FNAN300 Exam 1

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According to the originators of the current US corporate tax code, the only rates are

15%, 25%, 34%, and 35%

Stockholder's Equity

Assets - Liabilities

NWC (Net Working Capital)

CA - CL Current Assets - Current Liabilities

If dividends are $100, stock sold is $10, and stock repurchased is $25, what is the CF/SH?

CF/SH = dividends paid - Net New Equity $100- (10-20) = $115

Which of the following is true?

Cash flows can be derived from financial statements

The cash flow identity states that cash flows from ____ should equal cash flows to creditors and equity investors.

Cash flows from Assets should equal CF/CR and CF/SH

Which of the following positions generally report to the chief financial officer (CFO)?

Controller and Treasurer

The federal government taxes which of the following?

Corporate earnings and shareholder dividends

Noncash Items

Depreciation - Directly affect Net Income but DOES NOT AFFECT cash flow;Part of the matching principle.

Cash Flow

Dollars In - Dollars Out

NCS

End NFA-Beginning NFA+Depreciation

Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?

Enron, Worldcom, Tyco

Which of the following are classified as fixed-assets on the balance sheet? (relatively illiquid)

Equipment, Land, Buildings

Depreciation

Estimate of the cost of equipment and fixed assets used in production process and spread out over the span of its usable life

Investments (as a financial area)

Ex: domestic security analyst for a brokerage firm

capital structure decision

Ex: establishing the preferred debt-equity level

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

GAAP, cash vs non cash items, and time/cost

According to the textbook, which of the following is NOT one fo the three main questions to be addressed if you want to start your own business?

How many employees will I need?

Which of the following 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 firms owns?

Rank the ease (easiest to hardest) of turning these assets into cash

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

CF/CR

Interest - (beginning LTD - Ending LTD)

Which of the following areas of finance is concerned with financial asset allocation?

Investments

OCF

Revenue - [Costs + taxes (do not include depreciation & interest)]

Income

Revenues - Expenses

Which corporate officer is responsible for managing the firm's cash?

Treasurer is responsible for managing the firm's cash and credit, financial planning, and its capital expenditure.

Market Value

True Value the amount of cash the firm would receive if they'd sell the asset

Current assets ____ exceed current liabilities in a healthy firm

Usually

Addition to Retained Earnings

[(sales-costs-depreciation-taxes)(1-tax rate)]

Advantage of Corporate form

ability to raise larger sums of equity capital than other organizational forms

A balance sheet reflects a firm's

accounting value on a specific date

A customer has yet to pay the bill for products purchased from your firm on credit. Which account is the customers trade credit recorded in on the balance sheet?

accounts receivable

long run future

all future long run business costs are variable

Short Run

an imprecise period of time

NWC will be negative when CA ____ CL

are less than

Which of the following are reasons that the corporation is the most important form of business?

can sue and be sued separate legal entities enter into contracts

Operating Cash Flow

cash flow from the firm's day-to-day activities

Variable Cost

changes as the output of the firm changes

The officer responsible for corporate tax reporting is:

controller

Intangible Fixed Asset Give Example:

copyright

Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts?

corporation

Product costs are usually shown on the income statement under the heading of ____.

cost of goods sold

Assets can be characterized as

current and fixed tangible and intangible

The more debt a firm has, the greater its

degree of financial leverage

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

earnings management

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

equipment and other fixed assets

Marginal Tax Rates are the most important tax rate because:

financial decisions are usually based on new cash flows, incremental cash flows are taxed at marginal tax rates

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

fixed commitments

How is ownership transferred in a corporation?

gifting or selling of shares of stock

sole proprietorship

has its profits taxed as personal income

Net Income (Net Earnings)

in income after interest and taxes

A LLC's owners have _____ liability.

limited

Capital budgeting is concerned with making and managing expenditures on _____.

long-term assets

Which of the following are included in a firm's capital structure?

long-term debt and equity

What is the purpose of the income statement?

measure performance over some period of time (usually a quarter or year)

Income Statement

measures performance over some period of time

capital structure

mixture of the firm's debt and equity

Non-Cash items are expenses that directly affect ____ but do not directly affect ____.

net income; cash flow

CF/CR

net payments to creditors; Interest paid less net new borrowing

CF/SH

net payments to owners (stockholders); dividends paid less net new equity raised.

