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Ch 2 Smart-Book notes

Terms in this set (39)

Non-cash items are ______ that ____ cash flow.
expenses; do not directly affect
The last item (or "bottom line") on the income statement is typically the _________
net income
Non-cash items do not affect:
cash flow
According to GAAP, when is income reported?
When it is earned or accrued
The short run is a period when there are ______ costs.
both fixed and variable
What is depreciation?
the accountant's estimate of the cost of equipment used up in the production process.
A primary reason that accounting income differs from cash flow is that an income statement contains ______.
noncash items
Costs that do not change in the short run arise because of ______.
fixed commitments.
Net earnings refers to income earned ______.
after interest and taxes
In practice, accountants tend to classify costs as either ______ costs or _______ costs.
product; period
The short run is ______.
an imprecise period of time
______ changes as the output of the firm changes.
Variable cost
Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as:
Period costs
Period costs are the costs that are allocated to a specific ______.
interval of time
In the long-run, costs may be considered as ________.
All Variable
Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm.
overstate; understate
What is depreciation??
A systematic expensing of an asset based on the asset's estimated life
U.S. corporations pay tax at a rate of _______
percent.
21
Tax rates for propietorships, 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 _________________ .
COGS
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
For financial decision-making purposes, the most important tax rate is the ______ tax rate.
marginal tax rate, because financial decisions are based on new cash flows.
True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.
Big ol FALSE
Cash flow refers to _____.
the difference between the number of dollars that came in and the number that went out
The cash flow identity states that cash flow from assets equals cash flows to ____.
creditors and stockholders
Which of the following are components of cash flow from assets?
Operating cash flow, capital spending, change in NWC.
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.
True or false: For financial analysis, financial statements and accounting numbers are more important than cash flows.
FALSE! Financial analysis relies on cash flows, not accounting or book numbers.
In finance, the value of a firm depends on its ability to generate ______.
cash flows
A positive operating cash flow indicates that the firm is generating enough cash to:
pay everyday cash outflows.
The cash flow that results from the firm's day-to-day activities of producing and selling is called:
operating cash flows
Net capital spending is equal to the change in net fixed assets plus:
Depreciation... because..

Capital spending = Ending net fixed assets - beginning net fixed assets + depreciation.
For a mature firm, operating cash flow:
is usually positive and
a sign of trouble if negative over a long period of time
Net capital spending is negative when:
a firm sold off more assets than it purchased
Free cash flow is better described as ____.
total distributable cash flow
Cash flow to stockholders= ____.
dividends paid - net new equity raised
cash flow to creditors=
interest paid - net new borrowing
Net working capital will be negative when current assets ______ current liabilities.
are less than
True or false: Free cash flow is also known as cash flow from assets.
T
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