Business Finance Chapter 2
Current assets are defined as assets that can be turned into cash within ______ months.
12
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?
______ changes as the output of the firm changes.
Variable cost
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
Interest paid _____ (Plus/Minus) net new borrowing equals cash flow to creditors.
minus
The last item (or "bottom line") on the income statement is typically the _________.
net income
Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm.
overstate; understate
Ending net fixed assets minus beginning net fixed assets _____ depreciation equals net investment in fixed assets.
plus
Net capital spending is equal to ending net fixed assets minus beginning net fixed assets ____.
plus depreciation
Liquidity has two dimensions which are the ability to:
quickly convert assets into cash without significant loss in value
On a balance sheet, total assets must always equal total liabilities plus:
shareholders' equity
Physical assets are termed ______________ assets.
tangible
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
Changes in capital spending can be negative if
the firm sold more fixed assets than it purchased
Free cash flow is better described as ____.
total distributable cash flow
Financial leverage refers to a firm's _________.
use of debt in its capital structure
U.S. corporations pay tax at a rate of _________ of 1 percent. (Enter number only.)
21
A balance sheet reflects a firm's:
accounting value on a specific date
Net earnings refers to income earned ______.
after interest and taxes
Liquidity refers to the ease of changing _____.
assets to cash
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
The more debt a firm has, the greater its:
degree of financial leverage
Costs 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
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.
Which of the following are components of cash flow from assets?
Capital spending Operating cash flow Change in net working capital
Which of the following is an example of a non-cash item on an income statement?
Depreciation
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
True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.
False
Which of the following is NOT a component of cash flow from assets?
Finance expenses
According to GAAP, when is income reported?
When it is earned or accrued
In the long-run, costs may be considered as ________.
all variable
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
Cash flow to stockholders equals ____.
dividends paid minus net new equity raised
True or false: Interest paid minus net new borrowing equals cash flow to creditors.
true
The short run is ______.
an imprecise period of time
When a firm smooths earnings to please investors, it is called ________.
earnings management
For financial decision-making purposes, the most important tax rate is the ______ tax rate.
marginal
Operating cash flow (Select all that apply.)
tells us whether or not a firm's cash inflows from its operations are sufficient to cover its everyday cash outflows is a sign of trouble if negative over a long period of time
Long-term liabilities represent obligations of the firm lasting more than _____.
1 yr
How is the average income tax rate computed?
Total tax bill/Total taxable income
Long-term liabilities are not due in the current year (from the date of the balance sheet).
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
According to GAAP, when is revenue recognized on an income statement?
When the earnings process is virtually completed When the value of an exchange of goods or services is known or reliably determined
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
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
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
Current assets __________ (plus/minus) current liabilities equals NWC.
minus
The cash flow that results from the firm's day-to-day activities of producing and selling is called:
operating cash flow
A positive operating cash flow indicates that the firm is generating enough cash to:A positive operating cash flow indicates that the firm is generating enough cash to:
pay everyday cash outflows.
Assets can be categorized as (select all that are appropriate)
tangible and intangible assets current and fixed assets
