Managerial Finance/Midterms

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

1. GAAP 2. non-cash items 3. time and costs

The cash flows from financing activities include changes in:

1. LT debt 2. common stock

Which are true concerning product costs?

1. Product costs are reported as costs of goods sold. 2. Product costs contain both fixed and variable costs.

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

1. Some costs are fixed 2. Output can vary

Cash flow analysis is popular because ___

It is harder to "spin" and mislead

If a firm defaults on its bond contract, the bondholders ____

can sue the firm

The enterprise value multiple allows for comparing the value of firms with different ___ structures.

capital

Under GAAP, US firms must carry assets on their financial statements at the asset's ___

cost

Selling a firm's plant and equipment results in a change in ___

fixed assets

The US tax rate becomes a flat-rate tax in practice at approx. what corporate income level?

$18 mil

LT liabilities represent obligations of the firm 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

According to GAAP, when is revenue recognized on an income statement?

1. when the exchange of goods or services is completed 2. when the earnings process is virtually completed

Which of these computes days' sales in receivables?

365 / Receivables turnover

The Tax Reform Act of 1986 and the Budget Reconciliation Act of 1993 create ___ actual tax rates.

6

What does stockholders' equity represent?

A residual claim against the firm's assets

In a financial plan using the % of sales approach, why is it assumed that some assets increase with sales?

Additional working capital and fixed assets are needed to support growth.

Balance Sheet Equation

Assets = Liabilities + Stockholders' Equity

In a financial plan, how is the amount of borrowing determined?

By mgt's D/E decision

How are assets on a balance sheet listed?

In order of time taken by an ongoing firm to convert them to cash.

___ income is earnings after interest and taxes

Net

An income statement reflects activity that occurs ___ while a balance sheet reflects values ___

Over a period of time ; as of a specific date

How is sustainable growth calculated when equity used in the calculation of ROE is the beginning value?

ROE x b

Which of the following is a variable cost in the short run?

Raw materials used in production.

How is income defined?

Revenue minus expenses

On which side of the balance sheet do liabilities appear?

Right Side

What is treasury stock?

Stock the firm has repurchased

Operating cash flow reflects which one of these?

Tax payments

The 38% tax bracket is ___

The result of a surcharge

Bondholders have a higher claim to a firm's cash flow than stockholders do.

True

Holding too many liquid assets can harm a firm financially given that it is giving up an opp to invest an productive assets.

True

Taxes can be a large cash outflow for a corporation.

True

According to GAAP, when is income reported?

When it is earned or accrued

the sustainable growth rate can be used to ____

assess planned growth

The cash flow identity states that cash flows from _____ should equal cash flows to creditors and equity investors (stockholders).

assets

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

On the balance sheet, assets are listed at their ___ value.

book

The statement of cash flow explains changes in ___

cash and equivalents

In determining the economic and financial condition of a firm, ___ is more revealing than net income.

cash flow

Non-cash items do not affect

cash flow

One of the most important limitations of a balance sheet is that it shows only the historical ____, rather than market value.

costs

Net working capital plus current liabilities equal ____

current assets

Net capital spending is equal to the change in net fixed assets plus:

depreciation

the actual economic value of an asset varies ____ the asset's future cash flows

directly with

Dividends per share (DPS) equals ____ divided by total shares outstanding.

dividends

The activity of making net payments to creditors and owners (excluding interest) is called a ___ activity in the accounting statement of cash flows.

financing

Fixed costs are costs that will not change in the SR due to ___

fixed commitments over a stated period of time

Given an internal growth rate of 3%, a firm can ____

grow by 3% or less without any additional external financing.

A ____ PE ratio may indicate that investors believe a company has better prospects for future growth in earnings.

higher

a stock buyback ___ cash flow to stakeholders

increases

What is a primary difference between the accounting cash flow and the financial cash flow of a firm?

interest expense

The reason the quick ratio of Walmart is diff from its current ratio is due to ____

inventory

Cash flows from the acquisition and sale of fixed assets are located in the ___ activities section of the accounting statement of cash flows.

investing

A "round-trip" trade involves the selling of an asset followed by immediately buying it back. The deception occurs when the sale is classified as an operating activity and the buyback is classified as a ___

investing activity

If mgt has been unsuccessful at creating value for the company's stockholders, the market-to-book ratio will be___

less than 1

What is a primary concern for a bank lending funds to a business for the short term?

liquidity

Whose responsibility is it to create value for a firm?

management

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

market

Currently in the US, the corporate tax system that occurs in practice is a ___ tax system.

modified flat-rate

Interest expense is reflected in the ___ section of the income statement.

non-operating

Another deceptive practice is to classify labor as an investment expense which increases ____ cash flow.

operating

A positive operating cash flow indicates that the firm is generating enough cash to:

pay operating costs

If a company's common-size income statement shows a larger percentage for cost of goods sold this period compared to last period, the company may be controlling its costs well or it has ____

raised its prices relative to costs

Writeoff

refers to a decline in the value of a company's assets

Last claimants to be paid by a firm are the:

stockholders

How does a write-off affect shareholder's wealth?

stockholders may not lose money

What is the hardest cash flow number to manipulate?

total cash flow

Free cash flow is better described as ____

total distributable cash flow

How is the average income tax rate computed?

total tax bill / total taxable income

____ is the income subject to tax

taxable income

Which of the following are period costs?

