Chapter 2: Financial Statements, Taxes, and Cash Flow

Long-term liabilities represent obligations of the firm lasting over _____. 1. 6 months 2. 1 month 3. 1 year 4. 90 days

3

Which of the following is a current asset? 1. Inventory 2. Accounts payable 3. Accrued expense 4. Equipment

1 Inventory Accounts payable Reason: Accounts payable are current liabilities. Accrued expense Reason: Accrued expenses are current liabilities. Equipment Reason: Equipment is a fixed asset.

A balance sheet reflects a firm's: 1. earnings per share over an unspecified time 2. accounting value on a specific date 3. economic value over a specified time period 4. income at a specific time

2

Depreciation is the accountant's estimate of the cost of ______ used in the production process matched with the benefits produced from owning it. 1. inventory 2. cash 3. fixed assets 4. equipment

3, 4

Product costs are usually shown on the income statement under the heading of _________________ . 1. product costs 2. period costs 3. selling & general administrative costs 4. cost of goods sold

4

The short run is ______. 1. defined as one month 2. defined as more than one year 3. defined as six months 4. an imprecise period of time

4 defined as one month Reason: The short run is the period during which some equipment, resources, and commitments are fixed. defined as more than one year Reason: The short run is the period during which some equipment, resources, and commitments are fixed. defined as six months Reason: The short run is the period during which some equipment, resources, and commitments are fixed. an imprecise period of time

Long-term liabilities are not due in the current year (from the date of the balance sheet). True False

True

Assets can be categorized as (select all that are appropriate) 1. current and fixed assets 2. short-term and long-term equity 3. tangible and intangible assets 4. fixed and variable assets

1, 3

The balance sheet identity shows that stockholders' equity equals assets ______ liabilities. 1. plus 2. times 3. minus

3

The last item (or "bottom line") on the income statement is typically the _________. 1. operating income 2. gross income 3. net income 4. operating cash flow

3

Which of these questions can be answered by reviewing a firm's balance sheet? 1. How much of the firm's net income was paid out in dividends? 2. How much net income has the firm earned this period? 3. How much debt is used to finance the firm? 4. What is the total amount of assets the firm owns?

3, 4

What is depreciation? 1. The market value of an asset minus the asset's book value 2. A systematic expensing of an asset based on the asset's estimated life 3. A systematic cash contribution to a company's checking account to fund a new asset 4. The current market value of an asset minus the asset's initial cost

2 The market value of an asset minus the asset's book value Reason: Depreciation is the accountant's estimate of the cost of equipment used up in the production process. A systematic expensing of an asset based on the asset's estimated life A systematic cash contribution to a company's checking account to fund a new asset Reason: Depreciation is the accountant's estimate of the cost of equipment used up in the production process. The current market value of an asset minus the asset's initial cost Reason: Depreciation is the accountant's estimate of the cost of equipment used up in the production process.

U.S. corporations pay tax at a rate of [Blank] percent. (Enter number only.)

21

______ changes as the output of the firm changes. 1. Office rent 2. Salary expense 3. Fixed cost 4. Variable cost

4 Office rent Reason: Office rent is a fixed cost. It does not change when production changes. Salary expense Reason: Salary expense is related to the number of employees, rather than output. Fixed cost Reason: Fixed costs remain the same no matter the output of the firm. Variable cost

Current assets [Blank] (plus/minus) current liabilities equals NWC.

minus

The more debt a firm has, the greater its: 1. degree of financial leverage 2. retained earnings 3. degree of operating leverage 4. book value

1

According to GAAP, when is income reported? 1. Whenever the firm decides to report it 2. When it is first anticipated 3. When cash payment is received 4. When it is earned or accrued

4 Whenever the firm decides to report it Reason: The matching 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. When it is first anticipated Reason: The matching 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. Revenue is recognized when it is earned and realizable. When cash payment is received Reason: The matching 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. Recognition takes place when revenue is earned and expense incurred, rather than when cash is collected or spent. When it is earned or accrued

The market value of an item is: 1. the cash value you'd get if you sold it 2. the amount you paid it 3. its appraised value 4. the amount recorded in the balance sheet it

1

Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm. 1. change; don't change 2. overstate; understate 3. lie; fudge 4. overstate; inflate

2

Physical assets are termed ______________ assets. 1. intangible 2. tangible 3. long-term 4. current

2

The short run is a period when there are ______ costs. 1. only cash 2. both fixed and variable 3. only fixed costs 4. only variable costs

2 The short run is a period when there are both fixed and variable costs.

Non-cash items do not affect: 1. cash flow 2. earnings per share 3. retained earnings 4. net income

1

According to GAAP, when is revenue recognized on an income statement? 1. After the related expenses are paid in full 2. Only when cash has been received for the sale 3. When the earnings process is virtually completed 4. When the value of an exchange of goods or services is known or reliably determined

