Chapter 2 Flashcards
The difference between a firm’s current assets and its current liabilities is called ____ ___________ ____________.
net working capital
_________ refers to the speed and ease at which an asset can be converted to cash.
Liquidity
T or F: Equity holders in a company are only entitled to residual value of a company, after creditors are paid.
True
What is book value and why is it important?
Book value is the historical cost of an asset (whatever it was purchased for).
Assets are recorded at book value on the balance sheet and the fact that there is no connection between book value and fair market value.
What is financial leverage?
It is the use of debt within a firm’s capital structure.
What is important to note about timing and the income statement?
GAAP allows revenue recorded even if cash hasn’t come in. So sometimes cash flows and revenue recognition timings can differ.
What is the matching principle?
Matching revenues and costs associated with producing them.
What item on the income statement is the primary reason that accounting income differs from cash flow?
noncash items (depreciations etc)
In practice, accountants tend to classify costs as either _________ or _________ costs.
product
period
_________ costs are those that include raw materials, direct labor expense, or manufacturing overhead. They can be easily allocated to a cost object.
product
Define a “period cost”.
Costs which are incurred during a particular time period - typically reported as selling, G&A expense.
T or F: Both product and period costs can be fixed or variable.
True.
After the Tax Cuts and Jobs Act of 2017, the federal corporate tax rate was _______, but other forms of businesses did not have a flat rate.
21%
Average tax rate is calculated by…
Dividing your tax bill by your taxable income.
Marginal tax rate is the…
rate of the extra tax you would pay if you earned one more dollar.
