on that has a relatively long life.
Noncash items
A primary reason that accounting income differs from cash flow is that an income statement contains _____________________. - most important one is depreciation
1) product costs 2) period costs
Costs are classified as 2 things: 1) 2)
Liquid
Current assets are relatively ______________ and include cash and those assets that we expect to convert to cash over the next 12 months.
Illiquid
Fixed assets are, for the most part, relatively ____________________. - consists of tangible things such as buildings and equipment that don't convert to cash at all in normal business activity AND intangible assets, such as trademarks, which have no physical existence but can be very valuable
1) tangible 2) intangible
Fixed assets can either be: 1) 2)
Tax Cuts and Jobs Act; 21
Following the passage of the ___________________________, the federal corporate tax rate in the United States became a flat ____ percent for corporations.
Variable
In the long run, all business costs are ____________________.
Fixed
In the short run, some costs are effectively _____________- they must be paid no matter what Ex: property taxes
Per-share
Net income is often expressed on a _______________ basis
General rule
The ____________________ (recognition principle) is to recognize revenue at the time of sale, which need not be the same as the time of collection.
Balance sheet
The ____________________ is a snapshot of the firm. - it summarizes what a firm owns (its assets), what a firm owes (its liabilities), and the difference between the two (the firm's equity).
Change in net working capital
The _____________________________ is the amount spent on net working capital. - measured as the change in net working capital over the period being examined and represents the net increase or decrease in current assets and current liabilities
- historical cost - book value
Under GAAP, assets are generally carried on a firm's balance sheet at _________________. - historical cost - book value - market value - salvage value
A systematic expensing of an asset based on the asset's estimated life
What is depreciation? - A systematic cash contribution to a company's checking account to fund a new asset - The market value of an asset minus the asset's book value - A systematic expensing of an asset based on the asset's estimated life - The current market value of an asset minus the asset's initial cost
Illiquid
A ________________ asset is one that cannot be quickly converted to cash without a substantial price reduction.
Highly
A ________________ liquid asset is one that can be quickly sold without significant loss of value.
use of debt in its capital structure
Financial leverage refers to a firm's _________. - net working capital - organizational structure - use of debt in its capital structure
Current assets
For ___________________, market value and book value might be somewhat similar because current assets are bought and converted into cash over a relatively short span of time.
Fixed assets
For, _____________________, it would be purely a coincidence if the actual market value of an asset were equal to its book value.
assets to cash
Liquidity refers to the ease of changing _______________________. - assets to cash - cash in to other assets - cash to liabilities - liabilities to assets
Interval of time
Period costs are the costs that are allocated to a specific _________________.
Net working capital (NWC)
The difference between a firm's current assets and its current liabilities is called _______________________. - NWC is positive when CA>CL
both fixed and variable
The short run is a period where there are ________________ costs.
- GAAP, cash versus noncash items, and time and costs
The three most important items to keep in mind when reviewing an income statement are: - GAAP, cash versus noncash items, and earnings per share - GAAP, cash versus noncash items, and time and costs - Cash versus noncash items, time and costs, and earnings per share - GAAP, time and costs, and earnings per share
True
True or false: Operating cash flow does not include depreciation or interest.
Long-term
A debt that is not due in the coming year is classified as a ____________________ liability. Ex: a 5 year loan (B/P)
pay everyday cash outflows
A positive operating cash flow indicates that the firm is generating enough cash to: - pay everyday cash outflows. - create valuable projects. - repurchase stock. - pay out a dividend.
Residual value
Equity holders are entitled only to the ___________________, the portion left after creditors are paid. - this is the value of the shareholder's equity in the firm
Overstate; understate
Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm.
True
True or false: Free cash flow is also known as cash flow from assets.
the difference between the number of dollars that came in and the number that went out
Cash flow refers to ___________________________. - the difference between the number of dollars that came in and the number that went out - only the cash that represents the closing balance of retained earnings - the sum of the number of dollars that came in and the number that went out - only the cash that corresponds to the net income for the year
the difference between the number of dollars that came in and the number that went out
Cash flow refers to _______________________. - the sum of the number of dollars that came in and the number that went out - the difference between the number of dollars that came in and the number that went out - only the cash that corresponds to the net income for the year - only the cash that represents the closing balance of retained earnings
the firm sold more fixed assets than it purchased
Changes in capital spending can be negative if - the firm bought more assets than it sold - the firm sold more fixed assets than it purchased - the firm bought and sold the same amount of assets
total assets; total liabilities
Common stockholders are entitled to the difference between ______ and ________. total assets; long-term debt total assets; total liabilities current assets; current liabilities
- 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. - inventory - equipment - fixed assets - cash
Total distributable cash flow
Free cash flow is better described as _____________________.
