FIN219T 3403 chapter 2

Assets can be described as items that:

- generate revenue - a firm owns - provide market value ot the firm

Which of the following is true about the difference between the income statement and cash inflows and outflows?

- cost of raw materials purchased on credit are accounts payable rather than cash outflows until they are paid, which may be in a different period. - sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period. - income taxes are often deferred, so the amount on the income statement may not represent the amount of the check to the IRS.

The Short Run for a firm is the period of time during which _____.

-Some costs are fixed -Output can vary

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

1 year

What does stockholders' equity represent?

A residual claim against the book value of the firm's assets. (The book value of the firm's assets less the book value of its liabilities.)

When a customer purchases an item on credit, the purchase amount is recorded by the seller in which one of these accounts?

Accounts receivable

Net working capital plus current liabilities equal _______.

Current assets

If you make an extra $1,000 in income and your marginal tax rate is 30 percent while your average tax rate is 20 percent, then you will pay an extra ____ in taxes.

$300

if a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals _____.

$50

which of the following are period costs?

- Administrative expenses - Selling costs - General expenses

Which of the items are NOT shown on a balance sheet?

- Favorable economic conditions - Good managment - Proprietary assets

The use of financial leverage can:

- Greatly magnify both gains and losses. - Increase the chance of financial distress and business failure. - Increase the potential reward for investors

Which if the following are fixed assets?

- Land - Patents - Plant

Which of the following will be found in the liabilities section of a firm's balance sheet?

- Long-term bonds - Notes payable

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

- Notes payable - Accounts payable

Which are true concerning product costs?

- product costs are reported as costs of goods sold. -Product costs contain both fixed and variable costs.

On which side of the balance sheet do liabilities appear?

The Right Side

In the long run, all costs are ______.

Variable

_______ costs change as the output of the firm changes.

Variable

Net income refers to money earned ____.

after interests and taxes

Liquidity refers to the ease of changing _______.

assets to cash

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

both fixed and variable

Non-cash items do not affect _______.

cash flow

The more debt a firm has, the greater its:

degree of financial leverage

Accounting profit ______ cash flow.

differs from

Depreciation is the accountant's estimate of the cost of ______ used up in the production process.

equipment

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

fixed commitments

A decrease in depreciation expense ____ earnings per share.

increases

Why is positive net working capital important?

it means the firm should have sufficient cash to meet its current obligations.

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

market

The accounting equation shows that stockholders' equity equals assets ________ liabilities.

minus

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

net income; cash flow

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

twelve (12)

Residual value is the amount left over after paying ______________.

- Preferred stockholders - Other debt holders. - Bondholders - Accounts payable

Which of these are generally considered to be short-run fixed costs?

- Rent for a warehouse - Management salaries - Property taxes

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

- cash versus non-cash items - time and costs - GAAP

Marginal tax rates are the most important tax rate because:

- financial decisions are usually based on the new cash flows - incremental cash flows are taxed at marginal tax rates

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

What does GAAP stand for?

Generally Accepted Accounting Principles