FINC 3310 Chapter 2
Which of the following are components of cash flow from assets?
capital spending operating cash flow change in net working capital
Noncash items do not affect ______.
cash flow
In finance, the value of a firm depends on its ability to generate ______.
cash flows
What should you keep in mind when examining an income statement?
cash versus noncash items GAAP time and costs
Tax rates for proprietorships, partnerships, and LLCs ______ with the passage of the Tax Cuts and Jobs Act of 2017.
changed
Product costs are usually shown on the income statement under the heading of ______.
cost of goods sold
The cash flow identity states that cash flow from assets equals cash flows to ______.
creditors and stockholders
Liabilities can be classified as ______ or long-term.
current
Assets can be categorized as:
current and fixed assets. tangible and intangible assets.
Net working capital is defined as:
current assets minus current liabilities, should be positive for a healthy firm
The more debt a firm has, the greater its:
degree of financial leverage.
Net capital spending is equal to the change in net fixed assets plus ______.
depreciation
Which of the following is an example of a noncash item on an income statement?
depreciation
____ paid minus net new equity raised equals cash flow to stockholders.
dividends
Cash flow to stockholders equals ______.
dividends paid minus net new equity raised
When a firm smooths earnings to please investors, it is called ______.
earnings management
The GAAP matching principle requires revenues to be matched with ______.
expenses
Noncash items are ______ that ______ cash flow.
expenses; do not directly affect
True or false: Ending net fixed assets plus beginning net fixed assets minus depreciation equals net investment in fixed assets.
false
True or false: For financial analysis, financial statements and accounting numbers are more important than cash flows.
false
True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.
false
Marginal tax rates are the most important tax rates because:
financial decisions are usually based on new cash flows. incremental cash flows are taxed at marginal tax rates.
Which of the following is not a component of cash flow from assets?
financing expenses
Depreciation is the accountant's estimate of the cost of ______ used in the production process matched with the benefits produced from owning it.
fixed assets equipment
Costs that do not change in the short run arise because of ______.
fixed commitments
hat does GAAP stand for?
generally accepted accounting principles
The common set of standards and procedures by which audited financial statements are prepared are called ______.
generally accepted accounting principles (GAAP)
Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:
had to decrease.
The purpose of a(n) ______ is to measure performance over a set period of time.
income statement
Cash flow to creditors equals:
interest paid minus net new borrowing.
Period costs are the costs that are allocated to a specific ______.
interval of time
Which of the following is a current asset?
inventory
which of the following is a current asset?
inventory
Current assets are classified as relatively ______; these assets can be converted to cash within the next 12 months.
liquid
Which of the following are classified as liabilities on a firm's balance sheet?
long-term debt accounts payable
For financial decision-making purposes, the most important tax rate is the ______ tax rate.
marginal
The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the:
marginal tax rate
The price at which willing buyers and sellers would trade is called ______ value.
market
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
Current assets (plus/minus) current liabilities equals NWC.
minus
Interest paid (plus/minus) net new borrowing equals cash flow to creditors.
minus
The balance sheet identity shows that stockholders' equity equals assets ______ liabilities.
minus
The last item (or "bottom line") on the income statement is typically the ______.
net income
Noncash items are expenses that directly affect ______ but do not directly affect ______.
net income; cash flow
A primary reason that accounting income differs from cash flow is that an income statement contains ______.
non cash items
The cash flow that results from the firm's day-to-day activities of producing and selling is called:
operating cash flow
Earnings management is a controversial practice in which corporations ______ or ______ their earnings to "smooth out" dips and surges and keep investors calm.
overstate; understate
Paid-in surplus is classified as:
owners' equity.
A positive operating cash flow indicates that the firm is generating enough cash to:
pay everyday cash outflows.
Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as ______.
period costs
Ending net fixed assets minus beginning net fixed assets ____ depreciation equals net investment in fixed assets.
plus
In practice, accountants tend to classify costs as either ______ costs or ______ costs.
product; period
Liquidity has two dimensions which are the ability to:
quickly convert assets into cash without significant loss in value.
Stockholders' equity is always shown on the ______ of the balance sheet.
right side
Who is entitled to the residual value of a firm's cash flows?
shareholders
On a balance sheet, total assets must always equal total liabilities plus:
shareholders' equity.
Physical assets are termed ______ assets.
tangible
Operating cash flow:
tells us whether or not a firm's cash inflows from its operations are sufficient to cover its everyday cash outflows. is a sign of trouble if negative over a long period of time.
Book value
the balance sheet value of the assets, liabilities, and equity
The market value of an item is:
the cash value you'd get if you sold it.
Cash flow refers to ______.
the difference between the number of dollars that came in and the number that went out
Changes in capital spending can be negative if:
the firm sold more fixed assets than it purchased.
What is the purpose of the income statement?
to measure performance over a set period of time
Shareholders' equity equals ______.
total assets minus total liabilities
Common stockholders are entitled to the difference between ______ and ______.
total assets; total liabilities
Free cash flow is better described as ______.
total distributable cash flow
How is the average income tax rate computed?
total tax bill / total taxable income
True or false: Free cash flow is also known as cash flow from assets.
true
True or false: Long-term liabilities are not due in the current year (from the date of the balance sheet).
true
True or false: Operating cash flow does not include depreciation or interest.
true
Market value
true value; the price at which the assets, liabilities, or equity can actually be bought or sold
Financial leverage refers to a firm's ______.
use of debt in its capital structure
______ changes as the output of the firm changes.
variable cost
According to GAAP, when is income reported?
when it is earned or accrued
According to GAAP, when is revenue recognized on an income statement?
when the earnings process is virtually completed when the value of an exchange of goods or services is known or reliably determined
Long-term liabilities represent obligations of the firm lasting more than ______.
1 year
According to the current U.S. corporate tax code, the corporate tax rate in effect for 2021 is ______ percent.
21
balance sheet
A snapshot of the firm's assets and liabilities at a given point in time
Which one of the following terms is defined as the total tax paid divided by the total taxable income?
Average tax rate
Which one of the following has nearly the same meaning as free cash flow?
Cash flow from assets
True or false: Current assets plus current liabilities equals net working capital.
False
The three most important items to keep in mind when reviewing an income statement are:
GAAP, cash versus noncash items, and time and costs
Income statement equation
Net Income = Revenue - Expenses
Liquidity
Speed and ease of conversion to cash without significant loss of value, Valuable in avoiding financial distress
Income Statement
The income statement measures performance over a specified period of time (period, quarter, year). Report revenues first and then deduct any expenses for the period.
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?
What does shareholders' equity represent?
a residual claim against the firm's total assets
What is depreciation?
a systematic expensing of an asset based on the asset's estimated life
A balance sheet reflects a firm's:
accounting value on a specific date.
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
Which one of these is considered to be the most liquid?
accounts receivable
Amounts not yet collected from customers on sales already made are called:
accounts receivable.
Net income refers to income earned ______.
after interest and taxes
In the long run, costs may be considered as ______.
all variable
The short run is ______.
an imprecise period of time
Which of the following is shown on the left-hand side of the balance sheet?
assests
The cash flow identity states that cash flows from ______ should equal cash flows to creditors and equity investors.
assets
Liquidity refers to the ease of changing Blank______.
assets to cash
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
On the balance sheet, assets are listed at their ______ value.
book
Under GAAP, assets are generally carried on a firm's balance sheet at ______.
book value historical cost
The short run is a period when there are ______ costs.
both fixed and variable