FIN 3309 Anderson Chap 2

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

book value and historical cost

The GAAP matching principle requires revenues to be matched with:

expenses

Net Earnings

income earned after interest and taxes

Free cash flow is better described as ______.

total distributable cash flow

Net capital spending = ending net FA - beg net FA _________.

+ depreciation

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

-$50

Which of the following is shown on the left side of the balance sheet?

Assets

Which of the following is the balance sheet equation?

Assets = liabilities + stockholder's equity

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

Cash Flows

What are classified as liabilities on a firm's balance sheet?

Long-term debt accounts payable

The price at which willing buyers and sellers would trade is called _____ value.

Market

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

Matching

Purpose of income statement?

To measure performance over a set period of time

How is the average income tax rate computed?

Total tax bill / Total taxable income

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

are less than

NWC =

current assets - current liabilities

The more debt a firm has, the greater its:

degree of financial leverage

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

depreciation

Easiest to hardest of turning these assets into cash? Inventory Plant and Equipment Cash Equivalents Accounts Recievable

1)Cash Equivalents 2)Accounts Receivable 3)Inventory 4)Plant and Equipment

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

shareholders

What does stockholders' equity represent?

A residual claim against the firm's assets

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

earnings management

Non-cash items are expenses that directly affect ____ but do not directly affect _____.

net income; cash flow

Depreciation is the accountant's estimate of the cost of ______ used in the production process matched with the benefits produced from owning it.

Fixed assets and equipment

What does GAAP stand for?

Generally Accepted Accounting Principles

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

both fixed and variable

What are components of cash flow from assets?

capital spending, change in net working capital, operating cash flow

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

income statement

What is depreciation?

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

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

Accounts recievable

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

Assets

Assets can be categorized as ______.

Current, fixed, tangible, and intangible assets.

Marginal tax rates are the most important tax rates because:

1) incremental cash flows are taxed at marginal tax rates 2) financial decisions are usually based on new cash flows

For a mature firm, operating cash flow:

1) is a sign of trouble if negative over a long period of time 2) is usually positive

Components of cash flow from assets?

1) operating cash flow 2) change in net working capital 3) capital spending

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

1) when the value of an exchange of goods or services is known or reliably determined 2) when the earnings process is virtually completed

Cash flow to creditors equals:

interest paid minus net new borrowing

Period costs are the costs that are allocated to a specific _____.

interval of time

_______ costs change as the output of the firm changes.

Variable

Non-cash items do not affect ______.

cash flow

A positive operating cash flow indicates that the firm is generating enough cash to ______.

pay operating costs

Liquidity has two dimensions which are the ability to :

quickly convert assets into cash without significant loss in value

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

1) GAAP 2) Cash versus non-cash items 3) time and costs

What can be answered by reviewing a firm's balance sheet?

1) What is the total amount of assets the firm owns 2) How much debt is used to finance the firm?

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

12

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

1 year.

Tax rates for corporates?

35%, 25%, 15%, 34%

Common stockholders are entitled to the difference between ____ and ____.

total assets; total liabilities