Finance Midterm Chapter 2

What are the 2 dimensions of liquidity?

1) Ease of conversion 2) Loss of value

What is included in long term liabilities?

A loan to be paid off longer than a year

Cash flow to creditors is defined as: A. interest paid minus net new borrowing. B. interest paid plus net new borrowing. C. the operating cash flow minus net capital spending minus change in net working capital. D. dividends paid plus net new borrowing. E. cash flow from assets plus net new equity.

A. interest paid minus net new borrowing.

What are included in the current liabilities?

Accounts payable Any debt listed under one year

Shareholders' equity = ___________ - ___________

Assets - liabilities

The accounting statement which measures the revenues, expenses, and net income of a firm over a period of time is called the: A. statement of cash flows. B. income statement. C. GAAP statement. D. balance sheet. E. net working capital schedule.

B. income statement.

Mathematical calculation derived from the listed assets and liabilities. The value of a firm's assets is equal to the value of its liabilities plus the value of its equity

Balance sheet identity

Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant? A. An increase in net capital spending B. A decrease in the cash flow to creditors C. An increase in depreciation D. An increase in the change in net working capital E. A decrease in dividends paid

C. An increase in depreciation

Cash flow from assets is defined as: A. the cash flow to shareholders minus the cash flow to creditors. B. operating cash flow plus the cash flow to creditors plus the cash flow to shareholders. C. operating cash flow minus the change in net working capital minus net capital spending. D. operating cash flow plus net capital spending plus the change in net working capital. E. cash flow to shareholders minus net capital spending plus the change in net working capital.

C. operating cash flow minus the change in net working capital minus net capital spending.

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

Cash flow

Total of cash flow to creditors and cash flow to stockholders, consisting of the following: operating cash flow, Capital Spending and Change in net working capital

Cash flow from assets

Cash flow from assets = ______________ + _________________

Cash flow to creditors + cash flow to stockholders

Net working capital is positive when.....

Current assets exceed current liabilities

The financial statement that summarizes a firm's accounting value as of a particular date is called the: A. income statement. B. cash flow statement. C. liquidity position. D. balance sheet. E. periodic operating statement.

D. balance sheet.

Highly liquid assets: A. increase the probability a firm will face financial distress. B. appear on the right side of a balance sheet. C. generally produce a high rate of return. D. can be sold quickly at close to full value. E. include all intangible assets.

D. can be sold quickly at close to full value.

Cash flow to stockholders is defined as: A. cash flow from assets plus cash flow to creditors. B. operating cash flow minus cash flow to creditors. C. dividends paid plus the change in retained earnings. D. dividends paid minus net new equity raised. E. net income minus the addition to retained earnings.

D. dividends paid minus net new equity raised.

Delivery trucks are classified as: A. non-cash expenses. B. current liabilities. C. current assets. D. tangible fixed assets. E. intangible fixed assets.

D. tangible fixed assets.

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period? A. Positive operating cash flow B. Negative cash flow to creditors C. Positive cash flow to stockholders D. Negative net capital spending E. Positive cash flow from assets

E. Positive cash flow from assets

Tressler Industries opted to repurchase 5,000 shares of stock last year in lieu of paying a dividend. The cash flow statement for last year must have which one of the following assuming that no new shares were issued? A. Positive operating cash flow B. Negative cash flow from assets C. Negative cash flow to stockholders D. Negative operating cash flow E. Positive cash flow to stockholders

E. Positive cash flow to stockholders

Financial leverage: A. increases as the net working capital increases. B. is equal to the market value of a firm divided by the firm's book value. C. is inversely related to the level of debt. D. is the ratio of a firm's revenues to its fixed expenses. E. increases the potential return to the shareholders.

E. increases the potential return to the shareholders.

The market value of a firm's fixed assets: A. must exceed the book value of those assets. B. is more predictable than the book value of those assets. C. in addition to the firm's net working capital reflects the true value of a firm. D. is decreased annually by the depreciation expense. E. is equal to the estimated current cash value of those assets.

E. is equal to the estimated current cash value of those assets.

The common set of standards and procedures by which audited financial statements are prepared

GAAP Generally Accepted Accounting Principles

Financial statement summarizing a firm's performance over a period of time

Income Statement

What are included in current assets?

Inventory bought and to be sold in one year cash accounts receivables

Assets = ________ + ___________

Liabilities + Shareholders' equity

What is the current corporate US tax rate based on?

Modified flat-rate tax

Current Assets - Current liabilities = ?

Net working capital

Expenses charged against revenues that do not directly affect cash flow, such as depreciation

Noncash items

Selling, general and administrative expenses are listed as what type of costs?

Period costs

Raw materials, direct labor expense, and manufacturing overhead are what time of costs, and are reported as COGS?

Product costs

Income statement equation

Revenues - Expenses = Income

Total Assets - Total liabilities = ?

Shareholders' equity (common equity, or owners' equity)

total taxes paid divided by total taxable income

average tax rate

Financial statement showing a firm's accounting value on a particular date

balance sheet

the net spending on fixed assets (purchases of fixed assets - sales of fixed assets)

capital spending

A firm's interest payments to creditor - net new borrowing =

cash flow to creditors

Dividends paid out by a firm - net new equity raised =

cash flow to stockholders

amount spent on net working capital

change in net working capital

Most important noncash item?

depreciation

The controversial practice of showing the investors that there are steadily growing earnings by overstating or understating earnings at various times to smooth our dips and surges

earnings management

Only one tax rate; same for all income levels Marginal tax rate is always the same as the average tax rate

flat-rate tax

Another name for cash flow from assets

free cash flow (free as in, free to distribute to creditors and stockholders because it is not needed for working capital or fixed asset investments)

On what side of the balance sheet are the current assets and fixed assets located?

left side

Speed and ease with which an asset can be converted to cash is _________

liquidity

amount of tax payable on the next dollar earned

marginal tax rate

Cash generated from a firm's normal business

operating cash flow

On what side of the balance sheet are the current liabilities, long-term debt, and shareholder's equity located?

right side

One of the largest cash outflows

taxes