3, 4 After the related expenses are paid in full Reason: Revenue is recognized on an income statement when the earnings process is virtually completed and the exchange of goods or services has occurred. Only when cash has been received for the sale Reason: Revenue is recognized on an income statement when the earnings process is virtually completed and the exchange of goods or services has occurred. When the earnings process is virtually completed When the value of an exchange of goods or services is known or reliably determined

Assets can be categorized as (select all that are appropriate) 1. short-term and long-term equity 2. fixed and variable assets 3. current and fixed assets 4. tangible and intangible assets

3,4

Current assets are defined as assets that can be turned into cash within ______ months. 1. twenty-four 2. eighteen 3. six 4. twelve

4

Liquidity refers to the ease of changing _____. 1. cash to liabilities 2. liabilities to assets 3. cash in to other assets 4. assets to cash

4

Which of the following is an example of a non-cash item on an income statement? 1. Retained earnings 2. Dividends 3. Costs 4. Depreciation

4

Liquidity has two dimensions which are the ability to: 1. quickly convert assets into cash without significant loss in value 2. convert assets into cash so that value is maximized 3. quickly convert assets into cash regardless of loss in value

1

Costs that do not change in the short run arise because of ______. 1. fixed commitments 2. variable commitments 3. unknown future events 4. unfunded commitments

1 fixed commitments variable commitments Reason: Costs that do not change in the short run arise because of fixed commitments. unknown future events Reason: Costs that do not change in the short run arise because of fixed commitments. unfunded commitments Reason: Costs that do not change in the short run arise because of fixed commitments.

On a balance sheet, total assets must always equal total liabilities plus: 1. shareholders' equity 2. net working capital 3. fixed assets 4. retained earnings

1 shareholders' equity net working capital fixed assets retained earnings Reason: Retained earnings is only a portion of shareholders' equity.

Which of these questions can be answered by reviewing a firm's balance sheet? 1. How much debt is used to finance the firm? 2. How much of the firm's net income was paid out in dividends? 3. What is the total amount of assets the firm owns? 4. How much net income has the firm earned this period?

1,3 How much debt is used to finance the firm? How much of the firm's net income was paid out in dividends? Reason: Net income and dividends affect equity, but are not explicitly shown on the balance sheet. What is the total amount of assets the firm owns? How much net income has the firm earned this period? Reason: Net income and dividends affect equity, but are not explicitly shown on the balance sheet.

The price at which willing buyers and sellers would trade is called ______ value. 1. carrying 2. book 3. market 4. accounting

3 carrying Reason: The price at which willing buyers and sellers would trade is called market value. book Reason: The price at which willing buyers and sellers would trade is called market value. market accounting Reason: The price at which willing buyers and sellers would trade is called market value.

True or false: Current assets plus current liabilities equals net working capital. True False

False

Period costs are the costs that are allocated to a specific ______. 1. interval of time 2. production run 3. product 4. type of service

1 interval of time production run Reason: Period costs are the costs that are allocated to a specific interval of time. Product costs are related to production. product Reason: Period costs are the costs that are allocated to a specific interval of time. Product costs are related to production. type of service Reason: Period costs are the costs that are allocated to a specific interval of time. Product costs are related to production.

Financial leverage refers to a firm's _________. 1. net working capital 2. use of debt in its capital structure 3. organizational structure

2

Physical assets are termed ______________ assets. 1. current 2. tangible 3. long-term 4. intangible

2

Net earnings refers to income earned ______. 1. net of operating and administrative costs 2. after interest and taxes 3. prior to taxes 4. before interest and taxes

2 net of operating and administrative costs Reason: Net earnings refers to income earned after interest and taxes. after interest and taxes prior to taxes Reason: Net earnings refers to income earned after interest and taxes. before interest and taxes Reason: Net earnings refers to income earned after interest and taxes. Earnings before interest and taxes are known as EBIT.

How is the average income tax rate computed? 1. Total taxes paid over the last five years / 5 2. Last dollar of income earned / Amount of tax paid on that dollar of income 3. Total tax bill / Total taxable income 4. Total taxable income / Marginal tax rate

3 Total taxes paid over the last five years / 5 Reason: Average tax rate = total tax bill/total taxable income. Last dollar of income earned / Amount of tax paid on that dollar of income Reason: Average tax rate = total tax bill/total taxable income. Total tax bill / Total taxable income Total taxable income / Marginal tax rate Reason: Average tax rate = total tax bill/total taxable income.

For financial decision-making purposes, the most important tax rate is the ______ tax rate. 1. average 2. fair 3. marginal 4. flat

3 average Reason: For financial decision-making purposes, the most important tax rate is the marginal tax rate, because financial decisions are based on new cash flows. fair Reason: For financial decision-making purposes, the most important tax rate is the marginal tax rate, because financial decisions are based on new cash flows. marginal flat Reason: For financial decision-making purposes, the most important tax rate is the marginal tax rate, because financial decisions are based on new cash flows.