Chapter 2 Financial Management

Which of these is considered to be the most liquid? Land Accounts Receivable Equipment and machines Inventory

Accounts Receivable

The short run is

an imprecise period of time

Non-cash items do not affect ____________

cash flow

Net income and dividends affect equity but are not explicitly shown where?

on the balance sheet

Accumulated depreciation and trademarks are included in

the fixed asset portion of a balance sheet

how is the average income tax rate computed?

total tax bill/total taxable income

Which of the following are examples of short-run fixed costs? material costs bond interest wages to labors rent

bond interest rent

The short run is a period when there are __________ costs

both fixed and variable

True or false: operating cash flow includes capital spending and working capital requirements

false

what does a positive operating cash flow mean?

firm is generating enough cash to pay operating costs

What's the most important item that can be extracted from financial statements?

firm's actual cash flows

Which of the following are period costs? general expenses cost of goods sold selling costs administrative expenses

general expenses selling costs administrative expenses

The purpose of a(n) ____________________ is to measure performance over a set period of time

income statement

What happens to the tax rate at very high income levels?

it becomes flat

what are 2 classifications of costs used by financial accountants?

period and product costs

What's important to keep in mind when examining an income statement? (check all that apply) time and costs cash versus non-cash items GAAP asset composition

time and costs cash versus non-cash items GAAP

What are product costs reported as?

cost of goods sold

Net Capital Spending formula

ending net fixed assets - beginning net fixed assets + depreciation

which of these questions can be answered by reviewing a firm's balance sheet? how much of the firm's net income was paid out in dividends? what is the total amount of assets a firm owns? how much net income has the firm earned in this period? how much debt is used to finance the firm?

how much of the firm's net income was paid out in dividends? how much debt is used to finance the firm?

increasing its non-cash liquid assets will enable a firm to

increase ability to avoid financial distress and increase ability to meet short-term obligations

Which of these items do NOT appear on a balance sheet? knowledge that has no patent good management favorable economic conditions accounts payable

knowledge that has no patent good management favorable economic conditions

What is financial leverage?

the use of debt to acquire additional assets

The cash flow identity reflects the fact that: (check all that apply) A firm generates cash through various activities Cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm Cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders Operating cash flow is the same as operating income

A firm generates cash through its various activities Cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm Cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders

which of the following is true about the difference between the income statement and statement of cash inflows and outflows? Income taxes are often deferred, so the amount on the income statement may not represent the amount of the check to the IRS. 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 Depreciation expense is equal to the installment payment on the equipment being depreciated, so its a cash outflow 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. Cost of raw materials purchased on credit are accounts payable rather than cash outflows until they are paid, which may be a different period Sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period

The use of financial leverage can: (check all that apply) Increase the chance of financial distress and business failure Decrease the non-cash expenses incurred by the firm Increase the potential reward for investors Greatly magnify gains and losses

Increase the chance of financial distress and business failure Increase the potential reward for investors Greatly magnify gains and losses

Cash flow to creditors

Interest paid - net new borrowing

Why is positive net working capital important?

It means the firm should have sufficient cash to meet its current obligations

______ income is money earned after interest and taxes

Net