CH. 2

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

GAAP

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?

What is a primary concern for a bank lending funds to a business for the short term?

Liquidity

Which of the following are examples of short-run fixed costs?

Rent Bond interest

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

book

The matching principle of GAAP requires revenues be matched with _____.

expenses

Fixed costs are costs that will not change ______.

in the short run

If you make an extra $1,000 in income and your marginal tax rate is 30 percent while your average tax rate is 20 percent, then you will pay an extra ______ in taxes.

$300

What does stockholders' equity represent?

A residual claim against the book value of the firm's assets. (The book value of the firm's assets less the book value of its liabilities.)

What is depreciation?

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

What does a balance sheet reflect about a firm?

Accounting value on a specific date

What does GAAP stand for?

Generally accepted accounting principles

How are assets on a balance sheet listed?

In order of decreasing liquidity

The use of financial leverage can:

Increase the chance of financial distress and business failure. Increase the potential reward for investors. Greatly magnify both gains and losses.

Which of these are generally considered to be short-run fixed costs?

Rent payments for a warehouse Property taxes Management salaries

How is the average income tax rate computed?

Total tax bill/Total taxable income

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

depreciation

Cash flow to stockholders equals:

dividends paid minus net new equity raised.

In the long run, all costs are _____.

variable

Net income refers to money earned ______.

after interest and taxes

The cash flow identity reflects the fact that:

cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders. a firm generates cash through its various activities. cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm.

The more debt a firm has, the greater its:

degree of financial leverage