FIN315 Chapter 2 Review

Increasing its noncash liquid assets will enable a firm to do which of the following? Multiple select question. Reduce its investment in receivables and inventory Increase its ability to meet short-term obligations Increase its rate of return Increase its ability to avoid financial distress

Increase its ability to meet short-term obligations Increase its ability to avoid financial distress

Which of the following are included in the fixed asset portion of a balance sheet? Multiple select question. Trademarks Capital surplus Cash and equivalents Buildings

Trademarks Buildings

______ costs change as the output of the firm changes. Multiple choice question. Depreciation Fixed Variable Overhead

Variable

According to GAAP, when is income reported? Multiple choice question. When it is first anticipated When it is earned or accrued Whenever the firm decides to report it When cash payment is received

When it is earned or accrued

Noncash items are expenses that directly affect _____ but do not directly affect ______.

net income; cash flow

Assets can be described as items that _____. are always the same amount as a firm's liabilities provide market value to the firm a firm owns generate revenue

provide market value to the firm a firm owns generate revenue

Current assets are defined as assets that can be turned into cash within ______ months. Multiple choice question. twelve eighteen six twenty-four

twelve

Most importantly, assets provide ______ to the firm. Multiple choice question. value depreciation expenses leverage

value

If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals ______. Multiple choice question. $150 $350 $200 $ 50

$ 50

If a firm's current assets are $100 and its current liabilities are $80, then its net working capital is: Multiple choice question. $100 $80 $180 $20

$20

Which one of the following is true? Cash flows can be derived from financial statements. Financial statements explicitly show cash flows. Earnings, net income, and cash flows are identical. Cash flows always exceed earnings.

Cash flows can be derived from financial statements.

Which of the following is true about the difference between the income statement and cash inflows and outflows? Multiple select question. Depreciation expense is equal to the installment payment on the equipment being depreciated, so it is a cash outflow. 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. Income taxes are often deferred, so the amount on the income statement may not represent the amount of the check to the IRS. Sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period.

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. Income taxes are often deferred, so the amount on the income statement may not represent the amount of the check to the IRS. Sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period.

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

False

The common set of standards and procedures by which audited financial statements are prepared are called _____. Multiple choice question. GAAP SOX FINRA ICFRS

GAAP

Which of the following are period costs? Multiple select question. Cost of goods sold General expenses Selling costs Administrative expenses

General expenses Selling costs Administrative expenses

What does GAAP stand for? Multiple choice question. Greatly appreciated accounting procedures General accounting and auditing procedures Generally accepted accounting principles Generally accepted auditing principles

Generally accepted accounting principles

The use of financial leverage can: Multiple select question. Decrease the noncash expenses incurred by the firm. Greatly magnify both gains and losses. Increase the potential reward for investors. Increase the chance of financial distress and business failure.

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

In recent years, U.S. accounting standards have become more closely tied to _____. Multiple choice question. IFRS NYS GRET EnRx

IFRS

Assets are listed on a balance sheet in which order? Multiple choice question. In no particular order In order of increasing liquidity In order of account value from smallest to largest In order of decreasing liquidity

In order of decreasing liquidity

How are assets on a balance sheet listed? Multiple choice question. In order by date of acquisition In random order In order of increasing liquidity In order of decreasing liquidity

In order of decreasing liquidity

Why is it important for accounting standards to become more comparable across countries? Multiple choice question. U.S. companies refuse to use GAAP. U.S. accounting standards are not moving toward IFRS. Increasing globalization of business makes it necessary to understand financial reporting by firms that follow other accounting standards. Accounting firms in countries across the world must use US GAAP because it is the only accounting method used by accountants in other countries.

Increasing globalization of business makes it necessary to understand financial reporting by firms that follow other accounting standards.

A long-term liability represents a(n) _____. obligation of the firm lasting over 1 month debt that is not due in the coming year obligation of the firm lasting over 90 days debt that must be paid within the year

debt that is not due in the coming year

The more debt a firm has, the greater its: Multiple choice question. degree of operating leverage retained earnings degree of financial leverage book value

degree of financial leverage

Which of the following do not directly affect cash flow? Multiple choice question. Depreciation Interest payments Cash sales Wages

depreciation

Which of the following is an example of a noncash item on an income statement? Multiple choice question. Retained earnings Depreciation Dividends Costs

depreciation

Accounting profit ____ cash flow. Multiple choice question. is always larger than differs from is identical to

differs

Depreciation is the accountant's estimate of the cost of ______ used up in the production process. Multiple choice question. cash equipment labor inventory

equipment

The matching principle of GAAP requires revenues be matched with _____. Multiple choice question. expenses cash receipts retained earnings net income

expenses

The corporate tax code is _____. Multiple choice question. easy as pie extremely complicated fairly straightforward

extremely complicated

Which one of these is the most illiquid? Multiple choice question. Marketable securities Reason: Marketable securities are almost as liquid as cash. Cash Reason: Cash is the most liquid among the choices. Fixed assets Inventory Reason: Inventory is the least liquid among current assets, but is much more liquid than fix

