CH. 2: FINANCIAL STATEMENTS, TAXES, AND CASH FLOW

If your tax bill is $200 and your taxable income is $2,000, then your average tax rate is ________ percent.

10, ($200/$2,000)

In the long run, all costs are _______

variable

The U.S. tax rate becomes a flat-rate tax in practice at approximately what corporate income level?

$0

Given the tax rates of 15% on income from $0 to $50,000, 25% on income from $50,001 to $75,000, and 34% on income from $75,001 to $100,000, approximately how much tax would a company pay on a taxable income of $60,000?

$10,000

If you make an extra $1000 in income and your marginal tax rate is 30 percent while your average tax rate is 20 percent, then you will pay an extra _______ in taxes.

$300

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

$50, ($100-$60+$10)

If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals ________

$50, ($200-$150)

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?

Increasing its non-cash liquid assets will enable a firm to do which of the following?

-increase its ability to avoid financial distress -increase its ability to meet short-term obligations

The use of financial leverage can:

-increase the chance of financial distress and business failure -greatly magnify both gains and losses -increase the potential reward for investors

The Tax Cuts and Jobs Act of 2017 set the corporate tax rate to be _______ regardless of the level of taxable income.

21%

What does stockholders' equity represent?

A residual claim against the book value of the firm's assets. (The book value of the firm's assets less the book value of its liabilities)

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

Accounts payable, Notes payable

Which one of these is a correct version of the balance sheet equation?

Assets = Liabilities + Stockholders' equity

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

False

True or False: Operating cash flow includes capital spending and working capital requirements.

False

True or False: the corporate tax code is simplistic and makes good economic sense.

False

How are assets on a balance sheet listed?

In order of decreasing liquidity

Why is it important for accounting standards to become more comparable across countries?

Increasing globalization of business makes it necessary to understand financial reporting by firms that follow other accounting standards

Why is positive net working capital important?

It means the firm should have sufficient cash to meet its current obligations

What is a primary concern for a bank lending funds to a business for the short term?

Liquidity

Long-term liabilities are not due in the current year (from the date of the balance sheet).

True

True or False: Taxes can be a large cash outflow for a corporation

Ture.

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

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

assets

Liquidity refers to the ease of changing _________

assets to cash

On the balance sheet, assets are listed at their _______ value

book

The short tun is a period when there are _______ costs.

both fixed and variable

The statement of cash flow explains changes in ________

cash and equivalents

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

cash equivalents, accounts receivable, inventory, plant and equipment

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

cash flows

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

cash versus non-cash items, time and costs, GAAP

Net working capital equals________

current assets minus current liabilities

The more debt a firm has, the greater its:

degree of financial leverage

Which of the following do not directly affect cash flow?

depreciation

Which of the following is a non-cash item on an income statement?

depreciation

Cash flow to stockholders equals _________

dividends paid minus net new equity raised

Depreciation is the accountant's estimate of the cost of ________ used up in the production process.

equipment

Non-cash items are _______ that _______ cash flow

expenses; do not directly affect

Which of these items do NOT appear on a balance sheet?

favorable economic conditions, knowledge that has no patent, good management

Costs that do not change in the short run arise because of ________

fixed commitments

What does GAAP stand for?

generally accepted accounting principles

Assets can be described as items that:

generate revenue, a firm owns, provide market value to the firm

Period costs are the costs that are allocated to a specific ________

interval of time

Assets are recorded at historical cost, not market value, because:

it is hard to keep up with the market value

Changes in capital spending can be negative when the acquisition of fixed assets is ________ the sale of fixed assets.

less than

Whose responsibility is it to create value for a firm?

management

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

Which one of the following complies with GAAP?

matching revenues with expenses

An income statement reflects activity that occurs ______ while a balance sheet reflects values ________

over a period of time; as of a specific date

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

pay operating costs

What are two classifications of costs used by financial accountants?

period costs, product costs

Residual value is the amount left over after paying ________

preferred stockholders, accounts payable, other debt holders, bondholders

Which of these are generally considered to be short-run fixed costs?

rent payments for a warehouse, property taxes, management salaries

How is income defined?

revenue minus expenses

Who is entitled to the residual value of a firm's cash flows?

shareholders

The last (residual) claimants to be paid off by a firm are the _______

stockholders

Under a flat-rate tax, all income levels are taxed at _______

the same average rate, the same marginal rate

Which of the following is true about the U.S. modified flat-rate tax system?

the tax rate is flat at all income levels.

What is the purpose of the income statement?

to measure performance over a set period of time

Free cash flow is better described as _________

total distributable cash flow

Which of the following are included in the fixed asset portion of a balance sheet?

trademarks and accumulated depreciation

_________ costs change as the output of the firm changes

variable

If the Federal marginal tax bracket is 21%, the state marginal tax bracket 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?

$730,000

Suppose your company's taxable income was $235,000 in 2017. Using Table 2.3, calculate the income tax due, the average tax rate, and the marginal tax rate.

$74,900 ; 32% ; 39%

If a firm's net working capital is $120 in 2014 and $100 in 2013, then the change in net working capital is:

+$20

Which are true concerning product costs?

-product costs are reported as costs of goods sold -product costs contain both fixed and variable costs

Which of the following are current assets?

Accounts receivable, inventory

When is revenue recognized on an income statement?

-When the value of an exchange of goods or services can be reliably determined -When the earnings process is virtually completed

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

-$50, ($100-$150)

The cash flow identity reflects the fact that

-a firm generates cash through its various activities -cash is either used to produce the product or service, pay creditors, or payout to the owners of the firm -cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders

Which of the following is true about the difference between the income statement and cash inflows and outflows?

-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 -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

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

In March, Al's paid cash for a video game for the store's inventory. In April, it sold the game on credit. In May, Al's received payment for the sale. The expense should be recorded in ________ and the income should be reported in __________.

April; April

The _________ tax rate is the tax rate paid on the next dollar of income

marginal

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