Chapter 2 Questions

Non-cash items do not affect:

cash flow

The more debt a firm has, the greater its:

degree of financial leverage

Which of the following is an example of a non-cash item on an income statement?

depreciation

When a firm smooths earnings to please investors, it is called ________.

earnings management

True or false: Current assets plus current liabilities equals net working capital.

false

True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.

false

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 _____ current liabilities equals Net working Capital (NWC).

minus

The balance sheet identity shows that stockholders' equity equals assets ______ liabilities.

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

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

Financial leverage refers to a firm's _________.

use of debt in its capital structure

Which of these questions can be answered by reviewing a firm's balance sheet?

what is the total amount of assets the firm owns? how much debt is used to finance the firm?

According to GAAP, when is income reported?

when it is earned or accrued

Assets can be categorized as (select all that are appropriate)

- current and fixed - tangible and intangible

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

U.S. corporations pay tax at a rate of __ percent.

21

A balance sheet reflects a firm's:

accounting value on a specific date

Net earnings refers to income earned ______.

after interest and taxes

In the long-run, costs may be considered as ________.

all variable

The short run is ______.

an imprecise period of time

Liquidity refers to the ease of changing _____.

assets to cash

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