FINA5311 Chapter 2

If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals...

$50

Mortgage lenders probably have the most interest in the ______ ratios.

long-term debt and times interest earned

What does GAAP stand for?

Generally Accepted Accounting Principles

Assets are listed on a balance sheet in which order?

In order of decreasing liquidity

What is included on the fixed asset portion of a balance sheet?

Trademarks Buildings

Noncash items refer to:

Expenses which do not directly affect cash flows

True or False: Stockholders' equity appears on the left-hand side of the balance sheet.

False

Why is positive net working capital important?

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

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:

Sales

The statement of cash flow explains changes in________

cash and equivalents

Non-cash items do not affect

cash flow

Why is a dollar received today worth more than a dollar received in the future?

Today's dollar can be reinvested, yielding a greater amount in the future

On a common-size balance sheet all accounts for the current year are expressed as a percentage of:

Total Assets for the current year

An increase in which of the following must increase the return on equity, all else constant?

Total asset turnover and debt-equity ratio

Assets are recorded at historical cost, not market value, becuase

it is hard to keep up with the market value

The use of financial leverage can:

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

Assets can be described as items that:

-Provide market value to the firm -A firm owns -Generate Revenue

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be___

0.5

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 the financial statement that shows the accounting value of a firm's equity as of a particular date?

Balance Sheet

Rank the ease (from easiest to hardest) of turning the following assets into cash.

Cash equivalents Accounts receivable Inventory Plant and equipment

Net working capital equals...

Current assets minus current liabilities

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

What is the financial statement that summarizes a firm's revenue and expenses over a period of time?

Income Statement

What is a primary concern for a bank lending funds to a business for the short term?

Liquidity

Whose responsibility is it to create value for a firm?

Management

The price at which willing buyers and sellers would trade is called _____Value

Market

What ratio is a measure of a firm's liquidity?

Quick Ratio Current Ratio

What is a correct formula for computing the return on equity?

ROA × Equity multiplier

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

Shareholders

On a balance sheet, total assets must always equal total liabilities plus...

Shareholders' equity

The more debt a firm has, the greater its:

degree of financial leverage

Book value of assets is generally:

not what the assets are actually worth

Current assets are defined as assets that can be turned into cash within _______months

twelve

A long-term liability represents a(n)

Debt that is not due in the coming year

An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values.

Decrease in the Quick Ratio

Liquidity refers to the ease of changing _________.

assets to cash

The short run for a firm is the period of time during which ________.

Some costs are fixed output can vary