Cash flows
In finance, the value of a firm depends on its ability to generate _________________________. - earnings per share - net working capital - cash flows - net income
the cash you'd get if you sold it
The market value of an item is: - the cash value you'd get if you sold it - the amount recorded in the balance sheet - the amount you paid it - its appraised value
Greater
The more debt a firm has (as a percentage of assets), the _______________ is its degree of financial leverage.
Financial distress
The more liquid a business is, the less likely it is to experience ________________________.
Income statement
The purpose of a(n) _____________________ is to measure performance over a set period of time.
Liabilities and equity
The right-hand side of the balance sheet lists the ____________________________ of the firm.
an imprecise period of time
The short run is _____________________. - defined as one month - defined as six months - defined as more than one year - an imprecise period of time
Financial leverage
The use of debt in a firm's capital structure is called __________________________.
- When the earnings process is virtually completed - When the value of an exchange of goods or services is known or reliably determined
According to GAAP, when is revenue recognized on an income statement? - When the earnings process is virtually completed - After the related expenses are paid in full - Only when cash has been received for the sale - When the value of an exchange of goods or services is known or reliably determined
- current and fixed assets - tangible and intangible assets
Assets can be categorized as (select all that are appropriate) - current and fixed assets - short-term and long-term equity - tangible and intangible assets - fixed and variable assets
1) current 2) long-term
Liabilities are classified as either: 1) 2)
Less profitable
Liquid assets are generally ______________________ to hold. Ex: cash holdings are the most liquid investment of all but they sometimes earn no return at all- they just sit there
1) ease of conversion 2) loss of value
Liquidity has 2 dimensions: 1) VS 2)
quickly convert assets into cash without significant loss in value
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
a firm sold off more assets than it purchased
Net capital spending is negative when: - a firm sold off more assets than it purchased - Net capital spending cannot be negative - a firm purchased more assets than it sold
after taxes and interest
Net earnings refers to income earned _______________________. - net of operating and administrative costs - prior to taxes - before interest and taxes - after interest and taxes
Earnings per share
Net income is called _____________________.
expenses; do not directly affect
Non-cash items are ______ that ____ cash flow. - expenses; do not directly affect - revenues; do not directly affect - expenses; increase - expenses; decrease
Net income; cash flow
Non-cash items are expenses that directly affect __________________ but do not directly affect ___________________.
Cash flow
Non-cash items do not affect: - net income - earnings per share - cash flow - retained earnings
Book
On the balance sheet, assets are listed at their __________________ value.
Expenses
The GAAP matching principle requires revenues to be matched with: - accruals - expenses - net income - retained earnings
matching
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.
Period of time
The income statement measure performance over some _______________________, usually a quarter or a year.
Assets
The left-hand side of the balance sheet lists the _______________ of the firm.
Cash flow to creditors
To the extent that a firm borrows money, it usually gives first claim to the firm's _________________________.
Historical cost
Under GAAP, audited financial statements in the US generally show assets at ____________________.
1) short run 2) long run
We can think of the future as having 2 distinct parts: 1) 2)
A residual claim against the firm's total assets
What does shareholders' equity represent? - A residual claim only against the firm's intangible assets - A fixed claim against the firm's total assets - A fixed claim against the firm's liabilities - A residual claim against the firm's total assets
earnings management
When a firm smooths earnings to please investors, it is called ________. - discretionary reporting - earnings management - earnings smoothing - fair market accounting
Market value
When we speak of the value of an asset or the value of the firm, we will normally mean its _____________________.
- Accounts payable - Long-term debt
Which of the following are classified as liabilities on a firm's balance sheet? - Accounts receivable - Marketable securities - Accounts payable - Long-term debt
Depreciation
Which of the following is an example of a non-cash item on an income statement? - Costs - Depreciation - Dividends - Retained earnings
Shareholders
Who is entitled to the residual value of a firm's cash flows? - Bondholders - Occupy Wall Street protesters - Shareholders - The Internal Revenue Service
Cash flow
__________________ is one of the most important pieces of information that can be derived from financial statements.
Capital spending
____________________ refers to the net spending on fixed assets
Product costs
______________________ include things such as raw materials, director labor expense, and manufacturing overhead. - reported on the incomes statement as COGS, but include both fixed and variable costs
Operating cash flow
______________________ refers to the cash flow that results from the firm's day-to-day activities of producing and selling.
Operating cash flow
______________________ tells us whether or not a firm's cash inflow from its business operations are sufficient to cover its everyday cash outflow - a negative number is often a sign of trouble
GAAP Matching Principle
__________________________: - recognizes revenue when it's fully earned - match expenses required to generate revenue to the period of recognition