FIN Ch 2 Quiz
Which of the following are classified as liabilities on firms balance sheet?
- Accounts payable - Long term debt
Which of these questions can be answered by reviewing a firms balance sheet?
- What is the total amount of assets the firm owns? - How much debt is used to finance the firm?
Under GAAP, assets are generally carried on a firm's balance sheet at ____.
- book value - historical value
Rank the ease of turning the following assets into cash.
- cash equivalents - accounts receivable - inventory - plants and equipment
Marginal tax rates are the most important tax rates because:
- financial decisions are usually based on new cash flows - incremental cash flows are taxed at marginal tax rates
What should you keep in mind when examining an income statement?
- time and costs - GAAP - cash vs non-cash items
Long term liabilities represents obligations of the firm lasting more than ____
1 year
U.S. corporations pay tax at a rate of ___ percent.
21
According to the current U.S. corporate tax code, the corporate tax rate in effect for 2019 is:
21%
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 receivable
Amounts not yet collected from customers on sales already made are called:
Accounts receivable
Which one of these is considered to be the most liquid?
Accounts receivable
T/F - for financial analysis, financial statements and accounting numbers are more important than cash flows
False
T/F: Current assets plus current liabilities equals net working capital.
False
T/F: Ending net fixed assets minus depreciation equals net investment in fixed assets
False
T/F: with the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.
False
Which of the following is NOT a component of cash flows from assets?
Financing expenses
The three most important items to keep in mind when reviewing an income statement are:
GAAP, cash vs noncash items, and time & costs
On which side of the balance sheet do liabilities appear?
The right side
How is the average income tax computed?
Total tax bill/ total taxable income
Net capital spending is negative when:
a firm purchased more assets than it sold
NWC will be negative when current assets ____ current liabilities
are less than
Non-cash items do not affect
cash flow
In finance the value of a firm depends on it ability to generate
cash flows
The more debt a firm has, the greater its:
degree of financial leverage
Cash flows to stockholders equals ______.
dividends paid minus net new equity raised
When a firm smooths earnings to please investors, it is called ________.
earnings management
The GAAP matching principle requires to be matched with:
expenses
The purpose of a(n) ____ is to measure performance over a set period of time
income statement
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
Current assets are classified as relatively ____ these assets can be converted to cash within the next 12 months.
liquid
For financial decision-making purposes, the most important tax rate is the ________ tax rate.
marginal
The balance sheet identity shows that stockholders equity assets ____ liabilities.
minus
Non-cash items are expenses that directly affect ____ but do not directly affect _____.
net income; cash flow
The cash flow that results from the firm's day-to-day activities of producing and selling is called...
operating cash flows
Earnings management is a controversial practice in which corporations ______ or ______ their earnings to "smooth out" dips and surges and keep investors calm
overstate; understate
What is the purpose of an income statement?
to measure performance over a set period of time
Common stockholders are entitled to the difference btwn _____ and _____.
total assets; total liabilities
Free cash flow is better described as
total distributable cash flow
Financial leverage refers to a firms
use of debt in its capital structure
Depreciation is the accountants estimate of the cost of ____ used in the production process matched with the benefits produced from owing it.
- equipment - fixed assets
Product costs are usually shown on the income statement under the heading of _____
Cost of goods sold
According to GAAP, when is income reported?
When it is earned or accrued
Costs that do not change in the short run arise because of _____
fixed commitments
Current assets ____ currents liabilities equals NWC.
minus
The last item (or bottom line) on the income statement is typically the _____
net income
A primary reason that accounting income differs from cash flow is that income statement contains _____
noncash items
A positive operating cash flow indicates that the firm is generating enough cash to :
pay everyday cash flows
The cash flow identity states that cash flows from ____ should equal cash flows to creditors and equity investors.
assets
A company's _____ tax rate is its tax bill divided by its total taxable income, and its _______ tax rate is the tax rate its pays on the next dollar of income.
average; marginal
Tax rates for proprietorships, partnerships, and LLCs ______ with the passage of Tax Cuts and Jobs Act of 2017.
changed
The cash flow identity states that the cash flow from assets equals cash flows to _____.
creditors and stockholders
Net capital spending is equal to ending net fixed assets minus beginning net fixed assets ______.
plus depreciation
In practice, accountants tend to classify costs as either ____ costs or _____ costs.
product; period
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
interest paid ___ net new borrowing equals cash flow to creditors
minus
The market value of an item is:
the cash value you'd get if you sold it
Cash flow refers to:
the difference between the number of dollars that came in and the number that went out
Which of the following are components of cash flow from assets?
- change in NWC - capital spending - operating cash flow
Operating cash flows
- tell us whether or not a firm's cash inflows from its operations are sufficient to cover everyday cash outflows - is a sign of trouble if negative over a long period of time
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
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
Which of the following is the balance sheet equation?
Assets equal liabilities plus stockholders equity
Which of the following statements is true?
Cash flows can be derived from financial statements
Which of the following is an example of a non-cash item on an income statement?
Depreciation
Long-term liabilities are not due in the current year (from the date of the balance sheet).
True
The price at which buyers and sellers would trade is called ____ value
market
The ____ principle of GAAP states that costs associated with a good service should be recorded at the same time as the revenue from selling that good or service
matching
T/F: Dividends paid minus net new equity raised equals cash flow to stockholders
True
T/F: Free cash flow is also known as cash flow from assets
True
T/F: Interest paid minus net new borrowing equals cash flow to creditors
True
The common set of standards and procedures by which audited financial statements are prepared is known as the:
Generally Accepted Accounting Principles
Stockholders equity is always shown on the ___ of the balance sheet
right side
Liquidity refers to the ease of changing _________.
Assets to cash
Who is entitled to the residual value of a firm's cash flows?
Shareholders
Changes in capital spending can be negative if
the firm sold more assets than it purchased
A balance sheet reflects a firms
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
Shareholders equity equals _____
assets minus liabilities
On the balance sheet, assets are listed at their ____ value
book
Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as:
period costs
Ending net fixed assets minus beginning net fixed assets _____ depreciation equals investment in fixed assets
plus
Physical assets are termed ______ assets.
tangible
Current assets are defined as assets that can be turned into cash within _____ months.
twelve
____ changes as the output of the firm changes
variable cost
Liabilities can be classified as ___ or long-term.
current
Assets can be categorized as
current and fixed assets tangible and intangible assets
T/F: Operating cash flows does not include depreciation or interest.
True