FNAN 300 Connect Chapter 2
Which of the following is an example of a non-cash item on an income statement
depreciation
For a mature firm, operating cash flow:
is usually positive and it is a sign of trouble if negative over a long period of time
Net earnings refers to income earned _____________.
after interest and taxes
Net working capital will be negative when current assets ____________ current liabilities.
are less than
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 and equipment
Cash flow to creditors equals:
interest paid minus net new borrowing
Net capital spending is equal to ending net fixed assets minus beginning net fixed assets __________.
plus depreciation
What is the purpose of the income statement?
to measure performance over a set period of time
True or false: Free cash flow is very similar to cash flow from assets.
true
Assets can be categorized as:
current and fixed assets; tangible and intangible
The GAAP matching principle requires revenues to be matched with:
expenses
Non-cash items are ____________ that __________ cash flow
expenses; do not directly affect
What does GAAP stand for?
generally accepted accounting principles
True or false: Operating cash flow does not include depreciation or interest.
true
Rank the ease of turning the following assets into cash Inventory Plant and equipment Cash equivalents Accounts receivable
cash equivalents, accounts receivable, inventory, plant and equipment
Product costs are usually shown on the income statement under the heading of _________________.
cost of goods sold
Who is entitled to the residual value of a firm's cash flows?
shareholders
Current assets ____________ exceed current liabilities in a healthy firm.
usually
If a firm's current assets are $100 and its current liabilities are $80, then its net working capital is:
$20
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?
Under GAAP, assets are generally carried on a firm's balance sheet at ____________.
book value or historical cost
The short run is a period when there are ____________ costs.
both fixed and variable
The cash flow identity states that cash flow from assests equals cash flows to ____________.
creditors and stockholders
Net working capital equals _____________.
current assets minus current liabilities
Which of the following is NOT a component of cash flow from assets?
financing expenses
The price at which willing buyers and sellers would trade is called ____________ value.
market
Liquidity has two dimensions which are the ability to:
quickly convert assets into cash without significant loss in value
Long-term liabilities are not due in the current year
true
According to GAAP, when is revenue recognized on an income statement?
when the earnings process is virtually completed and when the value of an exchange of goods or services is known or reliably determined
Liquidity refers to the ease of changing __________________.
assets to cash
Which of the following is the balance sheet equation?
assets=liabilities+stockholders' equity
A balance sheet reflects a firm's:
accounting value on a specific date
Which of these is considered to be the most liquid?
accounts receivable
What does stockholders' equity represent?
a residual claim against the firm's assets
Which of the following are classified as liabilities on a firm's balance sheet?
accounts payable and long-term debt
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 firm smooths earnings to please investors, it is called _______________.
earnings management
Costs that do not change in the short run arise because of _____________.
fixed commitments
Stockholders' equity is always shown on the ______________ of the balance sheet.
right side
What should you keep in mind when examining an income statement?
time and costs, cash versus non-cash items, and GAAP
Common stockholders are entitled to the difference between ______________ and ______________.
total assets; total liabilities
Financial leverage refers to a firm's ________________.
use of debt in its capital structure