Finance Mid Term Chap 2

The higher the degree of financial leverage employed by a firm, the: A. higher the probability that the firm will encounter financial distress. B. lower the amount of debt incurred. C. less debt a firm has per dollar of total assets. D. higher the number of outstanding shares of stock. E. lower the balance in accounts payable.

A. Higher the probability that the firm will encounter financial distress

Which of the following are included in current liabilities? I. note payable to a supplier in eight months II. amount due from a customer next month III. account payable to a supplier that is due next week IV. loan payable to the bank in fourteen months A. I and III only B. II and III only C. I, II, and III only D. I, III, and IV only E. I, II, III, and IV

A. I and III only

The ______ tax rate is equal to total taxes divided by total taxable income.

Average

Which one of the following is included in a firms market value but yet is excluded from the firms accounting value? A. real estate investment B. good reputation of the company C. equipment owned by the firm D. money due from a customer E. an item held by the firm for future sale

B. Good reputation of the company

14. Which of the following are current assets? I. patent II. inventory III. accounts payable IV. cash A. I and III only B. II and IV only C. I, II, and IV only D. I, II and IV only E. II, III, and IV only

B. II and IV only

Which one of the following statements related to liquidity is correct? A. Liquid assets tend to earn a high rate of return. B. Liquid assets are valuable to a firm. C. Liquid assets are defined as assets that can be sold quickly regardless of the price obtained. D. Inventory is more liquid than accounts receivable because inventory is tangible. E. Any asset that can be sold within the next year is considered liquid.

B. Liquid assets are valuable to a firm

Which one of the following accounts is the most liquid? A. inventory B. building C. accounts receivable D. equipment E. land

C. Accounts Recievable

Which one of the following statements concerning net working capital is correct? A. The lower the value of net working capital the greater the ability of a firm to meet its current obligations. B. An increase in net working capital must also increase current assets. C. Net working capital increases when inventory is sold for cash at a profit. D. Firms with equal amounts of net working capital are also equally liquid. E. Net working capital is a part of the operating cash flow.

C. Net working capital increases when inventory is sold for cash at a profit

The cash flow of a firm which is available for distribution to the firms creditor and stockholder is called:

Cash Flow from assets

The cash flow related to interest payments less any net new borrowing is called the:

Cash Flow to creditors

Net Working capital

Current Assets - Current Liability

Which one of the following represents the most liquid asset? A. $100 account receivable that is discounted and collected for $96 today B. $100 of inventory which is sold today on credit for $103 C. $100 of inventory which is discounted and sold for $97 cash today D. $100 of inventory that is sold today for $100 cash E. $100 accounts receivable that will be collected in full next week

D. $100 of inventory that is sold TODAY for $100 cash

Which one of the following statements concerning net working capital is correct? A. Net working capital increases when inventory is purchased with cash. B. Net working capital must be a positive value. C. Total assets must increase if net working capital increases. D. A decrease in the cash balance may or may not decrease net working capital. E. Net working capital is the amount of cash a firm currently has available for spending.

D. A decrease in the cash balance may or may not decrease net working capital.

Which one of the following is classified as an intangible fixed asset? A. accounts receivable B. production equipment C. building D. trademark E. inventory

D. Trademark

Cash flow to stockholders is defined as:

Dividend payments less net new equity raised

Which one of the following will increase the value of a firm's net working capital? A. using cash to pay a supplier B. depreciating an asset C. collecting an accounts receivable D. purchasing inventory on credit E. selling inventory at a profit

E. Selling inventory at a profit

Noncash items refer to:

Expenses which do not directly affect cash flow

Income Statement

Financial Statement that summarizes a firms revenue & expenses

Balance Sheet

Financial statement that shows the accounting value of a firms equity

Cash flow from assets is also known as the firms:

Free Cash Flow

The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate.

Marginal

Which terms relates to the cash flow which results from a firms ongoing, normal business activities?

Operating Cash Flow

Shareholders equity:

Represents the residual value of a firm

Generally Accepted Accounting Principles (GAAP)

Standards and procedures by which audited financial statements are prepared

The book value of a firm is:

based on historical cost