Finance Chapter 2

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Ending net fixed assets minus beginning net fixed assets depreciation equals net investment in fixed assets.

plus

What is the purpose of the income statement?

to measure performance over a set period of time

Which of these questions can be answered by reviewing a firm's balance sheet?

-How much debt is used to finance the firm? -What is the total amount of assets the firm owns?

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

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

What does shareholders' equity represent?

A residual claim against the firm's total assets.

The cash flow identity states that cash flow from assets equals cash flows to ____.

creditors and stockholders

For financial decision-making purposes, the most important tax rate is the ______ tax rate.

marginal

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

marginal

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

market

Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as:

period costs

Ending net fixed assets minus beginning net fixed assets ______________ depreciation equals net investment in fixed assets.

plus

Assets can be categorized as (select all that are appropriate)

-fixed and variable assets -tangible and intangible assets -current and fixed assets

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

-historical cost -book value

For a mature firm, operating cash flow:

-is usually positive -is a sign of trouble if negative over a long period of time

Long-term liabilities represent obligations of the firm lasting over _____.

1 year

What is depreciation?

A systematic expensing of an asset based on the asset's estimated life

Which one of these is considered to be the most liquid?

Accounts receivable

Which of the following is the balance sheet equation?

Assets equal liabilities plus stockholders' equity.

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

True

A balance sheet reflects a firm's:

accounting value on a specific date

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

Amounts not yet collected from customers on sales already made are called:

accounts receivable

Net earnings refers to income earned ______.

after interest and taxes

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

all variable

In finance, the value of a firm depends on its ability to generate ______.

cash flows

The more debt a firm has, the greater its:

degree of financial leverage

Net capital spending is equal to the change in net fixed assets plus:

depreciation

Which of the following is an example of a non-cash item on an income statement?

depreciation

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

earnings management

The GAAP matching principle requires revenues to be matched with:

expenses

Non-cash items are ______ that ____ cash flow.

expenses; do not directly affect

Which of the following is NOT a component of cash flow from assets?

financing expenses

Costs that do not change in the short run arise because of ______.

fixed commitments

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

income statement

Cash flow to creditors equals:

interest paid minus net new borrowing

Period costs are the costs that are allocated to a specific ______.

interval of time

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

minus

Non-cash items are expenses that directly affect _____ but do not directly affect ______.

net income; cash flow

A primary reason that accounting income differs from cash flow is that an income statement contains ______.

noncash items

In practice, accountants tend to classify costs as either ______ costs or _______ costs.

product; period

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value.

Physical assets are termed ______________ assets.

tangible

The market value of an item is:

the cash value you'd get if you sold it

Changes in capital spending can be negative if

the firm sold more assets than it purchased

True or false: Dividends paid minus net new equity raised equals cash flow to stockholders.

true

True or false: Free cash flow is also known as cash flow from assets.

true

True or false: Operating cash flow does not include depreciation or interest.

true

Current assets are defined as assets that can be turned into cash within ______ months.

twelve

Free cash flow is better described as ____.

total distributable cash flow

The short run is ______.

an imprecise period of time

Net working capital will be negative when current assets ______ current liabilities.

are less than

he cash flow identity states that cash flows from ______ should equal cash flows to creditors and equity investors.

assets

Shareholders' equity equals ________________.

assets minus liabilities

U.S. corporations pay tax at a rate of _______________ percent

21

Cash flow refers to _____.

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

Liquidity refers to the ease of changing _____.

assets to cash

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

false

True or false: Ending net fixed assets plus beginning net fixed assets minus depreciation equals net investment in fixed assets.

false


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