Chapter 3

Question 1

Statement that shows a firm’s assets, liabilities, and shareholder’s equity at a given point in time. It is a snapshot of the firm’s financial position on a particular date

Answer 1

Balance Sheet

Question 2

The value of an asset as shown on a firm’s balance sheet. It represents the depreciated historical cost of the asset rather than its current market value or replacement cost

Answer 2

Accounting Book Value

Question 3

The ability to convert an asset into cash quickly without a significant loss of its value

Answer 3

Liquidity

Question 4

Consists of cash, marketable securities, accounts receivable, inventories, and prepaid expenses

Answer 4

Current Assets

Question 5

Money owed by customers who purchased goods or services from the firm on credit

Answer 5

Accounts Receivable

Question 6

Raw materials, work in progress, and finished goods held by the firm for eventual sale

Answer 6

Inventories

Question 7

Other short-term assets that will benefit future time periods, such as prepaid expenses

Answer 7

Other Current Assets

Question 8

Assets such as equipment, buildings, and land

Answer 8

Fixed Assets

Question 9

A noncash expense to allocate the cost of depreciable assets, such as plant and equipment, over the life of the asset

Answer 9

Depreciation Expense

Question 10

The sum of all depreciation taken over the entire life of a depreciable asset

Answer 10

Accumulated Depreciation

Question 11

The original cost of a firm’s fixed assets

Answer 11

Gross Fixed Assets

Question 12

Gross fixed assets minus the accumulated depreciation taken over the life to date of the assets

Answer 12

Net Fixed Assets

Question 13

Liabilities consisting of such sources as credit extended by suppliers or a loan from a bank

Answer 13

Debt

Question 14

Stockholders’ investment in the firm and the cumulative profits retained in the business up to the date of the balance sheet

Answer 14

Equity

Question 15

Debt due to be paid within 12 months

Answer 15

Current Debt (Short-term Liabilities)

Question 16

Credit provided by suppliers when a firm purchases inventory on credit

Answer 16

Accounts Payable

Question 17

Expenses that have been incurred but not yet paid in cash

Answer 17

Accrued Expenses

Question 18

Amounts borrowed from lenders, mostly financial institutions such as banks, where the loan is to be repaid within 12 months

Answer 18

Short-term Notes

Question 19

Loans from banks or other sources that lend money for longer than 12 months

Answer 19

Long-term Debt

Question 20

A loan to finance real estate where the lender has first claim on the property in the even the borrower is unable to repay the loan

Answer 20

Mortgage

Question 21

Stockholders who have claims on the firm’s income and assets after creditors, but before common stockholders

Answer 21

Preferred Stockholders

Question 22

Investors who are the residual owners of the firm

Answer 22

Common Stockholders

Question 23

Shares that represent ownership in the corporations

Answer 23

Common Stock

Question 24

The arbitrary value a firm puts on each share of stock prior to its being offered for sale

Answer 24

Par Value

Question 25

The amount a company receives above par value from selling stock to investors

Answer 25

Paid-in Capital

Question 26

The firm’s stock that has been issued and then repurchased by that firm

Answer 26

Treasury Stock

Question 27

Cumulative profits retained in a business up to the date of the balance sheet

Answer 27

Retained Earnings

Question 28

A balance sheet where a firm’s assets and sources of debt and equity are expressed as a percentage of its total assets

Answer 28

Common-sized Balance Sheet

Question 29

A firm’s total liabilities divided by its total assets. It measures the extent to which a firm has been financed with debt

Answer 29

Debt Ratio

Question 30

The difference between a firm’s current assets and its current liabilities

Answer 30

Net Working Capital

Question 31

A method of accounting where revenue is recorded when it is earned and expenses are recorded when they are incurred

Answer 31

Accrual Basis Accounting

Question 32

A method of accounting where revenue is recorded when cash is actually received

Answer 32

Cash Basis Accounting

Question 33

Statement that shows how changes in balance sheet accounts and income affect cash ands cash equivalents, and breaks the analysis down to operating, investing, and financing activities

Answer 33

Statement of Cash Flows

Question 34

The amount of cash available from operations after the firm pays for the investment it has made in operating working capital and fixed assets. Cash available to distribute to the firm’s creditors and owners

Answer 34

Free Cash Flows

Question 35

The amount of cash received from or distributed to the firm’s investor’s, usually in the form of interest, dividends, issuance of debt, or issuance or repurchase of stocks

Answer 35

Financing Cash Flows

Question 36

Rules-based accounting principles, standards, and procedures, issued by the FASB, that companies use to compile their financial statements

Answer 36

Generally Accepted Accounting Principles (GAAP)

Question 37

Principles-based set of international accounting standards, issued by the IASB, stating how particular types of transactions and other events should be reported in financial statements

Answer 37

International Financial Reporting Standards (IFRS)

Question 38

Income from all sources, except for allowable exclusions, less and tax-deductible expenses

Answer 38

Taxable Income

Question 39

Gains from selling any asset that is not part of the ordinary operations

Answer 39

Capital Gains

Question 40

The tax rate that would be applied to the next dollar of income

Answer 40

Marginal Tax Rate

Question 41

The tax rate on average that a company pays on its total taxable income

Answer 41

Average Tax Rate

Question 42

Operating Income - Interest Exp - Income Tax

Answer 42

Net Income