FIN 780 exam 1 chapter 2 concepts
Cash flow from investing activities includes which of the following?
-sales of fixed assets -changes in capital assets -acquisition of fixed assets
Rank the ease (from easiest to hardest) of turning the following assets into cash.
1. cash equivalent 2. account receivable 3. inventory 4. plant and equipment
________ is the price at which willing buyers and sellers would trade the assets.
Market Value
The short run is ______.
an imprecise period of time
In March, Al purchased 10 video games for his store's inventory. In April, he sold five games on credit and received the payment in May. The income should be reported in the month of
april
Liquidity refers to the ease of changing _____.
assets to cash
In determining the economic and financial condition of a firm, ______ is more revealing than net income.
cash flow
Stockholders' equity ______ when retained earnings increase.
increases
Debt service implies paying ____.
interest and principal
Which one of the following calculates cash flow from operations?
EBIT + Depreciation - Taxes
Which one of these is the most illiquid?
fixed assets
Accounting ______ refers to the speed and ease with which assets can be converted to cash.
liquidity
Financial accountants do not distinguish between _____ and _____.
variable costs; fixed costs
What does it mean when the firm has positive net working capital?
It means the firm should have sufficient cash to meet its current obligations.
If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the change in capital spending is ____.
$100 - 60 + 10 = $50
If a firm's current assets are $100 and its current liabilities are $80, then its net working capital is:
$20
If ending net fixed assets are $100, beginning fixed assets are $40, and depreciation is $10, then the change in capital spending is _____.
$70
Which of these are generally considered to be short-run fixed costs?
-Property taxes -Management salaries -Overhead expenses
Current assets are defined as assets that can be turned into cash within ______ months.
12
Which one of the following is true?
Cash flows can be derived from financial statements.
Which of the following do not directly affect cash flow?
Depreciation
The_______ tax rate is the tax paid on each extra dollar of income while the _______ tax rate is the percentage of income paid in taxes.
Marginal; Average
What does the operations section of an income statement report?
Revenues and expenses from principal operations
Which of the following increases a firm's cash flow that can be used for capital spending?
Sale of fixed assets
What is treasury stock?
Stock the firm has repurchased
What is the most important item that can be extracted from financial statements?
The firm's actual cash flows
How is the average income tax rate computed?
Total tax bill/Total taxable income
When is the appreciation on property recognized as a gain?
When the property is sold
The cash flow identity states that cash flow from assets equals cash flows to ____.
creditors and stockholders
Net capital spending is equal to the change in net fixed assets plus:
depreciation
The actual economic value of an asset varies ______ the asset's future cash flows.
directly with
Cash flow to stockholders equals ____.
dividends paid minus net new equity raised
To smooth its earnings, a firm is more apt to sell appreciated property and realize the income on that sale when its other earnings are _____.
down
EPS stands for
earnings per share
Depreciation is the accountant's estimate of the cost of ______ used up in the production process.
equipment
The activity of making net payments to creditors and owners (excluding interest) is called a(n) ______ activity in the accounting statement of cash flows.
financing
Selling a firm's plant and equipment results in a change in ____.
fixed assets
Which one of the following is shown on the left-hand side of the balance sheet?
fixed assets
The purpose of a(n) ______ is to measure performance over a set period of time.
income statement
Cash flows from the acquisition and sale of fixed assets are located in the _______ activities section of the accounting statement of cash flows.
investing
Cash flow to stockholders is the amount of cash that a company pays to its stockholders less any cash received from
issuing new shares of stock
For financial decision-making purposes, the most important tax rate is the ______ tax rate.
marginal
The price at which willing buyers and sellers would trade is called ______ value.
market
The accounting equation shows that stockholders' equity equals assets ______ liabilities.
minus
______ income is earnings after interest and taxes.
net
The first step in calculating cash flow from operating activities is to adjust net income for ____.
non-cash items and net working capital changes
The total cash flow of the firm includes ____.
operating, capital spending, and net working capital cash flows
An income statement reflects activity that occurs _____ while a balance sheet reflects values ____.
over a period of time; as of a specific date
A positive operating cash flow indicates that the firm is generating enough cash to ______.
pay operating costs
Net capital spending is equal to ending net fixed assets minus beginning net fixed assets
plus depreciation
Net cash flow is _______ when current assets are greater than current liabilities.
positive
Debt service means repaying ____.
principal and interest
On a balance sheet, total assets must always equal total liabilities plus ______.
shareholders equities
Negative capital spending would mean more fixed assets were______than_______
sold; purchased
Who owns treasury stock?
the issuer of the stock
Financing activities involve cash flows:
to and from creditors
What is the purpose of the income statement?
to measure performance over a set period of time
Operating cash flow, capital spending, and additions to net working capital are the components of _______
total cash flow
Free cash flow is better described as ____.
total distributable cash flow
True or false: Free cash flow is the total of cash flow to creditors and cash flow to stockholders.
true
If you make an extra $1,000 in income and your marginal tax rate is 30 percent while your average tax rate is 20 percent, then you will pay an extra ______ in taxes.
