Finance chapter 2

Operating cash flow: (2)

- Is usually positive - Is a sign of trouble if negative

Marginal tax rates are the most important tax rates because: (2)

- Financial decisions are usually based on new cash flows - Incremental cash flows are taxed at marginal tax rates

What should you keep in mind when examining an income statement? (3)

- GAAP - Cash versus non-cash items - Time and costs

What are two way in which financial accountants usually classify costs?

- Period costs - Product costs

What is the purpose of the income statement?

To measure performance over a set period of time

The more debt a firm has, the greater its:

- The degree of financial leverage

Assets can be categorized as: (2 answers)

- Current and fixed assets - Tangible and intangebal assets

What does stockholders' equity represent?

A residual claim against the firm's assets

On the balance sheet, assets are listed at their ______ value.

Book

Non-cash items do not affect _______.

Cash flow

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

Creditors and equity investors

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

Fixed commitments

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

Interval of time

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

In accounting, operating cash flow is often simply defined as the simple sum of two income statement items: ________ and ________.

Net income plus depreciation

Changes in capital spending can be negative if

The firm sold more assets than it purchased

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

$115

Which one of these is considered to be the most liquid? - Land - Equipment and machines - Accounts receivable - Inventory

Accounts Receivable

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

All variable

The short run is ______.

An imprecise period of time

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

Assets

Shareholders' equity equals ______.

Assets minus liabilities

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

Market

The short run is a period when there are ______ costs.

both fixed and variable

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

shareholders' equity

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

1 year

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 is depreciation?

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

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

Cash flows

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

Depreciation

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

Depreciation

The GAAP matching principal requires revenues to be matched with:

Expenses

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

Marginal

Financial leverage refers to a firm's ______.

Use of debt in its capital structure

______ costs change as the output of the firm changes.

Variable

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

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

Earnings management

Non-cash items are _____ that _____ cash flow.

Expenses; do not directly affect

Depreciation is the accountant's estimate of the cost of _______ used in the production process matched with the benefits produced from owning it. (2)

- Equipment - Fixed assets

Under GAAP, assets are generally carried on a firm's balance sheet at _______. (2)

- Historical cost - Book value

The last item on the income statement is typically the _______.

Net income

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

Net income; cash flow

When is revenue recognized on an income statement? (2)

- When the earnings process is virtually completed - When the exchange of goods or services is completed

Which if the following are componets of cash flow from assets? (3answers)

- Change in net working capital - Capital spending - Operating cash flow

Cash flow to stockholders equals _______.

- Dividends paid minus net new equity raised

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

$20

If you make an extra $1,000 in income and your marginal tax rate is 20%, then you will pay _____ in taxes on this extra income.

$300

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

According to the originators of the U.S. corporate tax code, the only rates are: (4)

- 34% - 35% - 25% - 15%

A balance sheet reflects a firm's: (2 answers)

- Accounting value on a specific date - Economic value at a specific time

Which of the following are classified as fixed assets on the balance sheet? (3)

- Buildings - Patents - Trademarks

Liquidity has two dimentions which are the ability to:

Quickly convert assets into cash without significant loss in value.

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

Shareholders

Physical assets are termed ______ assets.

Tangible

What is the most important item that can be extracted from financial statements?

The firm's actual cash flows

Which of the following are classified as liabilities on a firm's balance sheet? (2)

- Deferred taxes - Accounts payable

Stockholders' equity is always shown on the ______ of the balance sheet

- Right side

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

Which of these questions can be answered by reviewing a firm's balance sheet? (2)

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

Net working capital equals ______.

Current assets minus current liabilities

Cash flow to creditors equals:

Interest paid minus net new borrowing