Finance Chapter 2

T or F: Net income equals cash flow

False

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

$115 (Cash flow to stockholders= dividens paid- net new equity = $100-(10-25)= 115

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

Fixed assets

A "round trip" trade involves the selling of an asset followed by immediately buying it back. The deception occurs when the sale is classified as an operating activity and the buyback is classified as an investing activity.

Investing activity

Cash flow analysis is popular because

It is harder to "spin" and mislead

If a firm defaults on its bond contracts, bondholders can do which of the following to get their money back?

Sue the firm in court

If a firm defaults on its bond contract, the bondholders

can sue the firm

Non- cash items do not affect

cash flow

The cash flow from assets equals cash flows to

creditors and stockholders

..... are not a cash flow

deferred taxes

Cash flow to stockholders equals

dividends paid minus net new equity raised

A decrease in depreciation expense ....... earnings per share

increases

The 2nd step in compiling the acct statement of cash flows is to calculate the

investing activities

Changes in capital in spending can be neg when the acquisition of fixed assets is.... the sale of fixed assets

less than

Currently in the US the corporate tax system that occurs in practice is a ..... tax system

modified flat rate

An income statement reflects activity that occurs..... while a balance sheet reflects values ......

over a period of time; as of a specific date

on a balance sheet, total assets must always equal total liabilities plus

shareholders equity

An official acct statement that helps to explain the change in cash and cash equivalents is called the

statement of cash flows

The last claimants to be paid by a firm are the

stockholders

Cash flow from operations is calculated by adding depreciation to EBIT and .... current taxes

subtracting

T or F: When write offs occur, stockholders always lose money.

False

What does the asset side of the balance sheet depend on?

How management chooses to conduct the firms business. the nature of the business

What is the primary difference b/w the acct cash flow and the finance cash flow of a firm?

Interest expense

Which of the following are examples of short- run fixed cost?

Rent Bond interest

Operating cash flow differs from total cash flow in that the latter makes adjustments for

capital spending additions to net working capital

Under GAAP, U.S. firms must carry assets on their financial statements at the assets

cost

A stock buyback..... cash flow to stockholders

increases

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

net income/ cash flow

Which of the following are tangible fixed assets?

plant land

A..... refers to a decline in the value of a company's assets.

write off

Which of the following are examples of non- cash items on an income statement?

depreciation deferred taxes

Assets are listed on a balance sheet in which order?

in order of time it would take an ongoing firm to convert them into cash

Debt service means repaying

interest & principal

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

are less than

Interest expense is reflected in the.... section of the income statement

non-operating

Assume revenues are $100, cost are $50, depreciation is $10, the tax rate is 30%, and there are 100 shares outstanding. What is Earnings per share?

$0.28 (100- 50- 10) (1-.30)/100

Which of the following represent management decisions related to assets?

Cash versus credit sales/ Making versus buying commodities/ Cash vs marketable securities

T or F: In the short run, all costs are fixed.

False: Only some costs are fixed in the short run.

T or F: The corporate tax code is simplistic and makes good economic sense.

False: The tax code is complex.

Which of the following are period costs?

General expenses administrative expenses selling cost

How are assets on a balance sheet listed?

In order of time taken by an ongoing firm to convert them to cash.

Revenue minus expenses equals

Income

Which of these will result from a firm using cash to buy inventory?

Inventory would increase cash would decrease

Whose responsibility is it to create value for a firm?

Mgmt

What is treasury stock?

Stock the firm has repurchased

What is the hardest cash flow to manipulate?

Total cash flow

T or F: A balance sheet shows what a firm owns and how it is financed.

True

T or F: Taxes can be a large cash outflow for a corporation.

True

What are the 2 classification of costs used by financial acct?

Period costs product costs

Which of the following obligations can put a firm at risk of bankruptcy if not paid?

Principal payments interest payment on outstanding bonds interest payments on debt

Which are true concerning product cost?

Product cost are reported as cogs. Products cost contain both fixed and variable costs

Which of the following is a variable cost in the short run?

Raw materials used in production

Which of the following cash flows appear in the financing activities section of the accounting statement of cash flows.

Repurchase of stock Retirement of long term debt payment of dividends

Which of these are reported in the operations section of an income statement?

Revenues from principal operations Expenses from principal operations

A misclassification of a $100 operating expense as an investment expense will cause:

an understatement of investing cash flow an overstatement of operating cash flow no change in total cash flow

Accounting profit ............ cash flow

differs from

If a firm acquires $100 in fixed assets and sells $80 worth of fixed assets, the cash flow from investing activities is

-$20

If a firms' networking capital foes from $150 in 2013 to $130 in 2014, then the change in networking capital is

-$20 (Change in NWC= $130-150)

long-term liabilities represent obligations of the firm lasting over

1 year

What does stockholders' equity represent?

A residual claim against the firm's assets

which of these is a correct version of the balance sheet equation?

