chapter 2

Question 1

balance sheet

Answer 1

a snapshot of the firm’s assets and liabilities at a given point in time

Question 2

assets and liabilities order on BS

Answer 2

assets in order of decreasing liquidity
liabilities in ascending order of when due to be paid

Question 3

balance sheet equation

Answer 3

assets = liabilities + SE

Question 4

net working capital

Answer 4

current assets - current liabilities

Question 5

financial leverage

Answer 5

use of debt in a firm’s capital structure (more debt = greater degree)

Question 6

book value

Answer 6

the balance sheet value of the assets, liabilities, and equity

Question 7

market value

Answer 7

true value; the price at which they can actually be bought/sold

Question 8

t/f: market value is typically used

Answer 8

true

Question 9

income statement

Answer 9

measures performance over a specified period of time

Question 10

income statement equation

Answer 10

net income = revenues - expenses

Question 11

income statement end result =

Answer 11

net income = “bottom line” (dividends paid to shareholders and addition to retained earnings)

Question 12

GAAP matching principle

Answer 12

recognize revenue when it is fully earned, matches revenues with the costs associated with producing them

Question 13

noncash items

Answer 13

expenses charged against revenue that do not affect cash flow

Question 14

most important noncash item

Answer 14

depreciation

Question 15

why is the income statement not a good guide to which costs are fixed or variable?

Answer 15

accountants tend to classify costs as period or product

Question 16

earnings management

Answer 16

overstating or understating reported earnings, GAAP leaves wiggle room

Question 17

average tax rate

Answer 17

tax bill divided by your taxable income (% of income that pays taxes)

Question 18

marginal tax rate

Answer 18

extra tax you would pay if you earned one more dollar

Question 19

if the tax rate is 24% for up to $164,000, and your yearly income is $100,000 your marginal tax rate is

Answer 19

24%

Question 20

which tax rate is more relevant for financial decision making

Answer 20

marginal

Question 21

federal corporate tax rate is

Answer 21

a flat 21%

Question 22

cash flow

Answer 22

one of the most important pieces of information that can be derived from financial statements, focus on how cash is generated from utilizing assets and how it is paid to those who finance the asset purchase (cash in vs out)

Question 23

(cash flow identity) cash flow from assets =

Answer 23

cash flow to creditors + cash flow to stockholders

Question 24

cash flow from assets =

Answer 24

operating cash flow - net capital spending - changes in NWC

Question 25

3 components of cash flow from assets

Answer 25

- operating cash flow (day-to-day activities) - net capital spending (fixed assets) - changes in net working capital (net change in current assets over current liabilities)

Question 26

OCF =

Answer 26

EBIT + depreciation - taxes

Question 27

NCS =

Answer 27

ending net fixed assets - beginning net fixed assets + depreciation

Question 28

change in NWC =

Answer 28

ending NWC (end current assets - end current liabilities) - beg NWC (beg current asses - beg current liabilities)

Question 29

cash flow to creditors =

Answer 29

interest paid - net new borrowing (end-beg long term debt)

Question 30

cash flow to stockholders =

Answer 30

dividends paid - net new equity (end-beg common stock)