fixed assets

Costs that do not change in the short run arise because of ______. Multiple choice question. variable commitments unknown future events unfunded commitments fixed commitments

fixed commitments

The passage of the Tax Cuts and Jobs Act of 2017 was to make the federal corporate tax rate in the United States a _____ tax. Multiple choice question. residual flat progressive regressive

flat

If you think of the balance sheets as a snapshot, then the _____ can be thought of as a video covering the period between before and after pictures. Multiple choice question. cash flow statement income statement mortgage statement

income statement

The purpose of a(n) ______ is to measure performance over a set period of time. Multiple choice question. prospectus income statement statement of cash flows balance sheet

income statement

A decrease in depreciation expense ______ earnings per share. Multiple choice question. decreases does not affect increases

increase

Period costs are the costs that are allocated to a specific ______. Multiple choice question. production run type of service product interval of time

interval of time

Which of the following is a current asset? Multiple choice question. Inventory Equipment Accrued expense Accounts payable

inventory

The shareholders are the _____ in line to receive payment when a firm is forced to sell assets to pay off debt. Multiple choice question. first last second third

last

Holding too many liquid assets can be harmful for a firm because such assets are generally _____. Multiple choice question. too profitable more profitable than less liquid assets less profitable

less profitable

__________ refers to the speed and ease with which an asset can be converted to cash.

liquidity

For financial managers, the accounting value of the stock is not an especially important concern; it is the __________ value that matters.

market

The price at which willing buyers and sellers would trade is called ____ value. Multiple choice question. accounting book carrying market

market

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. Multiple choice question. matching historic tax revenue

matching

Net working capital equals current assets ______ current liabilities. Multiple choice question. divided by Reason: Net working capital equals current assets minus current liabilities. minus times Reason: Net working capital equals current assets minus current liabilities. plus Reason: Net working capital equals current assets minus current liabilities.

minus

The accounting equation shows that stockholders' equity equals assets ______ liabilities. Multiple choice question. minus times divided by plus

minus

______ income is money earned after interest and taxes. Multiple choice question. Gross Net Non-operating Operating

net

Book value of assets is generally: Multiple choice question. not what the assets are actually worth greater than market value of the assets the same as market value of the assets changes with the market value of the assets

not what the assets are actually worth

An income statement reflects activity that occurs _____ while a balance sheet reflects values ____. Multiple choice question. over a period of time; as of a specific date on a specific date; as of the same date on a specific date; that occur over a period of time over a period of time; over the same period of time

over a period of time; as of a specific date

The difference between the total assets and total liabilities is shareholders' or _______________ equity.

owners'

Net working capital is ______________ (negative/positive) when current assets exceed current liabilities.

positive

______________ costs include such things as raw materials, direct labor expense, and manufacturing overhead.

product

Accountants usually distinguish between _____ costs and _____ costs.

product; period

In general, revenue should be recognized at the time of _____________, which is not necessarily the same time as the money is collected.

sale

The last (residual) claimants to be paid by a firm are the ______. Multiple choice question. creditors stockholders bondholders employees

stockholders

When looking at the income statement, the financial manager should keep in mind GAAP, cash versus noncash items, and _____________ and costs.

time

What should you keep in mind when examining an income statement? Multiple select question. time and costs GAAP asset composition Reason: Assets appear on the balance sheet, not the income statement. cash versus non-cash items

time and costs GAAP cash versus non-cash items

True of false: Long-term liabilities are not due in the current year (from the date of the balance sheet).

true

True or false: Taxes can be a large cash outflow for a corporation.

true

In the long run, all costs are _____. Multiple choice question. operational variable fixed redundant

variable

Another name for short-term financial management is ___ management. Multiple choice question. current asset total earnings working capital current liability

working capital

Which of these items do NOT appear on a balance sheet? Multiple select question. Knowledge that has no patent Accounts Payable Favorable economic conditions Good management

Knowledge that has no patent Favorable economic conditions Good management

Whose responsibility is it to create value for a firm? Multiple choice question. Stakeholders Management Shareholders Legislators

Management

A balance sheet reflects a firm's ______ value on a particular date. fundamental market accounting hidden

accounting

In the long run, ________ are variable. Multiple choice question. some costs no costs all costs

all costs

Noncash items do not affect _____. Multiple choice question. cash flow earnings per share retained earnings net income

cash flow

What does stockholders' equity represent? A fixed claim against the firm's liabilities A residual claim against the firm's liabilities (The book value of the firm's assets less the book value of its current assets.) A claim against all of the firm's assets 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.)

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.)

What does stockholders' equity represent? Multiple choice question. A fixed claim against the firm's liabilities A residual claim against the firm's liabilities (The book value of the firm's assets less the book value of its current assets.) A claim against all of the firm's assets 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.)

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.)

