Finance Chapter 2
Ending net fixed assets minus beginning net fixed assets depreciation equals net investment in fixed assets.
plus
What is the purpose of the income statement?
to measure performance over a set period of time
Which of these questions can be answered by reviewing a firm's balance sheet?
-How much debt is used to finance the firm? -What is the total amount of assets the firm owns?
According to GAAP, when is revenue recognized on an income statement?
-When the value of an exchange of goods or services is known or reliably determined -When the earnings process is virtually completed
What does shareholders' equity represent?
A residual claim against the firm's total assets.
The cash flow identity states that cash flow from assets equals cash flows to ____.
creditors and stockholders
For financial decision-making purposes, the most important tax rate is the ______ tax rate.
marginal
The ______ tax rate is the tax rate paid on the next dollar of income.
marginal
The price at which willing buyers and sellers would trade is called ______ value.
market
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 net investment in fixed assets.
plus
Assets can be categorized as (select all that are appropriate)
-fixed and variable assets -tangible and intangible assets -current and fixed assets
Under GAAP, assets are generally carried on a firm's balance sheet at ________.
-historical cost -book value
For a mature firm, operating cash flow:
-is usually positive -is a sign of trouble if negative over a long period of time
Long-term liabilities represent obligations of the firm lasting over _____.
1 year
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
Which one of these is considered to be the most liquid?
Accounts receivable
Which of the following is the balance sheet equation?
Assets equal liabilities plus stockholders' equity.
Long-term liabilities are not due in the current year (from the date of the balance sheet). True or false
True
A balance sheet reflects a firm's:
accounting value on a specific date
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
Net earnings refers to income earned ______.
after interest and taxes
In the long-run, costs may be considered as ________.
all variable
In finance, the value of a firm depends on its ability to generate ______.
cash flows
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 non-cash item on an income statement?
depreciation
When a firm smooths earnings to please investors, it is called ________.
earnings management
The GAAP matching principle requires revenues to be matched with:
expenses
Non-cash items are ______ that ____ cash flow.
expenses; do not directly affect
Which of the following is NOT a component of cash flow from assets?
financing expenses
Costs that do not change in the short run arise because of ______.
fixed commitments
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
The balance sheet identity 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
A primary reason that accounting income differs from cash flow is that an income statement contains ______.
noncash items
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.
Physical assets are termed ______________ assets.
tangible
The market value of an item is:
the cash value you'd get if you sold it
Changes in capital spending can be negative if
the firm sold more assets than it purchased
True or false: Dividends paid minus net new equity raised equals cash flow to stockholders.
true
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
Current assets are defined as assets that can be turned into cash within ______ months.
twelve
Free cash flow is better described as ____.
total distributable cash flow
The short run is ______.
an imprecise period of time
Net working capital will be negative when current assets ______ current liabilities.
are less than
he cash flow identity states that cash flows from ______ should equal cash flows to creditors and equity investors.
assets
Shareholders' equity equals ________________.
assets minus liabilities
U.S. corporations pay tax at a rate of _______________ percent
21
Cash flow refers to _____.
the difference between the number of dollars that came in and the number that went out
Liquidity refers to the ease of changing _____.
assets to cash
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
