Chapter 2 Finance
US corporate taxes switch to a constant flat-rate tax once the average tax rate reaches:
35%
Shareholders Equity (book value)
= equipment + working capital - long term debt
Cash flow from assets
Can be positive, negative, or equal to zero
Which is the term that refers to the firms interest payment minus any net new borrowing?
Cash flow to creditors
As seen on the income statement
depreciation reduces both the pretax income and the net income
Book value:
is based on historical cost
Which one of the following assets is generally the most liquid?
Accounts recievable
An increase in which one of the following will cause the operating cash flow to increase for a profitable firm? A. Taxes B. Depreciation C. Changes in the amount of net fixed capital D. Net working capital E. Administrative expenses
B. Depreciation
Which of the following statements concerning liquidity is correct? Trademarks and patents are highly liquid. If you can sell an asset next year at a price equal to its actual value, the asset is highly liquid. The less liquidity a firm has, the lower the probability the firm will encounter financial difficulties. If you sold an asset today, it was a liquid asset. Correct Balance sheet accounts are listed in order of decreasing liquidity.
Balance sheet accounts are listed in order of decreasing liquidity
In the accounting statement of cash flows, which one of these is calculated by adding back noncash expenses to net income and adjusting for changes in current assets and liabilities?
Cash flow from operating activity
New working capital is defined as:
Current assets - current liability
Which of the following accounts is included in stockholders equity? A. Intangible assets B. Plant and equipment C. Deferred taxes D. Accumulated retained earnings E. Long-term debt
D. Accumulated retained earnings
Which one of these statements is correct? A.The addition to retained earnings is equal to net income plus dividends. B. Pretax income is equal to net income minus taxes. C. Operating income is equal to operating revenue minus cost of goods sold. D. Earnings per share can be negative but dividends per share cannot. E.Only current taxes are included in the tax expense.
D. Earnings per share can be negative but dividends per share cannot
Which one of these is a non cash item: A. current taxes B. interest expense C. dividends D. depreciation E. selling expenses
D. depreciation
For a firm with long-term debt, net income is equal to:
Dividends + addition to retained earnings
Net Capital Spending Formula
End net fixed assets - Beg net fixed assets + Depreciation expense for year
Noncash items refer to
Expenses charged against revenues that do not directly affect cash flow
The financial statement summarizing a firm's accounting performance over a period of time is the:
Income Statement
Cash flow to creditors for 2015?
Interest paid 2015 - (LTD 2015 - LTD 2014)
One of the reasons why cash flow analysis is popular is because:
It is difficult to manipulate or spin the cash flows
Which term defines the tax rate that applies to the next dollar of taxable income earned?
Marginal
If you sell an asset, you are most likely to receive which value for the asset?
Market Value
An increase in treasury stock:
Results from a repurchase of outstanding shares of stock
The cash flow to stockholders must be positive when:
The cash flow from assets is positive and also exceeds the cash flow to creditors
What is the amount of the non-cash items for 2015?
Whatever depreciation is on the income statement
On a balance sheet, deferred taxes are classified as
a long-term liability
Assuming the number of shares outstanding remains constant, an increase in dividends per share will reduce the:
addition to retained earnings.
What will increase the book value of the stockholders equity in a profitable, non-dividend paying firm?
an increase in earnings per share
The cash flow of the firm must be equal to:
cash flow to stock holders + cash flow to creditors
A firms dividend payments less any net new equity raised is referred to as the firms:
cash flow to stockholders
Free cash flow is:
cash that the firm can distribute to creditors and stockholders
Net working capital
current assets - current liabilities
All else held constant, the earnings per share will:
decrease as the number of shares outstanding increase
Depreciation for a profitable firm:
decreases net income by less than $1 for every $1 of depreciation expense
Assets are listed on the balance sheet in order of:
decreasing liquidity
Earnings per share will increase when:
depreciation decreases
Cash flow to stockholders is defined as:
dividends 2015 - (end common stock - beg common stock)
Cashflow to Stockholders
dividends paid - net new equity raised
Under generally accepted accounting principles (GAAP), a trims assets are reported at:
historical cost less accumulated depreciation
Earning per share will increase
if net income increase and the number of shares outstanding increase
The income statement:
includes non cash expense
The carrying value or book value of assets
is determined under GAAP and is based on the cost of the asset
When making financial decisions, the most relevant tax rate is the __________ rate.
marginal
According to generally accepted accounting principles, costs are:
matched with revenues
An increase in total assets:
must be offset by an equal increase in liabilities and stockholders equity
Net capital spending is equal to the:
net change in fixed assets + depreciation
The cash flow resulting from a firms ongoing, normal business activities is referred to as the:
operating cash flow
The statement of cashflows consist of cashflows from:
operating, investing activities and finance activities
The cash flow to creditors includes the firms cash:
outflow when interest is paid on outstanding debt
A firm starts its year with a positive net working capital. During the year, the firm acquires more short-term debt than it does short-term assets. This means that:
the ending net working capital can be positive, negative, or equal to zero
According to generally accepted accounting principles (GAAP), revenue is recognized as income when:
the transaction is complete and the goods or services are delivered
Liquidity is:
valuable to a firm even though liquid assets tend to be less profitable to own