Chapter 2 Concept questions

Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant? An increase in net capital spending A decrease in the cash flow to creditors An increase in depreciation An increase in the change in net working capital A decrease in dividends paid

An increase in depreciation

Which one of these is correct? Depreciation has no effect on taxes. Interest paid is a noncash item. Taxable income must be a positive value. Net income is distributed either to dividends or retained earnings. Taxable income equals net income multiplied by (1 + Average tax rate).

Net income is distributed either to dividends or retained earnings.

Which one of the following decreases net income but does not affect the operating cash flow of a firm that owes no taxes for the current year? Indirect cost Direct cost Noncash item Period cost Variable cost

Noncash item

Which one of the following is included in the market value of a firm but not in the book value? Raw materials Partially built inventory Long-term debt Reputation of the firm Value of a partially depreciated machine

Reputation of the firm

The accounting statement that measures the revenues, expenses, and net income of a firm over a period is called the: statement of cash flows. income statement. GAAP statement. balance sheet. net working capital schedule.

income statement.

Operating cash flow is defined as: a firm's net profit over a specified period. the cash that a firm generates from its normal business activities. a firm's operating margin. the change in the net working capital over a stated period. the cash that is generated and added to retained earnings.

the cash that a firm generates from its normal business activities.

The financial statement that summarizes a firm's accounting value as of a particular date is called the: income statement. cash flow statement. liquidity position. balance sheet. periodic operating statement.

balance sheet.

Net working capital is defined as: the depreciated book value of a firm's fixed assets. the value of a firm's current assets. available cash minus current liabilities. total assets minus total liabilities. current assets minus current liabilities.

current assets minus current liabilities.

Which one of the following statements concerning the balance sheet is correct? Total assets equal total liabilities minus total equity. Net working capital is equal total assets minus total liabilities. Assets are listed in descending order of liquidity. Current assets are equal to total assets minus net working capital. Shareholders' equity is equal to net working capital minus net fixed assets plus long-term debt.

Assets are listed in descending order of liquidity.

Which one of the following terms is defined as the total tax paid divided by the total taxable income? Average tax rate Variable tax rate Marginal tax rate Absolute tax rate Contingent tax rate

Average tax rate

An increase in which one of the following will increase operating cash flow for a profitable, tax-paying firm? Fixed expenses Marginal tax rate Net capital spending Inventory Depreciation

Depreciation

Which one of the following changes during a year will increase cash flow from assets but not affect the operating cash flow? Increase in depreciation Increase in accounts receivable Increase in accounts payable Decrease in cost of goods sold Increase in sales

Increase in accounts payable

Which one of the following is an intangible fixed asset? Inventory Machinery Copyright Account receivable Building

Copyright

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period? Positive operating cash flow Negative cash flow to creditors Positive cash flow to stockholders Negative net capital spending Positive cash flow from assets

Positive cash flow from assets

Tressler Industries opted to repurchase 5,000 shares of stock last year in lieu of paying a dividend. The cash flow statement for last year must have which one of the following assuming that no new shares were issued? Positive operating cash flow Negative cash flow from assets Positive net income Negative operating cash flow Positive cash flow to stockholders

Positive cash flow to stockholders

Production equipment is classified as: a net working capital item. a current liability. a current asset. a tangible fixed asset. an intangible fixed asset.

a tangible fixed asset.

The market value of: accounts receivable is generally higher than the book value of those receivables. an asset tends to provide a better guide to the actual worth of that asset than does the book value. fixed assets will always exceed the book value of those assets. an asset is reflected in the balance sheet. an asset is lowered each year by the amount of depreciation expensed for that asset.

an asset tends to provide a better guide to the actual worth of that asset than does the book value.

Highly liquid assets: increase the probability a firm will face financial distress. appear on the right side of a balance sheet. generally, produce a high rate of return. can be sold quickly at close to full value. include all intangible assets.

can be sold quickly at close to full value.

All else held constant, the book value of owners' equity will decrease when: the market value of inventory increases. dividends exceed net income for a period. cash is used to pay an accounts payable. a long-term debt is repaid. taxable income increases.

dividends exceed net income for a period.

