Financial Management Ch 2

Which of the following is a current asset?

Inventory

According to GAAP, when is revenue recognized on an income statement?

When the earnings process is virtually complete When the value of an exchange of goods or services is known or reliably determined

Highly liquid assets:

can be sold quickly at close to full value

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

cash flows

Assets can be categorized as

current and fixed assets tangible and intangible assets

Net working capital equals ___.

current assets minus current liabilities

The more debt a firm has, the greater its:

degree of financial leverage

costs that do not change in the short run arise because of ___.

fixed commitments

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

marginal tax rate

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

Changes in capital spending can be negative if

the firm sold more assets than it purchased

Free cash flow is better described as ___.

total distributable cash flow

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

Both fixed and variable

What is the following items is not readily available in financial statements and can only be calculated from the information available in financial statements?

The firms actual cash flows

Net working capital will be negative when current assets ____ current liabilities

are less than

Rank the ease (from easiest to hardest) of turning the following assets into cash.

Cash equivalents accounts receivable inventory plant and equipment

What should you keep in mind when examining and income statement?

Cash versus non-cash items time and costs GAAP

Marginal tax rates are the most important tax rates because:

Financial decisions are usually based on new cash flows Incremental cash flows are taxed at marginal tax rates

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

Net income

What is the purpose of the income statement?

To measure performance over a set period of time.

Cash flow to stockholders is defined as:

dividends paid minus net new equity raised

Cash flow to creditors is defined as:

interest paid minus net new borrowing

Which of the following are classified as liabilities on a firm's balance sheet?

long-term debt accounts payable

The price at which willing buyers and sellers would trade is called ___ value.

market

The balance sheet identity shows the stockholders' equity equals assets ___ liabilities

minus

Shareholders equity is equal to:

net fixed assets minus long-term debt plus net working capital

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

operating cash flow capital spending change in net working capital

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

pay operating costs

If a firm's current assets are $100 and its current liabilities are $80, then its net working capital is?

$20

Net working capital is defined as:

Current assets minus current liabilities

On the balance sheet, assets are listed at their ____ value.

book

Non-cash items do not affect ___.

Cash flow

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

marginal

Cash flow from assets is defined as:

operating cash flow minus the change in net working capital minus net capital spending

A negative cash flow to stockholders indicates a firm:

received more from selling stock than it paid out to shareholders

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

assets

Under GAAP, assets are generally carried on the firm's balance sheet at___.

book value historical cost

According to the originators of the current U.S. corporate tax code, the only rates are:

35% 15% 25% 34%

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

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

Financing expenses

What does GAAP stand for?

Generally Accepted Accounting Principles

Common stockholders are entitled to the difference between ___ and ___.

Total assets: total liabilities

What does stockholders' equity represent?

A residual claim against the firm's assets

If the Federal marginal tax rate is 34%, the state marginal tax rate is 5%, and the local marginal tax bracket is 1%, how much money will a corporation keep if it makes another $1,000,000 in taxable income?

$600,000

Blythe Industries reports the following account balances: inventory of $417,600, equipment of $2,028,300, accounts payable of $224,7000, cash of $51,900 and accounts receivable of $313,900. What is the amount of the current assets?

$783,400 x = 417600 + 51900 + 313900

If dividends are $100, stock sold is $10, and stock repurchased in $25, what is the cash flow to stockholders?

$85 Cash flow to stockholders = dividends paid - net new equity

Which of the following is shown on the left hand side of the balance sheet?

Assets

Which of the following is the balance sheet equation?

Assets equals liabilities plus stockholders equity

True or False: Operating cash flow does not include depreciation or interest

True

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

depreciation

True or False: Free cash flow is very similar to cash flow from assets.

True

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?

For the past year LP Gas, Inc., had cash flows from assets of $38,100 of which $21,500 flowed to the firm's stockholders. The interest paid was $2,300. What is the amount of the net new borrowing?

$-14,300 Cash flows from assets = cash flows to stockholders + net new borrowing 38100 = 21500 + (2300 - x) x = -14300

Rusty Antiques has a marginal tax rate of 39 percent and an average tax rate of 26.9 percent. If the firm owes $37,265 in taxes, how much taxable income did it earn?

$138,532 x = 37265/.269

If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the change in capital spending is ___.

$50

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

Cash flow to stockholders equals____.

Dividends paid minus net new equity raised

When a firm smooths earning to please investors, it is called____.

Earning management

Depreciation is the accountant's estimate of the cost of ____ used in the production process matched with the benefits produced from owning it.

Equipment fixed assets

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

False

Cash flow to creditors equals:

Interest paid - net new borrowing

The market value

of an asset tends to provide a better guide to the actual worth of an asset than does the book value.

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value

If interest paid is $100 and net new borrowing is $150, then cash flow to creditors equals:

$-50 Cash flow paid to creditors = interest paid - net new borrowing

Long-term liabilities represent obligations of the firm lasting over...

1 year