Chapter 2 - BF

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 (.15)(50,000)+(.25)(10,000)= $10,000

If you make an extra $1,000 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 Additional tax = (.30)($1,000)

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 $60 - $10 = $50 + $50 = $100

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

+$20 $120 - $100 = $20

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

-Accumulated depreciation -Trademarks (intangible)

Which of the following are examples of short-run fixed costs?

-Bond interest -Rent

Residual value is the amount left over after paying _________

-Bondholders -Preferred stockholders -Accounts payable -Other debt holders

Which of these items are NOT shown on a balance sheet?

-Favorable economic conditions -Knowledge that has no patent -Good management

The use of financial leverage can:

-Increase the potential reward for investors -Greatly magnify both gains and losses -Increase the change of financial distress and business failure

Which of the following are current assets?

-Inventory -Accounts receivable

Which of the following are fixed assets?

-Land -Plant -Patents

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

-Management salaries -Property taxes -Rent payments for a warehouse (at least for the life of the lease.)

Which of the following will be found in the liabilities section of a firm's balance sheet?

-Notes payable -Long-term bonds

Which are true concerning product costs?

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

Which of the following are period costs?

-Selling costs -General expenses -Administrative expenses

The cash flow identity reflects the fact that

-cash flow form the firm's assets equals the cash flow paid to suppliers of capital to the firm -cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm -a firm generates cash through its various activities

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

Assets can be described as items that:

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

The short run for a firm is the period of time during which ___________

-some costs are fixed -output can vary

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

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

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

1 Cash equivalents 2 Accounts receivable 3 Inventory 4 Plant and equipment

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

1 year

If you earn an extra $100 of taxable income this year and owe taxes of $34 on that income, then your marginal tax rate is _______ percent

34

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.)

A balance sheet reflects a firm's ________ value on a particular date.

Accounting

When a customer purchases an item on credit, the purchase amount is recorded by the seller in which on of these accounts?

Accounts receivable

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

Assets = Liabilities + Stockholders' equity

Assets are listed on a balance sheet in which order?

In increasing order of time to convert them into cash

Why is positive net working capital important?

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

Since new cash flows are taxed at _________ tax rates, those tax rates are the most important.

Marginal

Which one of the following complies with GAAP?

Matching revenues with expenses

How is income defined?

Revenue minus expenses

_________ costs change as the output of the firm changes.

Variable

Liquidity refers to the ease of changing __________

assets to cash

The cash flow identity states that cash flow from assets equals cash flows to ______

creditors and stockholder

Net working capital plus current liabilities equal __________

current assets

The more debt a firm has, the greater its:

degree of financial leverage

Accounting profit _______ cash flow

differs from (because an income statement contains noncash items)

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

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

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

less than

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

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

pay operating costs

An official accounting statement that helps to explain the change in cash and cash equivalents is called the __________

statement of cash flows

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

stockholders

In the long run, all costs are _________

variable

When is revenue recognized on an income statement?

-When the exchange of goods or services is completed -When the earnings process is virtually completed

Which of the following is true about the difference between the income statement and cash inflows and 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 material purchased on credit are accounts payable rather than cash outflows until they are paid, which may be in a different period.

What does GAAP stand for?

Generally accepted accounting principles