FINC Ch. 2
Which of the following are classified as liabilities on a firms balance sheet?
Accounts payable Long-term debt
Which of the following is the balance sheet equation?
Assets equals liabilities plus stockholders' equity
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
Long-term liabilities represent obligations of the firm lasting over _.
1 year
What does shareholders' equity represent?
A residual claim against the firms total assets
Amounts not yet collected from customers on sales already made are called:
Accounts receivable
Liquidity refers to the ease of changing _.
Assets to cash
Which of the following are classified as fixed assets on the balance sheet?
Buildings, trademark, equipment
Rank the ease (from easiest to hardest) of turning the following assets into cash.
Cash equivalents Accounts receivable Inventory Plant and equipment
Which of the following is true:
Cash flows can be derived from financial statements.
The GAAP matching principle requires revenues to be matched with:
Expenses
True or false: Current assets plus current liabilities equals net working capital
False
True or false: Current assets plus current liabilities equals net working capital.
False
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?
Which of the following is a current asset?
Inventory
Current assets are classified as relatively _______; these assets can be converted to cash within the next 12 months.
Liquid
Who is entitled to the residual value of a firm's cash flows?
Shareholders
True or false: Long-term liabilities are not due in the current year (from the date of the balance sheet)
True
According to GAAP, when is income reported?
When it is earned or accrued
Depreciation
a systematic expensing of an asset based on the asset's estimated life
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 one of these is considered to be the most liquid?
accounts receivable
Net earnings refers to income earned ______.
after interest and taxes
In the long-run, costs may be considered as ________.
all variables
Shareholders' equity equals_.
assets - liabilities
A company's ______ tax rate is its tax bill divided by its total taxable income, and its ______ tax rate is the tax rate it pays on the next dollar of income.
average; marginal
On the balance sheet, assets are listed at their _____ value.
book
Under GAAP, assets are generally carried on a firm's balance sheet at ____.
book value and historical cost
The short run is a period when there are ______ costs.
both fixed and variable
Tax rates for propietorships, 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
Liabilities can be classified as _ or long-term.
current
The more debt a firm has, the greater its:
degree of financial leverage
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
True or false: For financial analysis, financial statements and accounting numbers are more important than cash flows.
false
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
Period costs are the costs that are allocated to a specific ______.
interval of time
For financial decision-making purposes, the most important tax rate is the ______ tax rate.
marginal
The price at which willing buyers and sellers would trade is called ______ value.
market
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
Current assets _ (plus/minus) current liabilities equals NWC.
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
Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as:
period costs
Physical assets are termed ______ assets.
tangible
The market value of an item is:
the cash value you'd get if you sold it
What is the purpose of the income statement?
to measure performance over a set period of time
Common stockholders are entitled to the difference between ______ and ________.
total assets; total liablities
______ changes as the output of the firm changes.
variable cost
U.S. corporations pay tax at a rate of ___ percent.
21
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 and equipment
What does GAAP stand for?
Generally Accepted Accounting Principles
How is the average income tax rate computed?
Total tax bill/Total taxable income
Non-cash items do not affect:
cash flow
Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm.
overstate; understate
What should you keep in mind when examining an income statement?
GAAP time and costs cash versus non-cash items
The three most important items to keep in mind when reviewing an income statement are:
GAAP, cash versus non cash items, and time and costs
True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.
false
Marginal tax rates are the most important tax rates because:
incremental cash flows are taxed at marginal tax rates financial decisions are usually based on new cash flows
In practice, accountants tend to classify costs as either ______ costs or _______ costs.
product; period
On which side of the balance sheet to liabilities appear?
right side
Stockholders' equity is always shown on the _ of the balance sheet.
right side
On a balance sheet, total assets must always equal total liabilities plus:
shareholders equity
Current assets are defined as assets that can be turned into cash within _ months.
twelve
Financial leverage refers to a firm's _________.
use of debt in its capital structure
According to the current U.S. corporate tax code, the corporate tax rate in effect for 2019 is:
21%
The last item (or "bottom line") on the income statement is typically the _________.
Net income
Liquidity has two dimensions which are the ability to:
Quickly convert assets into cash without significant loss in value
Assets can be categorized as
current and fixed assets tangible and intangible assets