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FIN: Ch 2 Financial Statements, Taxes, and Cash Flow

Terms in this set (47)

The use of financial leverage can:
- Increase the potential reward for investors
- Increase the chance of financial distress and business failure
- Greatly magnify both gains and losses
Non-cash items do not affect ________________.
Cash flow
The more debt a firm has, the greater its:
Degree of financial leverage
Assets can be described as items that:
- A firm owns
- Provide market value to the firm
- Generate revenue
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?
Rank the ease (from easiest to hardest) of turning the following assets into cash.
a. Inventory
b. Cash equivalents
c. Accounts receivable
d. Plant and equipment
The short run is _____________.
An imprecise period of time
Fixed costs are costs that will not change due to _____________.
Fixed commitments over a stated period of time
The cash flow identity reflects the fact that
- Cash flow from the firm's assets equals the cash flow paid to suppliers of capital to the firm
- A firm generates cash through its various activities
- Cash is either used to pay creditors or paid out to the owners of the firm
A customer has yet to pay the bill for products purchased on credit. This debt is recorded in which balance sheet account?
Accounts receivable
The statement of cash flows explains changes in ____________.
Cash and equivalents
Net working capital plus current liabilities equals _____________.
Current assets
Book value of assets is generally:
not what the assets are actually worth
Which of the following are classified as liabilities on a firm's balance sheet?
- Accounts payable
- Notes payable
Which of the following are examples of short-run fixed costs?
- Bond interest
- Rent
Net income refers to money earned ____________.
After interest and taxes
On a balance sheet, total assets must always equal total liabilities plus:
Shareholders' equity
What does GAAP stand for?
Generally accepted accounting principles
______________ costs change as the output of the firm changes.
Variable
Which of the following will be found in the liabilities section of a firm's balance sheet?
- Long-term bonds
- Notes payable
What of the following are fixed assets?
- Land
- Patents
- Plant
Long-term liabilities represent obligations of the firm lasting over _____________.
1 year
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
Liquidity refers to the ease of changing ____________.
Assets to cash
Which of these items do NOT appear on a balance sheet?
- Knowledge that has no patent.
- Favorable economic conditions.
- Good management.
Which are true concerning product costs?
- Product costs are reported as costs of goods sold
- Product costs contain both fixed and variable costs
What does stockholders' equity represent?
A residual claim against the firm's assets

(The book value of the firm's assets less the book value of its liabilities)
Which of the following are included in the fixed asset portion of a balance sheet?
- Accumulated depreciation
- Trademarks
What is the purpose of the income statement?
To measure performance over a set period of time.
Non-cash items are expenses that directly affect __________ but do not directly affect _________.
net income; cash flow
What should you keep in mind when examining an income statement?
- Cash versus non-cash items
- Time and costs
- GAAP
Who is entitled to the residual value of a firm's cash flows?
Shareholders
In the long run, all costs are _________________.
Variable
Which of the following is true about the difference between the income statement and cash inflows and outflows?
- Income taxes are often deferred so the amount on the income statement may not represent the amount of the check to the IRS
- Cost of raw material purchases on credit are AP rather than cash outflows until they are paid, which many be a different period
- Sales on credit are accounts receivable rather than cash inflows until they are collected, which may be in a different period
Cash flow to stockholders equals __________.
Dividends paid minus net new equity raised
Which of the following are current assets?
Inventory
Accounts receivable
The price at which willing buyers and sellers would trade is called ____________ value.
Market
Marginal tax rates are the most important tax rates because:
- Incremental cash flows are taxed at marginal tax rates
- Financial decisions are usually based on new cash flows
Net capital spending is equal to the change in net fixed assets plus:
Depreciation
The cash flow identity states that cash flow from assets equals cash flows to ____________.
Creditors and stockholders
Which of the following are period costs?
- Selling costs
- General expenses
- Administrative expenses
If your tax bill is $200 and your taxable income is $2,000, then your average tax rate is _____ percent.
10
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.
Which of the following do not directly affect cash flow?
Depreciation
Given the corporate 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 if it had taxable income of $90,000?
$18,850

(.15)(50,000)(.25)(25,000)(.34)(15,000)= $18,850
Under a flat-rate tax, all income levels are taxed at _____.
- The same average rate.
- The same marginal rate.
What is the primary concern for a bank lending funds to a business for the short term?
Liquidity
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