Business Finance (Ch. 2) - Financial Statements, Taxes & Cash Flow
Shareholders' equity equals
assets minus liabilities
Liquidity refers to the ease of changing
assets to cash
The balance sheet identity shows that stockholders' equity equals assets ____ liabilities
minus
what does shareholders' equity represent?
a residual claim against the firm's total assets
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 receivables
current assets ____ current liabilities equals NWC (net working capital)
minus
True or false: operating cash flow does not include depreciation or interest
true
On a balance sheet, assets are listed at their ____ value
book
On the balance sheet, assets are listed at their ___ value
book
Liquidity has two dimensions which are the ability to:
quickly convert assets into cash without significant loss in value
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 of the following is the balance sheet equation?
Assets equal liabilities plus stockholders' equity
Which of these questions can be answered by reviewing a firm's balance sheet?
What is the total amount of assets the firm owns; how much debt is used to finance the firm
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
Net capital spending is negative when
a firm sold off more assets than it purchased
In the long-run, costs may be considered as
all variable
Net working capital will be negative when current assets ___ current liabilities
are less than
Under GAAP, assets are generally carried on a firm's balance sheet at
book value, historical cost
The short run is a period when there are ____ costs
both fixed and variable
In finance, the value of a firm depends on its ability to generate
cash flows
What should you keep in mind when examining an income statement?
cash versus non-cash items. time and costs, GAAP
Which of the following are components of cash flow from assets?
change in net working capital
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
___ paid minus net new equity raised equals cash flow to stockholders
dividends
Cash flow to stockholders equals
dividends paid minus net new equity raised
Depreciation is the accountant's estimate of the cost of ___ used in the production process matched with the benefits produced from owning it
equipment, fixed assets
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 arises because of
fixed commitments
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
Which of the following is a current asset?
inventory
For a mature firm, operating cash flow
is a sign of trouble if negative over a long period of time; is usually positive
Current assets are classified as relatively ____; these assets can be converted to cash within the next year
liquid
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
A primary reason that accounting income differs from cash flow is that an income statement contains
noncash items
The cash flow that results from the firm's day-to-day activities of producing and selling is called
operating cash flow
Earnings management is a controversial practice in which corporations ____ or ____ their earnings to "smooth out" dips and surges and keep investors calm
overstate, understate
A positive operating cash flow indicates that the firm is generating enough cash to
pay everyday cash outflows
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
In practice, accountants tend to classify costs as either ___ costs or ___ costs
product, period
The market value of an item is
the cash value you'd get if you sold it
Cash flow refers to
the difference between the number of dollars that came in and the number that went out
On which side of the balance sheet do liabilities appear?
the right side
What is the purpose of the income statement?
to measure performance over a set period of time
Common stockholders are entitled to the difference between ____ and ____
total assets; total liabilities
___ changes as the output of the firm changes
variable cost
According to GAAP, when is income reported?
when it is earned of accrued
A balance sheet reflects a firm's
accounting value on a specific date
Net earnings refers to income earned
after interest and taxes
Assets can be categorized as
current and fixed assets; tangible and intangible assets
Who is entitled to the residual value of a firm's cash flows?
shareholders
True or false: Free cash flow is also known as cash flow from assets
true
What does GAAP stand for?
Generally Accepted Accounting Principles
When a firm smooths earnings to please investors, it is called
earnings management
Stockholders' equity is always shown on the ____ of the balance sheet
right side
Long-term liabilities are not due in the current year (from the date of the balance sheet)
true
Financial leverage refers to a firm's
use of debt in its capital structure
The last item (or "bottom line") on the income statement is typically the
net income
Rank the ease (from easiest to hardest) of turning the following assets into cash
cash equivalents accounts receivable inventory plant and equipment
Which of the following are classified as liabilities on a firm's balance sheet?
long-term debt; accounts payable
The three most important items to keep in mind when reviewing an income statement are
GAAP, cash versus noncash items and time and costs
Rank the ease (from easiest to hardest) of turning the following assets into cash
1) cash equivalents 2) accounts receivables 3) inventory 4) plant and equipment
Which of the following are classified as fixed assets on the balance sheet?
buildings, trademark, equipment
Non-cash items do not affect
cash flow
Product costs are usually shown on the income statement under the heading of
cost of goods sold
Liabilities can be classified as ___ or long-term
current
True or false: current assets plus current liabilities equals net working capital
false
The price at which willing buyers and sellers would trade is called ____ value
market
Free cash flow is better described as
total distributable cash flow