Chapter 2 "Recharge" Flashcards
Which of these questions can be answered by reviewing a firm’s balance sheet?
How much debt is used to finance the firm? AND What is the total amount of assets the firm owns?
What does the balance sheet help us do?
It is a convenient means of organizing and summarizing what a firm owns (its assets), what a firm owes (its liabilities), and the difference between the two (the firm’s equity) at a given point in time.
On a balance sheet, total assets must always equal total liabilities plus:
A) Retained Earnings
B) Net Working Capital
C) Shareholders’ Equity
D) Fixed Assets
Shareholders’ Equity
True or False: Current assets plus current liabilities equals net working capital.
False. CA minus CL equals NWC.
Liquidity has two dimensions which are the ability to:
A) Convert assets into cash so that the value is maximized.
B) Quickly convert assets into cash without significant loss in value.
C) Quickly convert assets into cash regardless of loss in value.
Quickly convert assets into cash without significant loss in value.
The price at which willing buyers and sellers would trade is called ___ value.
A) Market
B) Carrying
C) Accounting
D) Book
Market
According to GAAP, when is income reported?
A) Whenever the firm decides to report it.
B) When it is earned or accrued.
C) When cash payment is received.
D) When it is first anticipated.
When it is earned or accrued.
What does the matching principle of GAAP state?
States that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service. Recognition takes place when revenue is earned and expense incurred, rather than when cash is collected or spent.
In the long run, costs may be considered as:
A) All fixed.
B) Some fixed and some variable.
C) All variable.
All variable
In practice, accountants tend to classify costs as either ___ costs or ___ costs.
A) Variable; Fixed
B) Fixed; Period
C) Product; Variable
D) Product; Period
Product; Period
When a firm smooths earnings to please investors, it is called:
A) Discretionary reporting.
B) Earnings smoothing.
C) Fair market accounting.
D) Earnings management.
Earnings management.
In finance, the value of a firm depends on its ability to generate:
A) Cash flows
B) Earnings per share.
C) Net working capital
D) Net income.
Cash flows.
A balance sheet reflects a firm’s:
A) Economic value over a specified time period.
B) Earnings per share over an unspecified time.
C) Accounting value on a specific date.
D) Income at a specific time.
Accounting value on a specific date.
The balance sheet identity shows that stockholders’ equity equals assets ____ liabilities.
A) Minus
B) Plus
C) Times
Minus
Current assets ___ current liabilities equals NWC.
A) Plus
B) Minus
Minus
Liquidity refers to the ease of changing ___.
A) Cash into other assets.
B) Liabilities to assets.
C) Cash to liabilities.
D) Assets to cash.
Assets to cash.
What does liquidity refer to?
Refers to the speed and ease with which an asset can be converted to cash.
The market value of an item is:
A) The amount you paid it.
B) The amount recorded in the balance sheet.
C) Its appraised value.
D) The cash value you’d get if you sold it.
The cash value you’d get if you sold it.
Select all that apply.
According to GAAP, when is revenue recognized on an income statement?
A) When the value of an exchange of goods or services is known or reliably determined.
B) Only when cash has been received for sale.
C) After the related expenses are paid in full.
D) When the earnings process is virtually completed.
A & D.
The short run is:
A) An imprecise period of time.
B) Defined as six months.
C) Defined as one month.
D) Defined as more than one year.
An imprecise period of time.
Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as:
A) Product Costs
B) Variable Costs
C) Fixed Costs
D) Period Costs
Period Costs
Earnings management is a controversial practice in which corporations ____ or ___ their earnings to “smooth out” dips and surges and keep investors calm.
A) Change; Don’t Change
B) Overstate; Understate
C) Lie; Fudge
D) Overstate; Inflate
Overstate; Understate
Cash flow refers to:
A) The difference between the number of dollars that come in and the number that went out.
B) The sum of the number of dollars that came in and the number that went out.
C) Only the cash that corresponds to the net income for the year.
D) Only the cash that represents the closing balance of retained earnings.
The difference between the number of dollars that came in and the number that went out.
Select all that apply.
Which of these questions can be answered by reviewing a firm’s balance sheet?
A) What is the total amount of assets the firm owns?
B) How much net income has the firm earned this period?
C) How much debt is used to finance the firm?
D) How much of the firm’s net income was paid out in dividends?
A & C
