Finance 3010 Ch.2

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

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

earnings management

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 equipment

True or false: Current assets plus current liabilities equals net working capital.

False

True or false: Ending net fixed assets plus beginning net fixed assets minus depreciation equals net investment in fixed assets.

False

How is the average income tax rate computed?

Total tax bill/Total taxable income

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

True

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

True

Net income refers to income earned

after interest and taxes

The short run is

an imprecise period of time

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

assets

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

both fixed and variable

Firms that compile financial statements according to GAAP:

can still manipulate their earnings to some degree.

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

cash flows

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

Operating cash flow

is a sign of trouble if negative over a long period of time tells us whether or not a firm's cash inflows from its operations are sufficient to cover its everyday cash outflows

Current assets are classified as relatively ______; these assets can be converted to cash within the next 12 months.

liquid

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

marginal

The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the:

marginal tax rate

Current assets (plus/minus) current liabilities equals NWC.

minus

The last item (or "bottom line") on the income statement is typically the

net income

The cash flow that results from the firm's day-to-day activities of producing and selling is called:

operating cash flow

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

operating cash flow capital spending change in net working capital

Earnings management is a controversial practice in which corporations ______ or ______ their earnings to "smooth out" dips and surges and keep investors calm.

overstate or understate

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

pay everyday cash outflows.

Ending net fixed assets minus beginning net fixed assets ______ depreciation equals net investment in fixed assets.

plus

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

plus depreciation

Physical assets are termed ______ assets.

tangible

On which side of the balance sheet do liabilities appear?

the right-hand side

Financial leverage:

the use of debt in a firm's capital structure

Shareholders' equity equals

total assets - total liabilities

Free cash flow is better described as

total distributable cash flow

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

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

1 year

For the year, Movers United has net income of $31,800, net new equity of $7,500, and an addition to retained earnings of $24,200. What is the amount of the dividends paid?

100 (net income - addition to retained earnings, find difference) iffy

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

12

LaMarcus Photography, a sole proprietorship owes $190,874 in taxes on a taxable income of $608,606. The company has determined that it will owe $195,246 in tax if its taxable income rises to $620,424. What is the marginal tax rate at this level of income?

32% iffy

Prospect Avenue Nursery has sales of $318,400, costs of $199,400, depreciation expense of $28,600, interest expense of $1,100, and a tax rate of 21 percent. The firm paid out $23,400 in dividends. What is the addition to retained earnings?

47147 (net income - cash dividends) iffy

Bolivar Farms had equity of $58,900 at the beginning of the year. During the year, the company earned net income of $8,200 and paid $2,500 in dividends. Also during the year, the company repurchased $3,500 of stock from one of its shareholders. What is the value of the owners' equity at year end?

61100 iffy

St. Louis Warehouse has net working capital of $42,400, total assets of $519,300, and net fixed assets of $380,200. What is the value of the current liabilities?

96700 (assets - liabilities) iffy

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 = liabilities + stockholders' equity.

A firm has earnings before interest and taxes of $27,130, net income of $16,220, and taxes of $5,450 for the year. While the firm paid out $31,600 to pay off existing debt it then later borrowed $42,000. What is the amount of the cash flow to creditors?

-$4940 iffy

According to GAAP, when is income reported?

When it is earned or accrued

Liquidity refers to the ease of changing

assets to cash

Noncash items do not affect

cash flow

Which one of the following has nearly the same meaning as free cash flow?

cash flow from assets

Assets can be categorized as:

current and fixed tangible and intangible

The more debt a firm has, the greater its:

degree of financial leverage

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

depreciation

Which of the following is an example of a noncash item on an income statement?

depreciation

Cash flow to stockholders equals

dividends paid minus net new equity raised

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

equipment buildings trademark

Financial leverage refers to a firm's

use of debt in its capital structure

changes as the output of the firm changes.

variable cost

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

financing expenses

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value.

Stockholders' equity is always shown on the ______ of the balance sheet.

right side

Cash flow refers to

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

According to the current U.S. corporate tax code, the corporate tax rate in effect for 2021 is ______ percent.

21

True or false: Interest paid minus net new borrowing equals cash flow to creditors.

True

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

True

Tax rates for proprietorships, partnerships, and LLCs ______ with the passage of the Tax Cuts and Jobs Act of 2017.

changed

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

cost of goods sold

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

creditors and stockholders

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

fixed commitments

On a balance sheet, total assets must always equal total liabilities plus:

shareholders' equity

What does shareholders' equity represent?

a residual claim against the firm's total assets