Capital Spending

net spending on fixed assets

Limited partnership

offers liability protection to some of its owners but not to all of its owners

A positive OCF indicates that the firm is generating enough cash to

pay operating costs

agency conflict

potential conflict of interest between owners and managers

COGS (Cost of Goods Sold)

raw materials, direct labor expense, manufacturing overhead (fixed & variable)

Recognition Principle (GAAP)

recognize revenue when the earning process is complete and can be reliably determined; at time of sale

Corporation

seperate legal entity

A ______ get paid after the employees, suppliers and creditors.

shareholder

The owners of a corporation are called _____.

shareholders

Balance Sheet

snapshot of the firm Organized and Summarized view of assets, liabilities, & the firm's equity at any given point in time.

short run future

some short run business costs are relatively fixed (have to be paid no matter what) but some are still variable such as payments to laborers and suppliers.

Cash Flow From Assets

sometimes called free cash flow because the firm is free to distribute to creditors and stockholders because it's not needed for working capital or fixed asset investment

Change in NWC

the amount spent on NWC

An agency issue is most apt to develop when

the control of a firm is separated from the firm's ownership

The primary responsibility of financial managers is to increase the value of ____.

the existing shares of stock

Marginal Tax Rate

the extra tax you would pay if you earned one more dollar; RELEVANT to financial decision making

Shareholders' Equity if best defined as

the residual value of a firm

Liquidity

the speed/ease an asset is converted to cash

financial leverage

the use of debt in a firm's capital structure; the more debt (as % of assets), the greater the degree of financial leverage

Book Value

the values shown on the balance sheet for the firm's assets

Common stockholders are entitled to the difference between ____ and ____ .

total assets and total liabilities

Free cash flow is better described as ____.

total distributable cash flow

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 complete

Ensuring that the firm has sufficient funds to continue operations on a day-to-day basis comes under the heading of _____ management.

working capital

The daily financial operations of a firm are controlled by managing the:

working capital

What three questions are the financial manager concerned with?

working capital management capital budgeting capital structure

ATR (Average Tax Rate)

your tax bill divided by your taxable income; % of income that goes to taxes

If ending NFA are $100, beginning NFA are $60, and depreciation is $10, then the change in capital spending is ____.

$50

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 million in taxable income?

$600,000 $1 million * (1-40%)

Net Income

(Sales-COGS-Other Costs-Depreciation)(1-tax rate)

Average Tax Rate (ATR)

(Taxes+Additional Taxes)/(taxable + marginal income)

If interest paid is $100 and net new borrowing is $150, then cash flow to creditors equals:

-$50

When a corporation is formed, it is granted which of the following rights?

Legal power to sue provincial citizenship for jurisdictional purposes the ability to issue stock

Assets

Liabilities + Stockholders' Equity

Matching Principle (GAAP)

Match revenues with the costs associated with producing them.

Current Assets

NWC+CL CL=TA-LTD-OE

Owner's Equity

NWC+Net Fixed Assets-LTD

Cash Flow from Assets

Operating cash flow, capital spending, and change in net working capital

A ____ is similar to a proprietorship, except that there are two or more owners.

Partnership

Which of the following is NOT one of the basic areas of finance?

Personal Finance is not considered one of the basic areas of finance. The 4 basic areas of finance are: Corporate Finance, Investments, Financial Institutions, and International Finance

Which of the following are traditional financial ratio categories?

Profitability ratios Turnover ratios Financial Leverage ratios


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