SB chapter 2
the common set of standards and procedures by which audited financial statements are prepared are called
GAAP
residual value is the amount left over after paying
accounts payable, other debt holders and bondholders
a customer has yet to pay the bill for products purchased on credit. the seller records this debt in which balance sheet account?
accounts receivable
what are considered period costs
administrative expenses, general expense, and selling costs
what a firm owns at a given point in time?
asset
the difference between the total assets and total liabilities is shareholders equity. also called
common equity or owners equity
the cash flow identity states that cash flow from assets equals cash flows to
creditors and stockholders
the matching principle of GAAP requires revenues be matched with
expenses
costs that do not change in the short run arise because of
fixed commitments
assets can be described as items that
generate revenue, a firm owns, provide market value to the firm
on a balance sheet, total assets must always equal total liabilities plus
shareholders equity
the last (residual) claimants to be paid by a firm are the
stockholders
marginal tax rate
the tax rate paid on the next dollar of income
what is true of taxes
they can be one of the largest cash outflows a firm experiences
who is entitled to the residual value of a firms cash flow?
shareholders
matching 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
the Tax Cuts and Jobs Act of 2017 set the corporate tax rate to be ___ regardless of the level of taxable income
21%
cash flow identity reflects
a firm generates cash through its various activities. Cash flow from the firms assets equals the total of cash flow to creditors and cash flow to stockholders. Cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm.
the short run
a period when there are both fixed and variable costs
what does stockholders equity represents
a residual claim against the book value of the firms assets
in the long run
all costs are variables
examples of short-run fixed costs
bond interest and rent
on the balance sheet, assets are listed at their __ value
book
the statement of cash flow explains changes in
cash and equivalents
rank the ease 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
what should you keep in mind when examining an income statement
cash vs noncash items, GAAP, time and costs
cash flow to creditors is equal to
interest paid less net new borrowing
taxes can be a large cash flow outflow for a corporation
true
true or false, financial statements are frequently a key source of information for financial decisions
true
another name for short-term financial management is
working capital management
cash flow to stockholders equals
dividends paid minus net new equity raised
assets are listed on a balance sheet in which order?
in order of decreasing liquidity
how are assets on a balance sheet listed?
in order of decreasing liquidity
product costs
include such things as raw materials, direct labor, expense, and manufacturing overhead
increasing its noncash liquid assets will enable a firm to do which of the following?
increase its ability to avoid financial distress and to meet short-term obligations
the use of financial leverage can:
increase the potential reward for investors, greatly magnify both gains and losses, and increase the chance of financial distress and business failure
a decrease in depreciation expense ___ earnings per share
increases
why is it important for accounting standards to become more comparable across countries?
increasing globalization makes it necessary to understand financial reporting by firms that follow other accounting standards.
assets are recorded at historical cost, not market value, because
it is hard to keep up with the market value
why is positive net working capital important?
it means the firm should have sufficient cash to meet its current obligations
holding too many liquid assets can be harmful for a firm because such assets are generally
less profitable
refers to the speed and ease with which an asset can be converted to cash
liquidity
what is a primary concern for a bank lending funds to a business for the short term
liquidty
generally considered to be short-run fixed costs
management salaries, property taxes, rent payments for a warehouse
for financial managers, the accounting value of the stock is not an especially important concern; it is ___ that matters
market value
accountants usually distinguish between
product costs and period costs
a variable cost in the short-run
raw materials used in production
differences between the income statement and cash inflows/outflows?
sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period. income taxes are often deferred, so the amount on the income statement may not represent the amount of the check to the irs. Cost of raw materials purchased on credit are accounts payable rather than cash outflows until they are paid, which may be in a different period.
how is the average income tax rate computed
total tax bill/total taxable income
true or false, long-term liabilities are not due in the current year
true
when is net working capital positive?
when the current assets exceed current liabilities
what will be found in the liabilities section of a firms balance sheet?
notes payable, long-term bonds issued by the firm
liquidity refers to the ease of changing
assets to cash
what is depreciation
a systematic expensing of an asset based on the assets estimated life