Chapter Two

Question 1

What document is a “snapshot” of a business?

Answer 1

Balance Sheet

Question 2

What is net working capital?

Answer 2

Current Assets-Current Liabilities

Question 3

What is the difference between the total value of assets and the total value of liabilities?

Answer 3

Shareholders’ equity

Question 4

What is the speed and easy with which an asset can be coverted to cash?

Answer 4

liquidity

Question 5

What are the two dimensions of liquidity?

Answer 5

Easy of conversion versus loss of value

Question 6

What is the use of debt in a firm’s capital structure?

Answer 6

Financial leverage

Question 7

What are the common set of standards and procedures by which audited financial statements are prepared

Answer 7

Generally Accepted Accounting Principles

Question 8

Financial managers are concerned with what type of valuation of assets?

Answer 8

Market value

Question 9

What is the distinction between market value and book value important?

Answer 9

Book value often drastically understates the firms’ assets

Question 10

What is the formula that gives income?

Answer 10

Revenues-Expenses=Income

Question 11

What is a financial statement summarizing a firm’s performance over a period of time

Answer 11

Income statement

Question 12

What are the items of an income statement (in order)

Answer 12

Net sales
Cost of Goods Sold
Depreciation
Earnings before interest and taxes
Interest expense
Taxable Income
Taxes
Net Profit
Dividends
Addition to Retained Earnings

Question 13

How do we calculate earnings per share?

Answer 13

Net Income/Total shares outstanding

Question 14

How do we calculate dividends per share?

Answer 14

Total Dividends/total shares outstanding

Question 15

What are expenses charged against revenues that do not directly affect cash flow, such as depreciation

Answer 15

noncash items

Question 16

What is earnings management?

Answer 16

Overstating or understating earnings at various times to smooth out dips and surges

Question 17

What is the average tax rate?

Answer 17

Total taxes paid divided by total taxable income

Question 18

Amount of tax payable of the next dollar earned

Answer 18

Marginal tax rate

Question 19

What is meant by cash flow?

Answer 19

the difference between the number of dollars that came in and went out

Question 20

Cash flow from assets =

Answer 20

Cash flor to creditors + Cash flow to stockholders

Question 21

Cash flow from assets involve three componenets

Answer 21

operation cash flow, capital spending, change in net working capital

Question 22

What is operating cash flow?

Answer 22

Cash generated from a firm’s normal business activities

Question 23

What is the operation cash flow formula?

Answer 23

EBIT+Depreciation-Taxes

Question 24

What is net capital spending?

Answer 24

money spent of fixed assets less money received from the sale of fixed assets

Question 25

What is the net capital spending formula

Answer 25

Ending net fixed assets-beginning net fixed assets+depreciation

Question 26

What is the formula for the cash flow from assets?

Answer 26

Operating cash flow-Net capital spending-Change in NWC

Question 27

What does a negative cash flow from assets mean?

Answer 27

the firm raised more money by borrowing and selling stock than they paid out to creditors and stockholders

Question 28

What is cash flow to creditors?

Answer 28

A firm's interest payments to creditors less net new borrowings

Question 29

What is the formula for cash flow to creditors?

Answer 29

Interest paid-net new borrowing

Question 30

What is cash flow to stockholders

Answer 30

dividends paid ot by a firm less net new equity raised

Question 31

What is the formula for cash flow to stockholders

Answer 31

dividends paid-net new equity raised

Question 32

What are the two types of equity to be raised?

Answer 32

common stock and paid in surplus

Question 33

What is the cash flow identity?

Answer 33

Cash flow from assets=cash flow to creditors+cash flow to stockholders

Question 34

Cash flow from assets =

Answer 34

Operating Cash Flow - Net capital spending - change in NWC

Question 35

Operating cash flow =

Answer 35

EBIT+Deprec-taxes

Question 36

Net Capital spending =

Answer 36

Ending net fixed asset-beginning fixed net asset + depreciation

Question 37

Change in NWC =

Answer 37

Ending NWC- Beginning NWC

Question 38

Cash flow to creditors =

Answer 38

Interest paid - net new borrowing

Question 39

Cash flow to stockholders =

Answer 39

Dividends paid - net new equity raised