What is depreciation? Multiple choice question. A systematic cash contribution to a company's checking account to fund a new asset A systematic expensing of an asset based on the asset's estimated life The market value of an asset minus the asset's book value The current market value of an asset minus the asset's initial cost

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

What does a balance sheet reflect about a firm? Income over a specified time period Earnings per share over a specified time period Accounting value on a specific date Economic value at a specific point in time

Accounting value on a specific date

When a customer purchases an item on credit, the purchase amount is recorded by the seller in which one of these accounts? Multiple choice question. Cash Accounts payable Accounts receivable Accrued expense

Accounts receivable

In March, Al's paid cash for a video game for the store's inventory. In April, it sold the game on credit. In May, Al's received payment for the sale. Based on matching principle, the expense should be recorded in ___ and the income should be reported in ____. Multiple choice question. April; May March, May March; March April; April

April; April

Which one of these is a correct version of the balance sheet equation? Multiple choice question. Stockholders' equity = Assets + Liabilities Liabilities = Assets + Stockholders' equity Assets = Liabilities + Stockholders' equity Assets = Stockholders' equity - Liabilities

Assets = Liabilities + Stockholders' equity

Which of the following are fixed assets? Multiple select question. Buildings Land Accounts receivable Plant

Buildings Land Plant

Why is positive net working capital important? Multiple choice question. It means the firm should have sufficient cash to meet its current obligations. It allows the firm to become debt-free. It results in the lowest possible tax bill. It results in the highest retained earnings possible.

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

What is a primary concern for a bank lending funds to a business for the short term? Multiple choice question. Depreciation expense Liquidity Competition in the industry Retained earnings

Liquidity

Which of these are generally considered to be short-run fixed costs? Multiple select question. Management salaries Property taxes Income taxes Rent payments for a warehouse Management bonuses

Management salaries Property taxes Rent payments for a warehouse

Which one of the following complies with GAAP? Multiple choice question. Matching revenues with cash flows Matching cash flows, revenues, and expenses Matching revenues with expenses Matching expenses with cash flows

Matching revenues with expenses

Which of the following are classified as liabilities on a firm's balance sheet? Notes payable Accounts payable Inventory Accounts receivable

Notes payable Accounts payable

Which of the following will be found in the liabilities section of a firm's balance sheet? Notes payable Inventory Preferred stock issued by the firm Long-term bonds issued by the firm

Notes payable Long-term bonds issued by the firm

What are two classifications of costs used by financial accountants? Multiple select question. Product costs Period costs Variable costs Reason: Financial accountants classify costs as product and period costs. Fixed costs Reason: Financial accountants classify costs as product and period costs.

Product costs Period costs

Which are true concerning product costs? Multiple select question. Product costs contain both fixed and variable costs. Product costs are reported as costs of goods sold. Product costs contain selling expenses. Reason: Selling expenses are period costs. Product costs are reported as administrative expenses. Reason: Administrative expenses are period costs.

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

Which of the following is a variable cost in the short run? Multiple choice question. Raw materials used in production. Bond interest Reason: Bond interest is a fixed cost. Property taxes Reason: Property taxes are a fixed cost. Monthly rent on the plant. Reason: Monthly rent is a fixed cost.

Raw materials used in production.

Which of the following are examples of short-run fixed costs? Multiple select question. Material costs Wages to labors Rent Bond interest

Rent Bond interest

How is income defined? Multiple choice question. Retained earnings minus dividends Change in cash and equivalents Revenue minus expenses Revenue plus expenses

Revenue minus expenses

Which is true of taxes? Multiple choice question. They are typically a very small expenditure for the firm. Firms can select to pay them in advance or in arrears, with no penalties or benefits. They are not mandatory for most small firms due to low earnings. They can be one of the largest cash outflows a firm experiences.

They can be one of the largest cash outflows a firm experiences.

What is the purpose of the income statement? Multiple choice question. To show the accumulation of assets and liabilities To identify the amount of cash spent on various expenses To identify the cash inflows and outflows To measure performance over a set period of time

To measure performance over a set period of time

When is revenue recognized on an income statement? Multiple select question. When the earnings process is virtually completed Only when cash has been received for the sale When the value of an exchange of goods or services can be reliably determined After the related expenses are paid in full

When the earnings process is virtually completed When the value of an exchange of goods or services can be reliably determined

A supplier may look at the size of _____ to see how promptly the firm pays its bills. Multiple choice question. accounts receivable depreciation fixed assets accounts payable

accounts payable

The short run is ______. Multiple choice question. defined as six months defined as one year an imprecise period of time defined as one month

an imprecise period of time

Liquidity refers to the ease of changing _____. Multiple choice question. assets to cash liabilities to assets cash to liabilities cash in to other assets

assets to cash

The fact that the balance sheets are listed at _____ means that there is no necessary connection between the total assets and the value of the firm. Multiple choice question. at cost at market value in order of liquidity at reduced value

at cost

Residual value is the amount left over after paying ________________. Multiple select question. bondholders preferred stockholders accounts receivable accounts payable other debt holders common shareholders

bondholders accounts payable other debt holders

On the balance sheet, assets are listed at their _____ value. Multiple choice question. book market estimated economic

book

Under GAAP, U.S. firms must carry assets at: Multiple choice question. book value market value fair value economic value

book value

Under GAAP, U.S. firms must carry assets at: Multiple choice question. fair value market value economic value book value

book value

The short run is a period when there are ______ costs. Multiple choice question. only fixed costs only variable costs both fixed and variable only cash

both fixed and variable