Finance chapter 2

Which of the following are components of cash flow from assets?

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

Which of these 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?

U.S. corporations pay tax at a rate of

21

Which of the following is the balance sheet equation?

Assets equal liabilities plus stockholders' equity.

Which of the following is an example of a non-cash item on an income statement?

Depreciation

True or false: Current assets plus current liabilities equals net working capital.

False

Which of the following is NOT a component of cash flow from assets?

Financing expenses

Physical assets are termed ______________ assets.

Tangible

According to GAAP, when is income reported?

When it is earned or accrued

A balance sheet reflects a firm's:

accounting value on a specific date

Net earnings refers to income earned

after interest and taxes

In the long-run, costs may be considered as

all variable

The short run is

an imprecise period of time

Liquidity refers to the ease of changing

assets to cash

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.

average; marginal

The short run is a period when there are

both fixed and variable

Non-cash items do not affect

cash flow

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

cash flows

The more debt a firm has, the greater its:

degree of financial leverage

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

True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.

false

Cash flow to creditors equals

interest paid minus net new borrowing

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

market

Current assets (plus/minus) current liabilities equals NWC

minus

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

minus

The last item (or "bottom line") on the income statement is typically the _________.

net income

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

overstate; understate

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value

On a balance sheet, total assets must always equal total liabilities plus

shareholders' equity

marginal

tax rate is the tax rate paid on the next dollar of income.

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

Financial leverage refers to a firm's

use of debt in its capital structure

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

Assets can be categorized as

- tangible and intangible assets - current and fixed assets