Corporate Finance MGMT 332 Chapter 2

Long-term liabilities represent obligations of the firm lasting over _____.

1 year

According to the originators of the current U.S. corporate tax code, the only rates are:

15% 25% 34% 35%

Which one of the following is true?

Cash flows can be derived from financial statements

True or false: For financial analysis, financial statement and accounting numbers are more important than cash flows.

False

Which of the following is NOT a component of cash flow from assets?

Financing expenses

What does GAAP stand for?

Generally accepted account principles

Marginal tax rates are the most important tax rates because:

Incremental cash flows are taxed at marginal tax rates. Financial decisions are usually based on new cash flows.

According to GAAP, when is revenue recognized on an income statement?

When the value of an exchange of goods or services is known or reliable determined. When the earnings process is virtually completed.

Which of the following are classified as liabilities on a firm's balance sheet.

accounts payable long-term debt

A customer has yet to pay the bill for products purchased from Firm A on credit. The customer's trade credit is recorded in which of Firm A's balance sheet accounts?

accounts receivable

Shareholder's equity equals

assets minus liabilities

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

Which of the following are classified as fixed assets on the balance sheet?

buildings equipment

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

cash flows

Capital spending = Ending net fixed assets - beginning net fixed assets + ______.

depreciation

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

earnings management

For financial decision-making purposes, the most important tax rate is the _______ tax rate.

marginal

The _____ tax rate is the tax rate paid on the next dollar of income.

marginal

The ____principle of GAAP states that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service.

matching

According to GAAP, when is income reported?

when it is earned or accrued and when expense is incurred.

If dividends are $100, stock sold is $10, and stock repurchased is $25, what is the cash flow to stockholders?

100 - (10 - 25) = $115

Which of the following are components of cash flow from assets?

Operating cash flow capital spending Change in net working capital

If interest paid is $100 and net new borrowing is $150, then cash flow to creditors equals:

$100 - $150 = -$50

If the Federal marginal tax bracket is 34%, the state marginal tax bracket is 5%, and the local marginal tax bracket is 1%, how much money will a corporation keep if it makes another $1,000,000 in taxable income?

(1 - 0.34 - 0.05 - 0.01) x $1 mil = $600,000

What is depreciation?

A systematic

Who is entitled to the residual value of a firm's cash flows?

Shareholders

What is the purpose of the income statement?

To measure performance over a set period of time.

Net earnings refers to income earned _____.

after interest and taxes

Product costs are usually shown on the income statement under the heading of ____________.

costs of goods sold

The cash flow identity states that cash flow from assets equals cash flows to _____.

creditors and stockholders

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

depreciation

Costs that do not change in the short run arise because of ______.

fixed commitments

Under GAAP, assets are generally carried on a firm's balance sheet at

historical cost book value

The purpose of a _____ is to measure performance over a set period of time.

income statement

For a mature firm, operating cash flow:

is a sign of trouble if negative over a long period of time. is usually positive.

Current assets are defined as assets that can be turned into cash within ____ months.

twelve

True or False: Free cash flow is also known as cash flow from assets.

True

Which one of these is considered to be the most liquid?

accounts receivable

The short run is ______.

an imprecise period of time.

liquidity refers to the ease of changing ____.

assets to cash

Net capital spending is equal to ending net fixed assets minus beginning net fixed assets _____.

plus depreciation

If ending net fixed assets are $100 beginning net fixed assets are $60, and depreciation is $10, then the change in capital spending is ______.

100 - 60 + 10 =$50

True or False: Operating cash flow does not include depreciation or interest.

True

Changes in capital spending can be negative if

the firm sold more assets than it purchased

Rank the ease (from easiest to hardest) of turning the following assets to cash.

cash equivalents accounts receivable inventory plant and equipment

Non-cash items do not affect:

cash flow

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value.

The short run is a period when there are ______ costs.

both fixed and variable

The cash flow identity states that cash flows from _____ should equal cash flows to creditors and equity investors.

assets

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

all variable

Cash flow to creditors equals:

Interest paid minus net new borrowing.

Net working capital will be negative when current assets ______ current liabilities.

are less than

What should you keep in mind when examining an income statement?

cash versus non-cash items GAAP time and costs

The GAAP matching principle requires revenues to be matched with:

expenses

A primary reason that accounting income differs from cash flow is that an income statement contains ______.

noncash items

Cash flow refers to _____.

the difference between the number of dollars that came in and the number that went out.