Finance EXAM 1- Chapter 2
Categories of assets: (2)
1. Current and fixed 2. Tangible and intangible
When a firm smooths earnings to please investors, its called:
Earnings management
Non-cash items are ____________ that __________ cash flow.
expenses that do not directly affect
Buildings patents trademarks these are considered what on the balance sheet?
fixed assets
How to classify costs: (2)
1. Period costs 2. Product costs
What are components of cash flow from assets? (3)
1. capital spending 2. operating cash flow 3. change in net working capital
Components of cash flow from assets: (3)
1. change in net working capital 2. operating cash flow 3. capital spending
Non-cash items affect: (3)
1. earnings per share 2. net income 3. retained earnings
Marginal tax rates are the most important tax rates because: (2)
1. incremental cash flows are taxed at marginal tax rates 2. financial decisions are based on new cash flows
"How much debt is used to finance the firm?" "What is the total amount of assets the firm owns?" These questions are answered using which financial statement?
Balance sheet
Net capital spending =
Change in net fixed assets + depreciation
T/F For financial analysis, financial statements and accounting numbers are more important than cash flows.
False financial analysis relies on cash flows, not accounting or book numbers.
GAAP stands for:
Generally Accepted Accounting Principles
T/F Free cash flow is very similar to cash flow from assets
True cash flow from assets is also known as free cash flow *there is some variation in the calculation
What does stockholders' equity represent?
a residual claim against the firms assets
Net working capital equals
current assets -- (minus) current liabilities
the more debt a firm has the greater its:
degree of financial leverage
Cash flow to stockholders equals:
dividends paid -- (minus) new net equity raised
The __________ tax rate is the tax rate paid on the next dollar of income.
marginal
The price at which buyers and sellers would trade is called:
market value
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.
matching
free cash flow is better described as:
total distributable cash flow
Things you should keep in mind when examining an income statement: (3)
1. cash versus non cash items 2. time and costs 3. GAAP
For a mature firm, the operating cash flow: (2)
1. is usually positive 2. is a sign of trouble if negative for a long period of time
When is revenue recognized on the income statement? (2)
1. when the exchange of goods or services is completed 2. When the earnings process is virtually completed
U.S. Corporate tax code- the only rates are:
15% 25% 34% 35%
T/F Operating cash flow does not include depreciation or interest
True
Total taxes paid divided by taxable income is ____________ tax rate
average tax rate
On the balance sheet, assets are listed at their _______ value
book
In finance, the value of a firm depends on its ability to generate:
cash flows
The cash flow identity states that cash flow from assets equals cash flow from ___________ and ______________
creditors and stockholders
Depreciation is the accountants estimate of the cost of ________ used in production process matched with benefits produced from owning it.
fixed assets ex- equipment
The purpose of _____________ is to measure performance over a set period of time.
income statement
least liquid current asset is considered to be:
inventory
Amount of ta payable on the next dollar earned is ______________ tax rate
marginal
The last item (bottom line) on the income statement is typically the ________________
net income
__________ ___________ are the costs that are allocated to a specific interval of time.
period costs
The most important item that can be extracted from financial statements
the firms actual cash flows
_______ costs change as the output of the firm changes.
variable
liquidity has the ability to:
quickly convert assets into cash without significant loss in value
