Chapter 2 business finance (actually ch 2)

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

- Cash versus non-cash items - Time and costs - GAAP

For a mature firm, operating cash flow:

1) is a sign of trouble if negative over a long period of time 2) is usually positive

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

paid minus net new equity raised equals cash flow to stockholders.

Dividends

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

Financing expenses

The three most important items to keep in mind when reviewing an income statement are:

GAAP, cash versus noncash items, and time and costs

What does GAAP stand for?

Generally Accepted Accounting Principles

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?

According to GAAP, when is income reported?

When it is earned or accrued

Net capital spending is negative when:

a firm sold off more assets than it purchased

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

accounts payable long-term debt

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

both fixed and variable

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

cash flows

The cash flow identity states that cash flow from assets equals cash flows to ____.

creditors and stockholders

Liabilities can be classified as _______ or long-term.

current

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

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

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

net income

Non-cash items are expenses that directly affect _____ but do not directly affect ______.

net income; cash flow

The cash flow that results from the firm's day-to-day activities of producing and selling is called:

operating cash flow

Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as:

period costs

Ending net fixed assets minus beginning net fixed assets _______ depreciation equals net investment in fixed assets.

plus

Physical assets are termed ______________ assets.

tangible

Changes in capital spending can be negative if

the firm sold more assets than it purchased

On which side of the balance sheet do liabilities appear?

the right side

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 liabilities

Free cash flow is better described as ____.

total distributable cash flow

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

true

True or false: Free cash flow is also known as cash flow from assets.

true

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

1 year

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 equal liabilities plus stockholders' equity.

Which of the following are classified as fixed assets on the balance sheet?

Buildings, Trademark, Equipment

The common set of standards and procedures by which audited financial statements are prepared are called:

Generally Accepted Accounting Principles (GAAP)

A balance sheet reflects a firm's:

accounting value on a specific date

Amounts not yet collected from customers on sales already made are called:

accounts payable

Liquidity refers to the ease of changing _____

assets to cash

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

book

Non-cash items do not affect:

cash flow

The more debt a firm has, the greater its:

degree of financial leverage

Cash flow to stockholders equals ____.

dividends paid minus net new equity raised

When a firm smooths earnings to please investors, it is called ________.

earnings management

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

The GAAP matching principle requires revenues to be matched with:

expenses

Interest paid _____ net new borrowing equals cash flow to creditors.

minus

Stockholders' equity is always shown on the ______ of the balance sheet.

right

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

Depreciation

What does shareholders' equity represent?

A residual claim against the firm's total assets

What is depreciation?

A systematic expensing of an asset based on the asset's estimated life

Product costs are usually shown on the income statement under the heading of _________________ .

Costs of Good Sold

True or false: Current assets plus current liabilities equals net working capital.

False

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

Long-term debt Accounts payable

True or false: Ending net fixed assets plus beginning net fixed assets minus depreciation equals net investment in fixed assets.

false

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 equipment

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

fixed commitments

A primary reason that accounting income differs from cash flow is that an income statement contains ____

non cash items

In practice, accountants tend to classify costs as either ______ costs or _______ costs.

product; period

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value

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

shareholders

Cash flow refers to _____.

the difference between the number of dollars that came in and the number that went out

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

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

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

Net earnings refers to income earned ______.

after interest and taxes

In the long-run, costs may be considered as ________.

all variable

The short run is ______.

an imprecise period of time

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

capital spending, operating cash flow, change in net working capital

Assets can be categorized as (select all that are appropriate)

current and fixed tangible and intangible

Under GAAP, assets are generally carried on a firm's balance sheet at ________.

historical cost book value

Cash flow to creditors equals:

interest paid minus net new borrowing

Current assets are classified as relatively _______; these assets can be converted to cash within the next 12 months.

liquid

current assets ______ current liabilities equals Net Working Capital

minus

Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm.

overstate; understate

On a balance sheet, total assets must always equal total liabilities plus:

shareholders equity

The market value of an item is:

the cash value you'd get if you sold it

True or false: Dividends paid minus net new equity raised equals cash flow to stockholders.

true

______ changes as the output of the firm changes.

variable cost

Net working capital will be negative when current assets ______ current liabilities.

are less than

the cash flow identity states that cash flows from ______ should equal cash flows to creditors and equity investors.

assets

Shareholders' equity equals ________________.

assets minus liabilities

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

pay everyday cash outflows.

Ending net fixed assets _______ minus beginning net fixed assets depreciation equals net investment in fixed assets.

plus

Net capital spending is equal to ending net fixed assets minus beginning net fixed assets ____.

plus depreciation

True or false: Interest paid minus net new borrowing equals cash flow to creditors.

true

True or false: Operating cash flow does not include depreciation or interest.

true