Cash flow to stockholders is defined as: cash flow from assets plus cash flow to creditors. operating cash flow minus cash flow to creditors. dividends paid plus the change in retained earnings. dividends paid minus net new equity raised. net income minus the addition to retained earnings.

dividends paid minus net new equity raised.

Net capital spending is equal to: ending net fixed assets minus beginning net fixed assets plus depreciation. beginning net fixed assets minus ending net fixed assets plus depreciation. ending net fixed assets minus beginning net fixed assets minus depreciation. ending total assets minus beginning total assets plus depreciation. ending total assets minus beginning total assets minus depreciation.

ending net fixed assets minus beginning net fixed assets plus depreciation.

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital: had to increase. had to decrease. remained constant. could have either increased, decreased, or remained constant. was unaffected as the changes occurred in the firm's current accounts.

had to decrease.

Financial leverage: increases as the net working capital increases. is equal to the market value of a firm divided by the firm's book value. is inversely related to the level of debt. is the ratio of a firm's revenues to its fixed expenses. increases the potential return to the stockholders.

increases the potential return to the stockholders.

Cash flow to creditors is defined as: interest paid minus net new borrowing. interest paid plus net new borrowing. operating cash flow minus net capital spending minus the change in net working capital. dividends paid plus net new borrowing. cash flow from assets plus net new equity.

interest paid minus net new borrowing.

A firm's liquidity level decreases when: inventory is purchased with cash. inventory is sold on credit. inventory is sold for cash. an account receivable is collected. proceeds from a long-term loan are received.

inventory is purchased with cash.

Net working capital increases when: fixed assets are purchased for cash. inventory is purchased on credit. inventory is sold at cost. a credit customer pays for his or her purchase. inventory is sold at a profit.

inventory is sold at a profit.

The market value of a firm's fixed assets: will always exceed the book value of those assets. is more predictable than the book value of those assets. in addition to the firm's net working capital reflects the true value of a firm. is decreased annually by the depreciation expense. is equal to the estimated current cash value of those assets.

is equal to the estimated current cash value of those assets.

Cash flow to creditors increases when: interest rates on debt decline. accounts payable decrease. long-term debt is repaid. current liabilities are repaid. new long-term loans are acquired.

long-term debt is repaid.

Given a profitable firm, depreciation: increases net income. increases net fixed assets. decreases net working capital. lowers taxes. has no effect on net income.

lowers taxes.

The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the: average tax rate. variable tax rate. marginal tax rate. fixed tax rate. ordinary tax rate.

marginal tax rate.

If a firm has a negative cash flow from assets every year for several years, the firm: may be continually increasing in size. must also have a negative cash flow from operations each year. is operating at a high level of efficiency. is repaying debt every year. has annual net losses.

may be continually increasing in size.

Shareholders' equity is equal to: total assets plus total liabilities. net fixed assets minus total liabilities. net fixed assets minus long-term debt plus net working capital. net working capital plus total assets. total assets minus net working capital.

net fixed assets minus long-term debt plus net working capital.

Cash flow from assets is defined as: the cash flow to shareholders minus the cash flow to creditors. operating cash flow plus the cash flow to creditors plus the cash flow to shareholders. operating cash flow minus the change in net working capital minus net capital spending. operating cash flow plus net capital spending plus the change in net working capital. cash flow to shareholders minus net capital spending plus the change in net working capital.

operating cash flow minus the change in net working capital minus net capital spending.

Paid-in surplus is classified as: owners' equity. net working capital. a current asset. a cash expense. long-term debt.

owners' equity.

A negative cash flow to stockholders indicates a firm: had a net loss for the year. had a positive cash flow to creditors. paid dividends that exceeded the amount of the net new equity. repurchased more shares than it sold. received more from selling stock than it paid out to shareholders.

received more from selling stock than it paid out to shareholders.

Market values: reflect expected selling prices given the current economic situation. are affected by the accounting methods selected. are equal to the initial cost minus the depreciation to date. either remain constant or increase over time. are equal to the greater of the initial cost or the current expected sales value.

reflect expected selling prices given the current economic situation.

Net income increases when: fixed costs increase. depreciation increases. the average tax rate increases. revenue increases. dividends cease.

revenue increases.