chapter 2
Which of these items do NOT appear on a balance sheet?
Favorable economic conditions Knowledge that has no patent Good management
The common set of standards and procedures by which audited financial statements are prepared are called _____.
GAAP
What should you keep in mind when examining an income statement?
GAAP cash versus noncash items time and costs
What does GAAP stand for?
Generally Accepted Accounting Principles
In recent years, U.S. accounting standards have become more closely tied to:
IFRS.
Assets are listed on a balance sheet in which order?
In order of decreasing liquidity
Increasing its noncash liquid assets will enable a firm to do which of the following?
Increase its ability to meet short-term obligations Increase its ability to avoid financial distress
Why is it important for accounting standards to become more comparable across countries?
Increasing globalization of business makes it necessary to understand financial reporting by firms that follow other accounting standards.
Why is positive net working capital important?
It means the firm should have sufficient cash to meet its current obligations.
What is a primary concern for a bank lending funds to a business for the short term?
Liquidity
Which of the following will be found in the liabilities section of a firm's balance sheet?
Long-term bonds issued by the firm Notes payable
Whose responsibility is it to create value for a firm?
Management
______ income is money earned after interest and taxes.
Net
What are two classifications of costs used by financial accountants?
Period costs Product costs
______ costs include such things as raw materials, direct labor expense, and manufacturing overhead.
Product
Which are true concerning product costs?
Product costs are reported as costs of goods sold. Product costs contain both fixed and variable costs.
Which of the following is a variable cost in the short run?
Raw materials used in production.
If you make an extra $1,000 in income and your marginal tax rate is 30 percent while your average tax rate is 20 percent, then you will pay an extra ______ in taxes.
Reason: Additional tax = (.30)($1,000)
Which of these are generally considered to be short-run fixed costs?
Rent payments for a warehouse Management salaries Property taxes
Who is entitled to the residual value of a firm's cash flows?
Shareholders
When looking at the income statement, the financial manager should keep in mind GAAP, cash versus noncash items, and _______ and costs.
TIME and costs
How is the average income tax rate computed?
Total tax bill/Total taxable income
Long-term liabilities are not due in the current year (from the date of the balance sheet).
True
______ costs change as the output of the firm changes.
Variable
A balance sheet reflects a firm's Blank______ value on a particular date.
accounting
What does a balance sheet reflect about a firm?
accounting value on a specific date
A supplier may look at the size of _____ to see how promptly the firm pays its bills.
accounts payable
Residual value is the amount left over after paying:
accounts payable. bondholders. other debt holders.
In the long run, ________ are variable.
all costs
The short run is ______.
an imprecise period of time
The cash flow identity states that cash flows from ______ should equal cash flows to creditors and equity investors.
assets
Liquidity refers to the ease of changing _____.
assets to cash
On the balance sheet, assets are listed at their _____ value.
book
Under GAAP, U.S. firms must carry assets at:
book value
Which one of these is the most liquid? Marketable securities Inventory Fixed assets Cash
cash
Noncash items do not affect _____.
cash flow
The difference between the total assets and total liabilities is shareholders' equity, also called ____ equity or ____ equity.
common; owner
The fact that the balance sheets are listed at _____ means that there is no necessary connection between the total assets and the value of the firm.
cost
A long-term liability represents a(n) _____.
debt that is not due in the coming year
The more debt a firm has, the greater its:
degree of financial leverage
Accounting profit ____ cash flow.
differs from
Depreciation is the accountant's estimate of the cost of ______ used up in the production process.
equipment
The matching principle of GAAP requires revenues be matched with _____.
expenses
The corporate tax code is _____.
extremely complicated
James is an owner of J & Jo Company. If he wants to find out the cash flow of his bakery, he should look into the firm's _____.
financial statements
For a ______asset, it would be purely a coincidence if the actual market value were equal to its book value.
fixed
Costs that do not change in the short run arise because of ______.
fixed commitments
The passage of the Tax Cuts and Jobs Act of 2017 was to make the federal corporate tax rate in the United States a _____ tax.
