Chapter 2 Learnsmart 2
Who is entitled to the residual value of a firm's cash flows?
Shareholders
If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals ___.
$50
Which of the following are CURRENT assets?
*Inventory *Accounts Receivable
Which of the following are fixed assets?
*Land *Plant *Patents
Which of the following is true about the difference between the income statement and cash inflows and outflows?
*Sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period. *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. *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 (from easiest to hardest) of turning the following assets into cash.
1 Cash Equivalents 2 Accounts Receivable 3 Inventory 4 Plant and Equipment
Long-term liabilities represent obligations of the firm lasting over ___.
1 year
Net income refers to money earned ___.
After interest and taxes
Net working capital plus current liabilities equal ___.
Current assets
The last (residual) claimants to be paid by the firm are the ___.
Stockholders
Which of the following is true about the U.S. modified-rate tax system?
The tax rate becomes flat at very high income levels
Most importantly, assets provide ___ to the firm.
Value
The use of financial leverage can:
*Increase the potential reward for investors *Greatly magnify both gains and losses *Increases the chance of financial distress and business failure
Which of the following complies with GAAP?
Matching revenues with expenses
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.)
Liquidity refers to the ease of changing ___.
Assets to cash
The matching principle of GAAP requires revenues be matched with ___.
Expenses
Non-cash items do not affect ___.
Cash flow
Depreciation is the accountant's estimate of the cost of ___ used up in the production process.
Equipment
A company's ___ tax rate is its tax bill divided by its total taxable income, and its ___ tax rate is the tax rate it pays on the next dollar of income.
Average and Marginal
Which of the following are included in the fixed asset portion of a balance sheet?
*Accumulated depreciation *Trademarks
Which of the following are period costs?
*Administrative expenses *General expenses *Selling costs
Which of these items are NOT shown on a balance sheet?
*Favorable economic conditions *Good management *Knowledge that has no patent
Marginal tax rates are the most important tax rates because:
*Financial decisions are usually based on new cash flows *Incremental cash flows are taxed at marginal tax rates
Which of the following are examples of short-run fixed assets?
*Rent *Bond interest
Which of the following are classified as liabilities on a firm's balance sheet?
*Notes Payable *Accounts Payable
Which are true concerning product costs?
*Product costs contain both fixed and variable costs *Product costs are reported as cost of goods sold
Which of these are generally considered to be short-run fixed costs?
*Property taxes *Management salaries *Rent payments for a warehouse
The short run for a firm is the period of time during which ___?
*Some costs are fixed *Output can vary
What should you keep in mind when examining and income statement?
*Time and costs *Cash vs. non-cash assets *GAAP
Which of these questions can be answered by reviewing a firm's balance sheet?
*What is the total amount of assets the firm owns? *How much debt is used to finance the firm?
A customer has yet to pay the bill for products purchased on credit. This debt is recorded 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
Which of the following are examples of non-cash items on an income statement?
Depreciation
Costs that so not change in the short run because of ___.
Fixed commitments
What does GAAP stand for?
Generally accepted accounting principals
Period costs are the costs that are allocated to a specific ___.
Interval of time
The price at which willing buyers and sellers would trade is called ___ value.
Market
The accounting equation shows that stockholders' equity equals assets ___ liabilities.
Minus
Which of the following is a variable cost in the short run?
Raw materials used in production
On a balance sheet, total assets must always equal total liabilities plus ___.
Shareholders' equity
