Chapter 2 Definitions

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

Accounts Receivable

A customer has yet to pay their bill. The seller records this debt into which account?

Income Statement

A financial statement showing the revenue and expenses for a fiscal period.

Statement of Cash Flows

A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time.

Balance Sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date.

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.)

Residual value is the amount left over after paying? - preferred stockholders -common shareholders -bondholders -accounts payable -accounts receivable -other debt holders

AP, bondholders, other debt holders

Which of the following are current assets? a. Buildings b. Patents and copyrights c. Accounts receivable d. Inventory

AR and inventory

Net income refers to money earned when?

After interest and taxes

Financial Equation

Assets = Liabilities + Owner's Equity

What is the correct balance sheet equation?

Assets = Liabilities + Stockholder Equity

Which of the following are examples of short-run fixed costs? -Bond interest -laborer wages/salary -Rent -material costs

Bond interests, rent

Rank the ease of turning the following assets into cash.

Cash Equivalents, AR, Inventory, Plant & Equipment

The statement of cash flow explains changes in __________?

Cash and equivalents

The cash flow identity reflects the fact that

Cashflow from the firm's assets equals the total cash flow from creditors and stockholders respectfully, A firm can generate cash thru various activities, Cash is either used to produce product/service, pay creditors or pay owners.

Operating Cash FLow

EBIT + Depreciation - Taxes

Expenses

Examples of this term are: advertising, auto, commissions, rent, salaries/wages, warranty, bad debt

Which of these items DO NOT appear on a balance sheet? a. Favorable economic conditions b. Accounts payable c. Good management d. Knowledge that has no patent

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

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

Fixed commitments

GAAP

Generally Accepted Accounting Principles. The standards and rules that accountants follow while recording and reporting financial activities.

Mailed, SEC reports, Company investor website

How can perspective investors receive financial statements.

Cash Flow

Non cash items do not affect what?

Which of these are generally considered to be short-run fixed costs? a. Property taxes b. Income taxes c. Rent payments for a warehouse d. Management bonuses e. Management salaries

Property taxes, warehouse rent payments, management salaries

Which of the following is a variable cost in the short run? -Bond Interest? -Property Taxes? -Monthly plant rent? -Raw materials used in production?

Raw materials used in production

Statements of Retained Earnings

Reports the changes in a company's retained earnings during the same period covered by the income statement.

Gross Profit

Sales - COGS

True

T/F? Short run is an imprecise period of time

How much debt is used to finance a firm? What is the total amount of assets the firm owns?

What are the questions that can be answered by reviewing a firm's balance sheet?

Accrual Method

a method of accounting that generally recognizes income in the period earned and recognizes deductions in the period that liabilities are incurred and matches them to revenues.

Liquidity refers to the ease of changing _________.

assets to cash

which of the following are included in the fixed asset portion of a balance sheet? -capital stimulus -cash and equivalents -buildings -trademarks

buildings and trademarks

NWC equals?

current assets - current liabilities

A long-term liability represents a?

debt that is not due in the coming year

The more debt a firm has the greater its _____?

degree of financial leverage

EBIT

earnings before interest and taxes AKA operating income

Which of the following are period costs? a. General expenses b. COGS c. Administrative expenses d. Selling costs

general expenses, administrative expenses, selling costs

Assets can be categorized as items that

generate revenue, provide market value to firm, are owned by firm

Which of the following are fixed assets? a. Land b. Buildings c. Accounts receivable d. Plant

land, buildings, plant

The price that buyers and sellers would trade at is called?

market value

Which of the following comply with GAAP? a. Matching expenses with cashflows b. Matching cash flows, revenues, and expenses c. Matching revenues with expenses d. Matching revenues with cash flows

matching revenues with expenses

Which of the following are classified as liabilities on a firm's balance sheet? a. Notes payable b. Accounts receivable c. Inventory d. Accounts payable

notes payable, accounts payable

A company's _____ cash flows reflect whether its cash flows from business operations can cover its everyday cash flows

operating

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

plus depreciation

Depreciation

systematic allocation of the costs of assets (non-cash)

What is true about product costs?

they are reported as COGS and contain both both fixed and variable costs