Chapter 2

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What should you keep in mind when examining an income statement

GAAP, Cash vs non cash items, and time and costs. (assets appear on the balance sheet)

Which of the following are current assets?

Inventory and accounts receivable (patents and copyrights are long-term intangible assets) (buildings are long-term fixed assets)

Which of the following are examples of short run fixed costs

Rent and Bond interest (utilities are a variable cost dependent on level of production)

The short run for a firm is the period of time in which

Some costs are fixed (In the short run some costs are fixed and some are variable, in the long run all costs are variable). ALSO - Outcome can vary.

Which of the following is true about a US modified flat-tax rate system

The tax-rate becomes flat at very high income levels.

Which of the following are fixed assets on a balance sheet

accumulated depreciation, and trademarks (cash is a current asset, trademarks are intangible fixed assets)

Which of the following are period costs

administrative expenses, selling costs, and general costs. (cost of goods sold are product costs - directly related to production)

In the long run________________costs are variable

all costs

The cash flow identity states that cash flow from _____________________should equal cash flows to creditors and equity investors

assets

Under GAAP firms must carry assets at _____________value

book

on a balance sheet assets are listed at their______________ value

book

In finance, the the value of a firm depends on its ability to generate

cash flow

Operating cash flow

cash flow generated by business activities, excluding financing, capital spending, and change in net working capital.

Net working capital plus current liabilities equal

current assets

net working capital plus current liabilities equals

current assets.

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

cash flow to stock holders equals

dividends paid minus net new equity raised.

change in capital spending

ending net fixed assets - beginning net fixed assets Plus depreciation

non-cash items are ________________ that _________________ cashflow

expenses; do not directly affect

the corporate tax code is

extremely complicated

assets are listed on the balance sheet in

in increasing order of the time to convert them into cash Or listed in decreasing order of liquidity

cash flow to creditors equals

interest paid - net new borrowing

operating cash flow

is cash flow generated by business activities, excluding financing, capital spending, or changes in networking capital

Which of the following are fixed assets?

land, plant, patents

What is the primary concern for a bank lending to a company in the short- term

liquidity ( banks are more interested if the company will pay back the loan so liquidity is the most important)

Which of these are generally considered short run fixed costs

management salaries, property taxes, rent payments for a warehouse

the purpose of an income statement is to

measure performance over a certain period of time (snapshot)

Residual value is the amount left over after paying

other debt holders bond holders accounts payable and preferred stockholders.

are selling expenses period or product costs

period costs

operating cash flow reflects which of the following?

tax payments (capital spending is subtracted from operating cash flow to compute cash flow to investors in the firm.) Operating cash flow is EBIT +depreciation - tax payments.

marginal tax rate

the tax rate if you earned 1 more dollar

average tax rate

total tax bill divided by taxable income

an increase in depreciation expense lowers net income true or false

true ( think Donald Trump casino. Due to depreciation expense it was determined his casino made no profits and therefore did not have to pay taxes, Even though the depreciation expense did not necessarily cost them cash, or hinder them from using the profits before the depreciation expense for other activities.


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