CH 2 Quiz

If a firm has a negative cash flow from assets every year for several years, the firm: Multiple Choice is repaying debt every year. must also have a negative cash flow from operations each year. has annual net losses. is operating at a high level of efficiency. may be continually increasing in size.

may be continually increasing in size.

The matching principle states that: Multiple Choice costs should be recorded when paid. costs should be recorded on the income statement whenever those costs can be reliably determined. the costs of producing an item should be recorded when the sale of that item is recorded as revenue. sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined. sales should be recorded when the payment for that sale is received.

the costs of producing an item should be recorded when the sale of that item is recorded as revenue.

Which one of these is correct? Multiple Choice Depreciation has no effect on taxes. Taxable income must be a positive value. Net income is distributed either to dividends or retained earnings. Taxable income equals net income divided by (1 + Average tax rate). Interest paid is a noncash item.

Net income is distributed either to dividends or retained earnings.

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

An increase in depreciation

Which one of the following is included in the market value of a firm but not in the book value? Multiple Choice Partially built inventory Reputation of the firm Raw materials Long-term debt Value of a partially depreciated machine

Reputation of the firm

Net working capital decreases when: Multiple Choice a credit customer pays his or her bill in full. depreciation increases. a new 3-year loan is obtained with the proceeds used to purchase inventory. a long-term debt is used to finance a fixed asset purchase. a dividend is paid to current shareholders.

a dividend is paid to current shareholders.

Production equipment is classified as: a current liability. an intangible fixed asset. a tangible fixed asset. a current asset.

a tangible fixed asset

Net working capital includes: Multiple Choice fixed asset depreciation. an invoice from a supplier. the balance due on a 15-year mortgage. non-cash expenses. a land purchase.

an invoice from a supplier.

Firms that compile financial statements according to GAAP: Multiple Choice can still manipulate their earnings to some degree. must record all expenses when incurred. record income and expenses at the time they affect the firm's cash flows. record both income and expenses as soon as the amount for each can be ascertained. have no discretion over the timing of recording either revenue or expense items.

can still manipulate their earnings to some degree.

Which one of the following is an intangible fixed asset? Multiple Choice Account receivable Machinery Copyright Inventory Building

copyright

An increase in which one of the following will increase operating cash flow for a profitable, tax-paying firm? Multiple Choice Inventory Fixed expenses Net capital spending Marginal tax rate Depreciation

depreciation

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital: Multiple Choice remained constant. had to increase. was unaffected as the changes occurred in the firm's current accounts. could have either increased, decreased, or remained constant. had to decrease.

had to decrease.

Financial leverage: Multiple Choice increases as the net working capital increases. is the ratio of a firm's revenues to its fixed expenses. increases the potential return to the stockholders. is inversely related to the level of debt. is equal to the market value of a firm divided by the firm's book value.

increases the potential return to the stockholders.

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

interest paid minus net new borrowing.

Paid-in surplus is classified as: Multiple Choice owners' equity. a current asset. long-term debt. a cash expense. net working capital.

owners equity

An income statement prepared according to GAAP:A. reflects the net cash flows of a firm over a stated period of time.B. reflects the financial position of a firm as of a particular date.C. distinguishes variable costs from fixed costs.D. records revenue when payment for a sale is received.E. records expenses based on the matching principle.

records expenses based on the matching principle.