FNAN 300 - Ch. 2
For a mature firm, operating cash flow:
-is usually positive -is a sign of trouble if negative over a long period of time
Non-cash items do not affect:
cash flow
If the Federal marginal tax bracket is 34%, the state marginal tax bracket is 5%, and the local marginal tax bracket is 1%, how much money will a corporation keep if it makes another $1,000,000 in taxable income?
$600,000
According to the originators of the current U.S. corporate tax code, the only rates are:
15%, 25%, 34%, 35%
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
Which of the following is NOT a component of cash flow from assets?
Financial expenses
What are two ways in which financial accountants usually classify costs?
Product costs & period costs
Net earnings refers to income earned _____
after interest and taxes
The short run is _____
an imprecise period of time
Net working capital will be negative when current assets _____ current liabilities
are less than
Stockholders' equity is always shown on the _____ of the balance sheet
right side
If dividends are $100, stock sold is $10, and stock repurchased is $25, what is the cash flow to stockholders?
$115
If a firm's current assets are $100 and its current liabilities are $80, then its net working capital is:
$20
If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the change in capital spending is _____
$50 (100-60+10)
Which of the following are classified as fixed assets on the balance sheet?
-Buildings -Patents -Trademarks
What does stockholders' equity represent?
A residual claim against the firm's assets
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
What does GAAP stand for?
Generally accepted accounting principles
(T/F) Free cash flow is very similar to cash flow from assets
True
(T/F) Operating cash flow does not include depreciation or interest
True
In finance, the value of a firm depends on its ability to generate _____
cash flows
Cash flow to stockholders equals _____
dividends paid minus net new equity raised
Costs that do not change in the short run arise because of _____
fixed commitments
The purpose of a(n) _____ is to measure performance over a set period of time
income statement
The _____ tax rate is the tax rate paid on the next dollar of income
marginal
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
If interest paid is $100 and net new borrowing is $150, then cash flow to creditors equals:
-$50
What should you keep in mind when examining an income statement?
-GAAP -cash vs. non-cash items -time and cost
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
Which of the following are classified as liabilities on the firm's balance sheet?
-Long-term debt -Accounts Payable
When is revenue recognized on an income statement?
-When the exchange of goods or services is completed -When the earnings process is virtually complete
Assets can be categorized as...
-current and fixed assets -tangible and intangible assets
Marginal tax rates are the most important tax rates because:
-financial decisions are usually based on new cash flows -incremental cash flows are taxed at marginal tax rates
Depreciation is the accountant's estimate of the cost of _____ used in the production process matched with the benefits produced from owning it
-fixed assets -equipment
Under GAAP, assets are generally carried on a firm's balance sheet at _____
-historical cost -book value
Long-term liabilities represent obligations of the firm lasting over _____
1 year
Which of the following is true?
Cash flows can be derived from financial statements
The cash flow identity states that the cash flow from _____ should equal cash flows to creditors and equity investors
assets
On the balance sheet, assets are listed at their _____ value
book
Net working capital equals _____
current assets minus current liabilities
The more debt a firm has, the greater its:
degree of financial leverage
Net capital spending is equal to the change in net fixed assets plus:
depreciation
When a firm smooths earnings to please investors, it is called _____
earnings management
The GAAP matching principle requires revenue to be matched with:
expenses
Period costs are the costs that are allocated to a specific _____
interval of time
The price at which willing buyers and sellers would trade is called _____ value
market
Non-cash items are expenses that directly affect _____ but do not directly affect _____
net income; cash flow
A positive operating cash flow indicates that the firm is generating enough cash to:
pay operating costs
Net capital spending is equal to ending net fixed assets minus beginning net fixed assets _____
plus depreciation
On a balance sheet, total assets must always equal total liabilities plus:
shareholders' equity
Changes in capital spending can be negative if
the firm sold more assets than it purchased
Common stockholders are entitled to the difference between _____ and _____
total assets ; total liabilities