Financial management ch. 2

Suppose your company's taxable income was $235,000 in 2017. Using table 2.3, calculate the income tax due, the average tax rate, and the marginal tax rate.

$74,900; 32%; 39%

The use of financial leverage can:

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

Which of the following are period costs?

-Administrative expenses -General expenses -Selling costs

Assets can be described as items that:

-Provide market value to the firm. -Generate revenue. - A firm owns.

Which of the following are classified as liabilities on a firm's balance sheet?

-accounts payable -notes payable

The cash flow identity reflects the fact that

-cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders -a firm generates cash through various activities -cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm

Which of the following is true about the difference between the income statement and cash inflows and outflows?

-cost of raw materials purchased on credit are accounts payable rather than cash outflows until they are paid, which may be in a different period -income taxes are often deferred, so the amount on the income statement may not represent the amount of the check to the IRS -sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period

Which of these items do NOT appear on a balance sheet?

-good management -knowledge that has no patent -favorable economic conditions

Long-term liabilities represent obligations of firms lasting over

1 year

Rank the ease (from easiest to hardest) of turning the following assets into cash.

1. cash equivalents 2. accounts receivable 3. inventory 4. plant and equipment

What does stockholders' equity represent?

A residual claim against the book value of the firm's assets. (The book value of the firm's assets less the book value of its liabilities.)

A customer has yet to pay the bill for products purchased on credit. The seller records this debt in which balance sheet account?

Accounts receivable

Which one of these is a correct version of the balance sheet equation?

Assets = Liabilities + Stockholders' equity

Which of the following are examples of short-run fixed costs?

Bond interest Rent

The statement of cash flow explains changes in ______

Cash and equivalents

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

Cash versus non-cash items Time and costs GAAP

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

Equipment

What does GAAP stand for?

Generally Accepted Accounting Principles

Which of the following are current assets?

Inventory and accounts receivable

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

Market

The short run for a firm is the period of time during which ________.

Output can vary Some costs are fixed

What does a balance sheet reflect about a firm?

accounting value on a specific date

Liquidity refers to the ease of changing _________.

assets to cash

Non-cash items do not affect

cash flow

Net working capital equals:

current assets minus current liabilities

Costs that do not change in the short run arise because of _____

fixed commitments

Which of the following are fixed assets?

land, plant, patents

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

less than

How is income defined?

revenue minus expenses

On which side of the balance sheet do liabilities appear?

right side

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

stockholders

Most importantly, assets provide _____ to the firm

value

_______ costs change as the output of the firm changes.

variable