Finance Chapter 2
Which of the following are examples of short-run fixed costs?
Bond Interest Rent
Residual value is the amount left over after paying ___.
Bondholders Other Debt holders AP Preferred Stockholders
Which of the following is true about difference between the income statement and cash inflows and outflows?
Income taxes are often deffered, 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. Sales on credit are accounts recievable rather than cash inflows until they are collected, which may be in a different period.
Which of the following is an example of a non-cash item on an income statement?
Depreciation
Depreciation is the accountant's estimate of the cost of ___ used up in the production process.
Equipment
Why is positive net working capital important?
It means the firm should have sufficient cash to meet its current obligations.
Non-cash items are expenses that directly affect ____ but do not directly affect _____.
Net Income ; Cash Flow
The cash flow identity reflects the fact that:
Cash is either used to produce the products or service, pay creditors or pay out to the owners of the firm. A firm generates cash through its various activities. Cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders.
When a customer purchases an item on credit, the purchase amount is recorded by the seller in which one of these accounts?
AR
Costs that do not change in the short run arise because of ___.
fixed commitments
Which of the following is a current asset?
inventory
Book value of assets is generally:
not what the assets are actually worth
Assets are listed on the balance sheet in order of:
of decreasing liquidity
In the long run, all costs are ___.
variable
Given the tax rates of 15% on Income from $0 to $50,000, 25% on income from $50,001 to $75,000, and 34% on income from $75,001 to $100,000, approximately how much tax would a company pay on a taxable income of $60,000?
$10,000 (.15)(50000) + (.25)(10000) = 10,000
Rank the ease (from easiest to hardest) of turning the following assets into cash.
1. Cash Equivalents 2. AR 3. Inventory 4. Plant and Equipment
If your tax bill is $200 and your taxable income is $2,000, then your average tax rate is _____ percent.
10%
What should you keep in mind when examining an income statement?
Cash versus non-cash items GAAP Time and costs
The cash flow identity states that cash flow from assets equals cash flows to ___.
Creditors and Stockholders
The use of financial leverage can
Greatly magnify both gains and losses Increase the potential reward for investors Increase the chance of financial distress and business failure
Increasing its non-cash liquid assets will enable a firm to do which of the following?
Increase its ability to avoid financial distress. Increase its ability to meet short-term obligations.
A decrease in depreciation expense ___ earnings per share.
Increases
What is a primary concern for a bank lending funds to a business for the short-term?
Liquidity
Whose responsibility is it to create value for a firm?
Managment
The ___ principle of GAAP states that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service.
Matching
Which of the following will be found in the liabilities section of a firm's balance sheet?
Notes Payable Long-term bonds issued by the firm
A postitive 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
What are the two classifications of costs used by financial accountants?
Product costs Period costs
Which of the following are period costs?
Selling costs General expenses Administrative expenses
An official accounting statement that helps to explain the change in cash and cash equivalents is called the ______.
Statemment of cash flows
Under a flat-tax, all income levels are taxed at ___.
The same average rate The same marginal rate
Which of the following are included in the fixed asset portion of a balance sheet?
Trademarks Buildings
T/F Long-term liabilities are not due in the current year (from the date of the balance sheet)
True
___ costs change as the output of the firm changes.
Variable
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?
According to GAAP, when is income reported?
When it is earned or accrued
Net working capital plus current liabilities equal ___.
current assets
If dividends are $100, stock sold is $10, and stock repurchased is $25, what is the cash flow to stockholders?
$115
Suppose your company's taxable income was $235,000 in 2017. Using Table 2.3, calculate the income tax due, the average tax rate, and the marginal tax rate. Round average tax rate to the nearest whole dollar.
$74,900 : 32% ; 39% .15 x 50000 = 7,500 .25 x (75000-50000) = 6250 .34 x (100,000 - 75000) = 8500 .39 x (235,000-100,000) = 52,650 Total tax = 7500+6250+8500+52650=74900 Average TR= 74900/235000= .32 Marginal TR from table is 39%
If a firm's net working capital is $120 in 2014 and $100 in 2013, then the change in NWC is:
+$20.00
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.)
If you make an extra $1000 in income and your marginal tax is 30% while your average tax is 20%, then you will pay an extra ___ in taxes.
$300.00
If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals ___.
$50
Since new cash flows are taxed at ___ tax rates, those tax rates are the most important.
Marginal
The ___ tax rate is the tax rate paid on the next dollar of income.
Marginal
The cash flow identity reflecrs the fact that
Cash flow from the firms assets = the total of cash flow to creditors and cash flow to stockholders. 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 owner's of the firm.
Which of these items do NOT appear on a balance sheet?
Favorable economic conditions Good Management Knowledge that has no patent
Marginal tax rates are the most important rates because:
Incremental cash flows are taxed at marginal rates. Financial decisons are usually based in new cash flows.
Period costs are the costs that are allocated to a specific ___.
Interval of time
Assets are recorded at historical cost, not market value, because:
It is hard to keep up with the market value.
Which are true concerning product costs?
Product costs contain both fixed and variable costs. Product costs are reported as COGS.
Assets can be described as items that:
Provide market value to the firm. Generate revenue. A firm owns.
Which of theses are generally considered to be short-run fixed costs?
Rent payments for a warehouse
On a balance sheet, total assets must always equal total liabilities plus
Shareholder's equity
net income refers to money earned
after interest and taxes
Net working capital equals
current assets minus current liabilities
The more debt a firm has, the greater its:
degree of financial leverage
Who is entitled to the residual value of a firm's cash flows?
shareholders
The short run for a firm is the period of time during which ___.
some costs are fixed Output can vary
Liquidity refers to the ease of changing _________.
Assets to cash
What is the most important item that can be extracted from financial statements?
The firm's actual cash flows
The accounting equation shows that stockholders' equity equals assets ___ liabilities.
Minus
The price at which willing buyers and sellers would trade is called ___ value.
market
Most importantly, assets provide ___ to the firm.
Value