1. selling costs 2. general expenses 3. admin expenses

EPS stands for ___

Earnings per share

True or False: Stockholders' equity appears on the left-hand side of the balance sheet

False

A balance sheet reflects a firm's ____ value on a particular date.

accounting

Deferred taxes arise from differences in true taxable income and ___ income.

accounting

Profitability measures such as ROA and ROE are ___ rates of return.

accounting

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

The purpose of a ___ is to measure performance over a set period of time.

income statement

A decrease in depreciation expense ___ earnings per share.

increases

Stockholders' equity ___ when retained earnings increase

increases

The 2nd step in compiling the accounting statement of cash flows is to calculate the ____

investing activities

Financial planning is a ___ process

iterative

changes in capital spending can be negative when the acquisition of fixed assets is ___ the sale of fixed assets

less than

Increasing its liquid assets will enable a firm to do which of the following?

1. increase its ability to avoid financial distress 2. increase its ability to meet ST obligations

Which of the following obligations can put a firm at risk of bankruptcy if not paid?

1. interest payment on outstanding bonds 2. principal payments on debt 3. interest payments on debt

Which of these are generally considered to be SR fixed costs?

1. management salaries 2. overhead expenses 3. property taxes 4. rent 5. bond interest

What are 2 classifications of costs used by financial accountants?

1. period costs 2. product costs

Which of the following are tangible fixed assets?

1. plant 2. land

Debt service means repaying ____

1. principal 2. interest

Which of these are reported in the operations section of an income statement?

1. revenues from principal ops 2. expenses from principal ops

What does an inventory turnover ratio of 5 mean?

Entire inventory was sold and replaced 5 times during the year.

Given external financing needs in a financial plan, the firm must borrow both LT and ST funds.

False

In the short run, all costs are fixed.

False

What does it mean if a company's capital intensity ratio is 2.4?

Firm requires $2.40 in assets to generate $1 in sales.

What is the main difference between the cash coverage ratio and the times interest earned ratio?

Non-cash expenses

The ____ identity can help to explain why 2 firms with the same ROE may not be operating in the same way

DuPont Identity

What does EPS stands for?

Earnings Per Share

Appreciation of property will be recognized as income even if not realized

False

The corporate tax code is simplistic and makes good economic sense

False

The 39% tax bracket is an official US tax code bracket.

False - it is 35%

Which of these questions can be answered by reviewing a firm's balance sheet?

1. What is the total amount of assets the firm owns? 2. How much debt is used to finance the firm?

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

1. Working in progress 2. Raw Materials 3. Finished Goods

Under a flat-rate tax, all income levels are taxed at _____.

1. same marginal rate 2. same average rate

the value of a firm depends on its ability to generate ____

cash flows

Standardized statements used for the purpose of comparing the financial statements of diff companies are called ____

common-size statements

to smooth its earnings, a firm is more apt to sell appreciated property and realize the income on that sale when its other earnings are ____

down

A times interest earned ratio means ___

earnings before interest and taxes

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

equipment

as long as sales requests are being met, a ___ inventory turnover ratio is better

higher

Which of the following are current assets?

1. accounts receivable 2. inventory

Operating cash flows differs from total cash flow in that the latter makes adjustments for ____

1. additions to net working capital 2. capital spending

A misclassification of a $100 operating expense as an investment expense will cause:

1. an understatement of investing cash flow 2. an overstatement of investing cash flow 3. no change in total cash flow

Which of the following represent management decisions related to assets?

1. cash vs. marketable securities 2. cash vs. credit sales 3. making vs buying commodities

Which of these will result from a firm using cash to buy inventory?

1. cash would decrease 2. inventory would increase

Which of the following are examples of non-cash items on an income statement?

1. deferred taxes 2. depreciation

marginal tax rates are the most important tax rates because____

1. financial decisions are usually based on new cash flows 2. incremental cash flows are taxed at marginal tax rates

High growth often shows up in higher spending, especially on ___

1. fixed assets 2. inventory

Some financial ratios measure a firm's ___, which shows the ability to meet short-term obligations without undue stress, while others measure a firm's financial ___, which demonstrates the ability to meet LT obligations.

liquidity; leverage

____ refers to the quickness and ease with which assets can be converted to ____

liquidity____cash

The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes _____ to sell.

long time

The companies in biotechnology industry pay tax at the ____ average tax rate

lowest

What does a current ratio of 1.2 mean?

the firm has $1.20 in current assets for every $1 in current liabilities

Who owns treasury stock?

the issuer of the stock