Chapter 2 Financial statements, Taxes, and Cash flow

If dividends are $100, stock sold is $10, and stock repurchased is $25, what is the cash flow to shareholders?

$115= $100-($10-$25)

If a firm's current assets are $100 and its current liabilities are $80, then its net working capital is:

$20

Which of the following are classified as liabilities on a firm's balance sheet?

1. Accounts payable 2. Long-term debt

Which of the following are components of cash flow from assets?

1. Capital spending 2. Operating cash flow 3. Change in net working capital

Which of the following are classified as fixed assets on the balance sheet?

1. Trademark 2. Equipment 3. Building

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?

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

1. When the value of an exchange of goods or services is known or reliably determined 2. When the earnings process is virtually completed

Under GAAP, assets are generally carried on a firm's balance sheet at ____.

1. book value 2. historical value

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

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

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

Depreciation is the accountant's estimate of the cost of _______ used in the production process matched with the benefits produced from owning it.

1. equipment 2. fixed assets

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

For a mature firm, operating cash flow:

1. is usually positive 2. is a sign of trouble if negative over a long period of time

Assets can be categorized as

1. tangible and intangible assets 2. current and fixed assets

According to the originators of the current U.S. corporate tax code, the tax rates in effect for 2015 are:

25%, 35%, 34%, 15%

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

Which of the following is shown on the left hand side of the balance sheet?

Assets

For financial analysis, financial statements and accounting numbers are more important than cash flows.

False

What does GAAP stand for?

Generally accepted auditing principles

Who is entitled to the residual value of a firm's cash flows?

Shareholders

What is the purpose of the income statement?

To measure performance over a set period of time

Free cash flow is also known as cash flow from assets.

True

Long-term liabilities are not due in the current year.

True

Operating cash flow does not include depreciation or interest.

True

_______ changes as the output of the firm changes.

Variable cost

Net earning refers to income earned _______.

after interest and taxes

In the long-run, costs may be considered as ______.

all variable

The short run is _________.

an imprecise period of time

Non-cash items do not affect

cash flow

Product costs are usually shown on the income statement under the heading of _____.

cost of goods sold

The cash flow identity states that cash flow from assets equals cash flow to _____.

creditors and stockholders

When a firm smooths earnings to please investors, it is called _________.

earnings management

Non-cash item are _____ that _____ cash flow.

expense; do not directly affect

Cash flow to creditors equals:

interest paid minus net new borrowing

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

lowest

The ______ tax rate is the tax rate paid on the next dollar of income.

marginal

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

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

The balance sheet identity shows that stockholders' equity assets _____ liabilities.

minus

Net capital spending is equal to ending net fixed assets minus beginning net fixed assets ________.

plus depreciation

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value

Cash flow refers to ________.

the difference between the number of dollars that came in and the number went out

Common stockholders are entitled to the difference between ______ and ______.

total assets; total liabilities

Free cash flow is better described as ______.

total distributable cash flow

Financial leverage refers to a firm's _____.

use of debt in its capital structure

Current assets _____ exceed current liabilities in a healthy firm.

usually