300; Additional tax = (.30)($1,000)
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
What does the acronym EBIT stand for?
Earnings before interest and taxes
The cash flow from operating activities results from which of the following?
Normal business activities such as producing and selling goods and services
True or false: The realization (timing) of income can be useful to a firm.
True
A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts?
accounts receivable
When a customer purchases an item on credit, the purchase amount is recorded in the books of the seller in which one of these accounts?
accounts receivable
Which one of these is considered to be the most liquid?
accounts receivable
Net earnings refers to income earned ______.
after interest and taxes
In the long-run, ________ are variable.
at all costs
A company's ______ tax rate is its tax bill divided by its total taxable income, and its ______ tax rate is the tax rate it pays on the next dollar of income.
average; marginal
EBIT stands for earnings ______ and taxes.
before interest
On the balance sheet, assets are listed at their _____ value.
book
Assets are listed on a US firm's balance sheet at ________.
cost
True or false: Stockholders' equity appears on the left-hand side of the balance sheet.
false
When a firm pays out fewer dividends, it ______ the accounting value of its retained earnings.
increases
True or false: Revenue includes both cash and credit sales of goods and services.
true
True or false: Taxes can be a large cash outflow for a corporation.
true
Which of the following are included in a firm's inventory according to GAAP?
-Finished goods -Work in progress -Raw materials
Which of these questions can be answered by reviewing a firm's balance sheet?
-What is the total amount of assets the firm owns? -How much debt is used to finance the firm?
Liabilities usually involve which of these?
-obligations of the firm -require a cash payout within a stated period of time
The short run for a firm is the period of time during which _______
-output can vary -some costs are fixed
Which of these are reported in the operations section of an income statement?
-Expenses from principal operations -Revenues from principal operations
The cash flow identity states that cash flows from ______ should equal cash flows to creditors and equity investors.
assets
A balance sheet reflects a firm's ______ value on a particular date.
accounting
Stockholder's equity is the residual difference between _________.
assets and liabilities
The short run is a period when there are ______ costs.
both fixed and variable
Which of the following is NOT a component of operating cash flow?
capital spending
The statement of cash flow explains changes in _____.
cash and equivalents
Non-cash items do not affect:_______
cash flow
In finance, the value of a firm depends on its ability to generate ______.
cash flows
Net income expressed per share of common stock is known as
earnings per share
Non-cash items are ______ that ____ cash flow.
expenses; do not directly affect
True or false: For financial analysis, financial statements and accounting numbers are more important than cash flows
false
True or false: In the short run, all costs are fixed.
false
Revenue minus expenses measures a firm's ______
income
Which of the following shows performance during the year?
income statement
Raw materials, work in process, and finished goods are examples of _______.
inventory
Changes in capital spending can be negative when the acquisition of fixed assets is ______ the sale of fixed assets.
less than
Non-cash items are expenses that directly affect _____ but do not directly affect ______.
net income; cash flow
What impact will the collection of cash from a firm's credit customers have on its net working capital?
no effect
Which section of the income statement reports a firm's operating revenues and expenses?
operations section
Accountants usually distinguish between ______ costs and ______ costs.
product; period
How is income defined?
revenue minus expenses
An official accounting statement that helps to explain the change in cash and cash equivalents is called the _____.
statement of cash flows
Cash flow from operations is calculated by adding depreciation to EBIT and ______ current taxes.
subtracting
The amount of taxes paid on a firm's earnings is determined by the set of rules known as the _____________
tax code
Operating cash flow reflects which one of these?
tax payments
True or false: A balance sheet shows what a firm owns and how it is financed.
true
True or false: Contract liabilities put the firm at risk of default.
true
True or false: There is a correlation between future cash flows and the economic value of an asset.
true
In the long run, all costs are ______.
variable
GAAP requires that income is reported:
when it is accrued, regardless of payment status
If your tax bill is $200 and your taxable income is $2,000, then your average tax rate is _____ percent.
10
What does stockholders' equity represent?
A residual claim against the firm's assets
Which one of these is a correct version of the balance sheet equation?
Assets = Liabilities + Stockholders' equity
If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals ______.
$200 - 150 = $50
True or false: Net income equals cash flow.
False
True or false: Operating cash flow includes capital spending and working capital requirements.
False
What does GAAP stand for?
Generally accepted accounting principles
Why would negative operating cash flow indicate trouble for a firm?
If operating cash flow is negative, it means that the firm is not generating enough cash to pay operating costs.
Which of the following are examples of short-run fixed costs?
-Bond interest -Rent
Which of these will result from a firm using cash to buy inventory?
-Inventory would increase -Cash would decrease
Which of the following are found on an income statement?
-The operations section -The non-operating section
Operating cash flow differs from total cash flow in that the latter makes adjustments for
-additions to net working capital -capital spending
