chapter 2
liquidity refers to the ease of changing ________
assets to cash
which will be found in the liabilities section of a firm's balance sheet
- long-term bonds issued by the firm - notes payable
the short run for a firm is the period of time during which
- output can vary - some costs are fixed
the use of financial leverage can
- Increase the chance of financial distress and business failure - Greatly magnify both gains and losses - Increase the potential reward for investors
which are true concerning product costs
- Product costs are reported as costs of goods sold. - Product costs contain both fixed and variable costs.
the cash flow identity reflects the fact that:
- 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 - cash flow from the firm's assets equals the total of cash flow to creditors and stockholders
residual value is the amount left over after paying
- accounts payable - preferred stockholders - other debt holders - bondholders
long term liabilities represent obligations of the firm lasting over
1 year
rank the ease (from easiest to hardest) of turning the following assets into cash
1. cash equivalents 2. accounts receivable 3. inventory 4. plant and equipment
net working capital plus current liabilities equal
current assets
examples of non-cash items on an income statement
depreciation
accounting profit ________ cash flow
differs from
depreciation is the accountant's estimate of the cost of _________ used up in the production process
equipment
t/f: operating cash flow includes capital spending and working capital requirements
false
assets are listed on a balance sheet in which order
in order of decreasing liquidity
fixed costs are costs that will not change ____________
in the short run
Increasing its non-cash liquid assets will enable a firm to do which of the following?
increase its ability to avoid financial distress increase its ability to meet short-term obligations
_______ income is money earned after interest and taxes
net
Non-cash items are expenses that directly affect ______ but do not directly affect _____.
net income; cash flow
book value of assets is generally
not what the assets are actually worth
an income statement reflects activity that occurs _______ while a balance sheet reflects values ________
over a period of time; as of a specific date
examples of fixed assets
patents, land, plant
which is a variable cost in the short run
raw materials used in production
on which side of the balance sheet do liabilities appear
right side
the last residual claimants to be paid by a firm are
stockholders
the most important item that can be extracted from financial statements
the firm's actual cash flows
according to GAAP, when is income reported
when it is earned or accrued
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 - cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm - a firm generates cash through its various activities
which are generally considered to be short-run fixed costs
- property taxes - management salaries - rent payments for a warehouse
assets can be described as items that
- provide market value to the firm. - generate revenue. - a firm owns.
examples of period costs
- selling costs - general expenses - administrative expenses
what does stockholder's equity represent
a residual claim against the book value of the firm's assets
a customer has yet to pay the bill for products purchased on credit. the seller records this debt in which balance sheet account?
accounts receivable
current assets examples
accounts receivable inventory
which one of these is a correct version of the balance sheet equation
assets = liabilities + stockholders' equity
what does GAAP stand for
Generally Accepted Accounting Principles