flat
If you think of the balance sheets as a snapshot, then the _____ can be thought of as a video covering the period between before and after pictures.
income statement
The purpose of a(n) ______ is to measure performance over a set period of time.
income statement
A decrease in depreciation expense ______ earnings per share.
increases
Period costs are the costs that are allocated to a specific ______.
interval of time
Which of the following is a current asset?
inventory
Which of the following are fixed assets?
land, plant, buildings
The shareholders are the _____ in line to receive payment when a firm is forced to sell assets to pay off debt.
last
Holding too many liquid assets can be harmful for a firm because such assets are generally _____.
less profitable
______ refers to the speed and ease with which an asset can be converted to cash.
liquidity
For financial managers, the accounting value of the stock is not an especially important concern; it is the ______ value that matters.
market
The ___________ principle of GAAP states that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service.
matching
Which one of the following complies with GAAP?
matching revenues with expenses
Net working capital equals current assets ______ current liabilities.
minus
Noncash items are expenses that directly affect _____ but do not directly affect ______.
net income; cash flow
Book value of assets is generally:
not what the assets are actually worth
An income statement reflects activity that occurs _____ while a balance sheet reflects values ____.
over a period of time; as of a specific date
Net working capital is (negative/positive) when current assets exceed current liabilities.
positive
Accountants usually distinguish between _____ costs and _____ costs.
product; period
How is income defined?
revenue minus expenses
In general, revenue should be recognized at the time of _________, which is not necessarily the same time as the money is collected.
sale
On a balance sheet, total assets must always equal total liabilities plus ______.
shareholders' equity
An official accounting statement that helps to explain the change in cash and cash equivalents is called the _____.
statement of cash flows
The last (residual) claimants to be paid by a firm are the ______.
stockholders
What is the purpose of the income statement?
to measure performance over a set period of time
In the long run, all costs are _____.
variable
Another name for short-term financial management is ___ management.
working capital
If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals ______.
$ 50 Reason: $200 - 150 = $50
When is revenue recognized on an income statement?
- When the earnings process is virtually completed -When the value of an exchange of goods or services can be reliably determined
Assets can be described as items that _____.
- a firm owns - generate revenue - Provide market value to the firm
The use of financial leverage can:
- greatly magnify both gains and losses - increase the potential reward for investors - increase the chance of financial distress and business failure
Which of the following are period costs?
-Administrative expenses -General expenses -Selling costs
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. -Sales on credit are accounts receivable rather than cash inflows until they are collected, 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.
Rank the ease of turning the following assets into cash. (Place the asset that is the easiest to turn into cash at the top.)
1. cash equivalents 2. accounts receivable 3. inventory 4. plant and equipment
If your tax bill is $200 and your taxable income is $2,000, then your average tax rate is _____ percent.
10
Current assets are defined as assets that can be turned into cash within ______ months. Multiple choice question.
12 (twelve)
If a firm's current assets are $100 and its current liabilities are $80, then its net working capital is:
20 Reason: $100 - 80 = $20
The Tax Cuts and Jobs Act of 2017 set the corporate tax rate to be ______ regardless of the level of taxable income.
21%
Which of the following are examples of noncash items on an income statement?
Depreciation
Which of the following do not directly affect cash flow?
Depreciation
Which of the following is an example of a noncash item on an income statement?
Depreciation
The corporate tax code is simplistic and makes good economic sense.
False
If you earn an extra $100 of taxable income this year and owe taxes of $34 on that income, then your marginal tax rate is _____ percent.
34
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.)
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
Which of the following are classified as liabilities on a firm's balance sheet?
Accounts payable Notes payable
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
When a customer purchases an item on credit, the purchase amount is recorded by the seller in which one of these accounts?
Accounts receivable
In March, Al's paid cash for a video game for the store's inventory. In April, it sold the game on credit. In May, Al's received payment for the sale. Based on matching principle, the expense should be recorded in ___ and the income should be reported in ____. Multiple choice question.
April; April
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
Which of the following are included in the fixed asset portion of a balance sheet?
Buildings Trademarks