Chapter 2. FINANCIAL STATEMENTS, TAXES, AND CASH FLOW

The more debt a firm has, the greater its:

degree of financial leverage

What should you keep in mind when examining an income statement? 1. time and cost 2. asset composition 3. GAAP 4. Cash vs noncash items

1 3 4

Which of the following is true about the difference between the income statement and cash inflows and outflows? 1. 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. 2. Depreciation expense is equal to the installment payment on the equipment being depreciated, so it is a cash outflow. 3. Sale on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period. 4. Income taxes are often deferred, so the amount on the income statement may not represent the amount of the check to the IRS.

1, 3, & 4

Residual value is the amount left over after paying __________ 1. Accounts payable 2. Accounts receivable 3. Other debt holders 4. common shareholders 5. Bondholders 6. Preferred stockholders

1, 3, & 5

Which of these are generally considered to be short-run fixed costs? 1. Management salaries 2. Income taxes 3. Rent payments for a warehouse 4. Management bonuses 5. Property Taxes

1, 3, & 5

What should you keep in mind when examining an income statement? 1. Time and cost 2. Asset composition 3. Cash vs non-cash items 4. GAAP

1, 3,& 4

Which one of the following complies with GAAP? 1. Matching expenses with cash flow 2. Matching revenues with expenses 3. Matching revenues with cash flow 4. Matching cash flow, revenues, and expenses

2

What does stockholders' equity represent?

A residual claim against the book value of the firm's assets

When a customer purchases an item on credit, the purchase amount is recorded by the seller in which one of these accounts? Accrued expense Accounts payable Accounts Receiveable Cash

Accounts Receivable

shareholders equity equation

Assets - Liabilities

What are the three things to keep in mind when looking at an income statement?

GAAP, cash vs noncash items and time and costs.

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

Shareholders

Marginal tax rate

amount of tax payable on the next dollar earned

A balance sheet reflects a firm's ______ value on a particular date.

accounting

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

both fixed and variable

James is the owner of j and jo company and wants to find out the cash flow of his bakery, he should look into the firms.... purchase day book financial statements sales and purchase invoices general journals

financial statements

Which are true concerning product costs? 1. Product costs contain selling expenses 2. Product costs are reported as costs of goods sold 3. Products costs contain both fixed and variable costs. 4. Product cost are reported as admin expenses.

2 & 3

Which of the following are included in the fixed asset portion of a balance sheet? 1. Cash and equivalents 2. Buildings 3. Capital Surplus 4. Trademarks

2 & 4

Balance Sheet

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

In the long run, all cost are______

variable

The cash flow identity reflects the fact that 1. operating cash flow is the same as operating income 2. a firm generates cash thought its various activities 3. Cash flow from the firm's assets equal the total of cash flow to creditors and cash flow to stockholders. 4. cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm.

2 3 4

which of the following are period cost? 1. cost of goods sold 2. selling cost 3. admin expenses 4. general expenses

2 3 4

Residual value is the amount left over after paying... 1. common share holders 2. accounts payable 3. bondholders 4. accounts receivable 5. other debt holders 6. preferred stockholders

2 3 5

Which of the following are example of short-run fixed cost? 1. material cost 2. wages to labors 3. rent 4. bond interest

3 4

Whos responsibility is it to create value for a firm?

Management

The price at which willing buyers and sellers would trade is called ______ Value.

Market

What was the impact of the Tax Cuts and Jobs Act of 2017 on corporate tax rates?

Raised taxes from 15% to 21%

Which of the following is a variable cost in the short run? Bond interest Property taxes Monthly rent on plant Raw materials used in the production

Raw materials used in production

Which of the following is a variable cost in the short run?

Raw materials used in production.

What is the income statement equation?

Revenues - Expenses = Net Income

Net Working Capital (NWC)

current assets - current liabilities

Why is accounting income not the same as cash flow? Give 2 reasons.

income contains noncash items like depreciation and time

A decrease in depreciation expense __________ earnings per share.

increases

Changes in captial spending can be negative when the acquisition of fixed assets is ______ the sale of the fixed asset. less than greater than equal

less than

Generally Accepted Accounting Principles (GAAP)

the rules of financial accounting

Average Tax rate

total taxes paid divided by total income

Which of the following are considered to be short-run fixed cost? 1.Management bonuses 2.Rent on warehouse 3.Income tax 4.Property tax 5.Management salaries

2 4 5