Assets= liabilities + stockholders equity

..... cost change as the output of the firm changes

Variable

T or F: For financial analysis, financial statements & acct numbers are more important than cash flows.

false

Which 1 of these is the most illiquid?

fixed assets

Stockholders equity ..... when retained earnings increase.

increases

The 38% tax bracket is

the result of a surcharge. (applied to all income in excess of 18,333,334)

Under a flat-rate tax, all income levels are taxed at _____.

the same average rate the same marginal rate

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

time and costs non-cash items GAAP

Which of the following are included in a firm's inventory?

work in progress raw materials finished goods

A balance sheet reflect a firms ..... value on particular date

accounting

Which of the following are current assets?

acct receivable inventory

In the long run, ..... are variable.

all cost

If your tax bill is $200 and your taxable income is $2,000, then your average tax rate is _____ percent.

10

The U.S tax rate becomes flat- rate tax in practice at approx what corporate income level?

18 million

If you earn an extra $100 of taxable income this year and owe taxes of $34 on that income, then you marginal tax rate is ..... percent.

34

According to the U.S tax code, marginal and average tax rates equalize at a final tax rate of ......... percent.

35

When a customer purchases an item on credit, the purchase amount is recorded in the books of the seller in which 1 of these accts?

Acct receivable

Net earning s refers to income eared

after interest and taxes

Liquidity refers to the ease of changing _________.

assets to cash

If ending net fixed assets are $100, beginning fixed assets are $40, and depreciation is $10, then the change in capital spending is?

$130. (Net fixed assets - beginning fixed assets + depreciation)

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

$50

T or F: The 39% tax bracket is an official us tax code bracket.

False

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

Liquidity

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

Output can vary some costs are fixed

..... is the income subject to tax

Taxable income

Bondholders have a higher claim to a firm's cash flow than stockholders do. (t or F)

True

If interest paid is $100 and net new borrowing is $150, then cash flow to creditors equals:

+$50 (Cash flow paid to creditors= interest paid- net new borrowing= $100-$150)

Which of the following is true about the U.S modified flat- rate tax system?

The tax rate becomes flat at very high income levels. *Note: The avg tax rate decreases significantly at very high income levels.

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, marginal

One of the most important limitations of a balance sheet is that it shows only the historical ......, rather than market value.

cost

Net working capital equals

current assets minus current liabilities

A systemic expensing of an asset based on the assets estimated life is called

depreciation

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

depreciation

To smooth its earnings, a firm is more apt to sell appreciated property and realize the income on that sale when its other earnings are....

down

EBIT stands for _____ _____ _____ and _____

earnings before interest and taxes

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

income statement

T or F: Free cash flow is the total cash that a firm is free to distribute to creditors and stockholders as it is not needed for working capital or fixed asset investments.

True

True or false: Appreciation of property will be recognized as income even if not realized.

True

The acronym EBIT stands for

earnings before interest and taxes

If s company buys back $100 worth of stock, this increases the cash flow to the stockholders by

exactly 100

period cost are cost that are allocated to a specific

interval of time

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

market

A positive operating cash flow indicates that the firm is generating enough cash to

pay operating costs

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

when the exchange of goods or services is completed when the earnings process is virtually completed

Changes in notes payables are included in the.... section of the acct statement of cash flows

financing

If EBIT equals $100, the tax rate is $40%, and interest expense is $10, and there are 30 shares outstanding, calculate eps.

$1.80 ($100-$10) x (1- .40)/ 30

Currently in the U.S the corporate tax system that occurs in practice is a ........ tax

Modified flat- rate

Which of these are generally considered to be short- run fixed costs?

Property taxes Management salaries Overhead expenses

If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the change in capital spending is ______.

$50. (100-60+10)

Increasing its liquid assets will enable a firm to do which of the following?

Increase its ability to meet short term- obligations. Increase its ability to avoid financial distress.

Another deceptive practice is to classify labor as an investment expense which increases.............. cash flow

Operating

What is the effect of the Tax Reform Act of 1986 and the Omnibus Budget Reconciliation Act of 1993 on corporate tax rates?

There are 6 marginal tax rates

T or F: There is a correlation between future cash flows and the economic value of an asset.

True

The matching principle of GAAP requires revenues be matched with

expenses

The activity of making net payments to creditors and owners (excluding interest) is called a.... activity in the acct statement of cash flows.

financing

Selling a firm's plant and equipment results in a change in

fixed assets

High growth often shows up in higher spending, especially on:

fixed assets and inventory

Cost that do not change in the short run arise because of

fixed commitments

Marginal tax rates are the most important tax rates because:

incremental cash flows are taxed at marginal tax rates financial decisions are usually based on new cash flows

Cash flows from the acquisition and sale of fixed assets are located in the .... activities section of the acct statement of cash flows.

investing

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

lowest