Ch 2: Financial Statements and Cash Flows

Question 1

What is the balance sheet identity?

Answer 1

Assets = Liabilities + Stockholder’s Equity

Question 2

How are assets listed on a balance sheet?

Answer 2

listed in order of liquidity (which ones can be converted to cash the fastest)

Question 3

What is liquidity?

Answer 3

-ease and quickness with which assets can be converted to cash without a significant loss in value

Question 4

What type of assets are the most liquid?

Answer 4

current assets

Question 5

Who receives the first claim on a firm’s cash flow?

Answer 5

creditors

Question 6

What is shareholder’s equity?

Answer 6

residual difference between assets and liabilities (after creditors have been paid)

Question 7

What is the accounting definition of income?

Answer 7

Income = Revenue - Expenses

Question 8

Can income be reported even if a cash flow has not occurred?

Answer 8

yes

Question 9

What are some non-cash items?

Answer 9

depreciation, deferred taxes

Question 10

What is the marginal tax rate?

Answer 10

percentage paid on the next dollar earned

Question 11

What is the average tax rate?

Answer 11

tax bill divided by taxable income

Question 12

What is the cash flow law?

Answer 12

cash flow from the firm’s assets must equal the cash flows to the firm’s stockholders and creditors