Chapter 1 - 4
Current assets are defined as assets that can be turned into cash within ____ months.
12
Which one of these statements related to the time value of money (TVM) is correct? Assume a positive rate of interest.
A dollar received today is more valuable than a dollar received next month.
What does stockholder's equity represent?
A residual claim against the firms assets
A balance sheet reflects a firm's _____ value on a particular day.
Accounting
Which one of the following accounts is generally the most liquid?
Accounts Receivable
When a customer purchases an item on credit, the purchase amount is recorded in the books of the seller in which of these accounts?
Accounts receivable
Discounting cash flows involves
Adjusting all expected future cash flows to their current value
Net earnings refers to income earned
After interest and taxes
Which one of these terms refers to a conflict of interest between the stockholders and managers of a corporation?
Agency problem
The interest rate charged per period multiplied by the number of periods per year is called the
Annual Percentage Rate (APR)
In March, Al purchased 10 video games for his store's inventory. In April, he sold 5 games on credit and received the payment in May. The income should be recorded in the month of ______.
April
Balance Sheet Equation
Assets = Liabilities + Stockholder's Equity
Liquidity refers to the ease of changing _____
Assets to cash
Which one of the following statements concerning liquidity is correct?
Balance sheet accounts are listed in order of decreasing liquidity.
On the balance sheet, assets are listed at their _____ value.
Book
What should you keep in mind when examining an income statement?
Cash VS non-cash items, GAAP, & Time and costs
The statement of cash flows explains changes in ______.
Cash and equivalents
_____ refers to a firm's interest payments minus any net new borrowing.
Cash flow to creditors
Assume a stated rate of interest of 8 percent. Which form of compounding will produce the highest effective rate of interest?
Continuous
Which form of business structure faces the greatest agency problems?
Corporation
Which form(s) of business is treated as a distinct legal entity separate from its owners?
Corporation
Which one of the following business types is best suited to raising large amounts of capital?
Corporation
Which type of business organization has all the respective rights and privileges of a legal person?
Corporation
Net Working Capital + Current Liabilities =
Current Assets
Which one of the following is a capital budgeting decision?
Deciding whether or not to open a new store
Which one of these will increase earnings per share?
Decreasing deferred taxes
Kate starts saving for retirement today and plans to make annual contributions into this retirement account. Which one of these is most apt to increase the total amount she has saved on the day she retires? Assume she earns a positive rate of return each year.
Delaying her retirement by 1 year
What is the formula for computing operating cash flow?
EBIT + Depreciation − Current taxes
EBIT
Earnings Before Interest and Taxes
What does a balance sheet reflect about a firm?
Economic value at a specific point in time Explanation: Economic value is the market value. The balance sheet shows accounting value which is mostly historical
An interest rate expressed as if it were compounded once per year is called the
Effective Annual Rate (EAR)
The Effective Annual Rate (EAR) of a loan will increase if
Either the annual percentage rate (APR) or the compounding frequency is increased.
Depreciation is the accountant's estimate of the cost of ____ used up in the production process.
Equipment
T/F: Operating Cash flows include capital spending and working capital requirements
False
T/F: Stockholder's equity appears on the left-hand side of the balance sheet.
False
The activity of making net payments to creditors and owners (excluding interest) is called a(n) ________ activity in the accounting statement of cash flows.
Financing
A change in which one of these accounts will appear as an investing activity in an accounting statement of cash flows?
Fixed assets
What does GAAP stand for?
Generally Accepted Accounting Principles
Which of these items is not shown on the balance sheet?
Good management, Proprietary Assets, Favorable economic factors
Which term applies to a set of cash flows that are finite in number and increase in amount at a steady rate?
Growing annuity
Which one of the following would have the greatest value assuming each has a Year 0 cash flow of zero and a Year 1 annual cash flow of $100?Assume a discount rate of 8 percent, compounded annually. Also, assume any growth rate is positive.
Growing perpetuity
You are comparing two investments, A and B, with unequal annual cash flows and varying numbers of years. Which one of these statements is correct regarding this comparison?
If B has a higher net present value, then B will have the higher net future value at any point in time, given a stated discount rate.
How are assets on a balance sheet listed?
In order of decreasing liquidity
Stockholder's Equity _____ when Retained Earnings increases.
Increases
When a firm pays out fewer dividends, it ______ the accounting value of its retained earnings.
Increases
Which one of the following will increase the present value of a finite stream of even cash flows? Assume a positive rate of return.
Increasing the Time 2 cash flow by $100 and lowering the Time 3 cash flow by $100
Given a firm with positive annual cash flows, which one of the following will increase the current value of that firm?
Increasing the annual growth rate of the cash flows
Which type(s) of loan repays the interest as an annuity and the principal as a lump sum?
Interest-only loans
Cash flows from the acquisition and sale of fixed assets are located in the ______ activities section of the accounting statement of cash flows.
Investing
An annuity
Is a stream of equal payments that occur in equal periods of time for a finite period.
Short term finance...
Is concerned with managing net working capital.
Which of the following are tanglible fixed assets?
Land & Plant
What is a primary concern for a bank lending funds to a business for the short term?
Liquidity
Which one of these statements is correct? 1. Long-term debt is the residual difference between assets and liabilities. 2. Net income that is not paid out in dividends decreases retained earnings. 3. Long-term debt requires a payout of cash within a stated time period. 4. Stockholders' equity is stated at market value on the balance sheet. 5. Stockholders' equity increases as the liquidity of a firm increases.
