Chapter 2 Financial Management
Which of these is considered to be the most liquid? Land Accounts Receivable Equipment and machines Inventory
Accounts Receivable
The short run is
an imprecise period of time
Non-cash items do not affect ____________
cash flow
Net income and dividends affect equity but are not explicitly shown where?
on the balance sheet
Accumulated depreciation and trademarks are included in
the fixed asset portion of a balance sheet
how is the average income tax rate computed?
total tax bill/total taxable income
Which of the following are examples of short-run fixed costs? material costs bond interest wages to labors rent
bond interest rent
The short run is a period when there are __________ costs
both fixed and variable
True or false: operating cash flow includes capital spending and working capital requirements
false
what does a positive operating cash flow mean?
firm is generating enough cash to pay operating costs
What's the most important item that can be extracted from financial statements?
firm's actual cash flows
Which of the following are period costs? general expenses cost of goods sold selling costs administrative expenses
general expenses selling costs administrative expenses
The purpose of a(n) ____________________ is to measure performance over a set period of time
income statement
What happens to the tax rate at very high income levels?
it becomes flat
what are 2 classifications of costs used by financial accountants?
period and product costs
What's important to keep in mind when examining an income statement? (check all that apply) time and costs cash versus non-cash items GAAP asset composition
time and costs cash versus non-cash items GAAP
What are product costs reported as?
cost of goods sold
Net Capital Spending formula
ending net fixed assets - beginning net fixed assets + depreciation
which of these questions can be answered by reviewing a firm's balance sheet? how much of the firm's net income was paid out in dividends? what is the total amount of assets a firm owns? how much net income has the firm earned in this period? how much debt is used to finance the firm?
how much of the firm's net income was paid out in dividends? how much debt is used to finance the firm?
increasing its non-cash liquid assets will enable a firm to
increase ability to avoid financial distress and increase ability to meet short-term obligations
Which of these items do NOT appear on a balance sheet? knowledge that has no patent good management favorable economic conditions accounts payable
knowledge that has no patent good management favorable economic conditions
What is financial leverage?
the use of debt to acquire additional assets
The cash flow identity reflects the fact that: (check all that apply) A firm generates cash through various activities Cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm Cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders Operating cash flow is the same as operating income
A firm generates cash through its various activities Cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm Cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders
which of the following is true about the difference between the income statement and statement of cash inflows and outflows? 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 materials purchased on credit are accounts payable rather than cash outflows until they are paid, which may be in a different period Depreciation expense is equal to the installment payment on the equipment being depreciated, so its a cash outflow 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 materials purchased on credit are accounts payable rather than cash outflows until they are paid, which may be a different period Sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period
The use of financial leverage can: (check all that apply) Increase the chance of financial distress and business failure Decrease the non-cash expenses incurred by the firm Increase the potential reward for investors Greatly magnify gains and losses
Increase the chance of financial distress and business failure Increase the potential reward for investors Greatly magnify gains and losses
Cash flow to creditors
Interest paid - net new borrowing
Why is positive net working capital important?
It means the firm should have sufficient cash to meet its current obligations
______ income is money earned after interest and taxes
Net