Long-term debt requires a payout of cash within a stated time period.
When you are making a financial decision, the most relevant tax rate is the _____ rate.
Marginal
The price at which willing buyers and sellers would trade is called _____ value.
Market
_____ refers to the difference between a firm's current assets and its current liabilities.
Net Working Capital
Which of the following will be found in the liabilities section of a firm's balance sheet?
Notes payable & Long-term bonds
Liabilities usually involve which of these
Obligations of the firm & Require a cash payout within a stated period of time
Annuities with payments occurring at the end of each time period are called _____, whereas annuities with payments occurring at the beginning of each time period are called _____.
Ordinary annuities, annuities due
An annuity stream where the payments occur forever is called a(n)
Perpetuity
The net present value of an investment is best defined as the
Present value of the investment's future cash flows minus the investment's cost.
In which type of loan does the borrower initially receive the present value of the future lump sum loan repayment amount?
Pure Discount Loan
Which of the following is a variable cost in the short run?
Raw materials used in production
Which of the following are included in a Firm's inventory according to GAAP?
Raw materials, Finished goods, Work in process
How is income defined?
Revenue - expenses
On a balance sheet, total assets must always equal total liabilities plus ______.
Shareholder's equity
Which type of business is the easiest and cheapest to form?
Sole proprietorship
Which of the following statements is correct?
Sole proprietorships and partnerships are taxed in a similar fashion.
The short run for a firm is the period of time during which _____.
Some costs are fixed, Output can vary
What is treasury stock?
Stock the firm has repurchased
The last claimants to be paid by a firm are the ________.
Stockholders
If a firm defaults on it's bond contracts, bondholders can do which of the following to get their money back?
Sue the firm in court
Which of the following items is taken into consideration while determining the operating cash flow of a firm?
Tax payments
Assume two annuities will each provide $500 annual cash flows for 5 years. One is an ordinary annuity and the other is an annuity due. Which statement concerning these annuities is correct?
The annuity due is more valuable than the ordinary annuity
Which one of the following statements is correct concerning the organizational structure of a corporation?
The chief operations officer reports to the chief executive officer
Which one of the following statements concerning a sole proprietorship is correct?
The owner of a sole proprietorship may be forced to sell personal assets to pay company debts.
The value of a firm is best defined as the
Total present value of all the firm's future cash flows
Which position is generally directly responsible for financial planning and capital expenditures?
Treasurer
T/F: Contract liabilities put the firm at risk of default.
True
T/F: Revenue includes both cash and credit sales of goods and services.
True
A conflict of interest between the stockholders and management of a firm is called:
an agency problem.
Your _____ tax rate measures the total taxes you pay divided by your total taxable income.
average
One of the most important limitations of the balance sheet is that it only shows the
book value rather than marketing value.
The process of planning and managing a firm's long-term investments is called:
capital budgeting.
The mixture of debt and equity used by a firm to finance its operations is called:
capital structure.
A current asset is best defined as
cash and other assets owned by the firm that should convert to cash within the next year.
The treasurer and the controller of a corporation generally report to the
chief financial officer.
The person generally directly responsible for overseeing the tax management, cost accounting, financial accounting, and information system functions is the:
controller.
A business created as a distinct legal entity composed of one or more individuals or entities is called a(n):
corporation.
Sole Proprietorships
create unlimited liability for their owners.
Capital structure refers to
decisions related to long-term debt and equity financing.
Al's has a positive net income and a marginal tax rate of 34 percent. Given this, an increase in which one of the following will cause the operating cash flow to increase?
depreciation
The cash flow of a firm, also referred to as cash flow from assets, must be equal to the cash flow to
equity holders plus the cash flow to debt holders.
Which one of these is handled differently in calculating cash flows for accounting versus financial purposes?
interest expense
The cash flow to creditors increases when
interest is paid on outstanding debt
Current assets include
inventory and accounts receivable
Depreciation
is a noncash expense that reduces the pretax income.
A business entity operated and taxed like a partnership, but with limited liability for the owners, is called a
limited liability company.
A business entity operated and taxed like a partnership, but with limited liability for the owners, is called a:
limited liability company.
A(n) ____ asset is one that can be quickly converted into cash without significant loss in value.
liquid
Your _____ tax rate is the percentage of the next taxable dollar of income you earn that is payable as a tax.
marginal
The primary goal of financial management is to:
maximize the current value per share of the existing stock.
The division of profits and losses among the members of a partnership is formalized in the
partnership agreement.
The primary purpose of the Sarbanes-Oxley Act of 2002 is to
protect investors from corporate abuses.
The long-term debts of a firm are liabilities
that do not come due for at least 12 months.
Agency costs refer to
the costs of any conflicts of interest between stockholders and management.
The goal of financial management focuses on the fact that
the current stockholders are the owners of the corporation.
Cash flow to stockholders must be positive when
the dividends paid exceed the net new equity raised.
The issuance of new equity shares is a cash flow from
the financial markets to a firm.
The person generally directly responsible for overseeing the cash and credit functions, financial planning, and capital expenditures is the:
treasurer.
The management of a firm's short-term assets and liabilities is called:
working capital management
