CORP FIN. Ch2
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Questions and Answers

Which financial statement represents a snapshot of the firm’s financial position at a particular point in time?

  • Income statement
  • Statement of cash flows
  • Balance sheet (correct)
  • Statement of stockholders’ equity

    • What does the income statement report?

  • Change in stockholders’ equity
  • Earnings per share (correct)
  • Effect of operating activities
  • Cash flows over an accounting period

    • Which statement shows the change in stockholders’ equity, including the change in retained earnings, between balance sheet dates?

  • Statement of cash flows
  • Statement of stockholders’ equity (correct)
  • Income statement
  • Balance sheet

    • Why does net cash flow often differ from accounting profit?

    <p>Because of noncash items like depreciation</p> Signup and view all the answers

    Which current assets are used to support operations and are not included in operating current assets?

    <p>Short-term investments</p> Signup and view all the answers

    What does the statement of cash flows report?

    <p>Cash flows over an accounting period</p> Signup and view all the answers

    What represents a claim against assets, not assets per se?

    <p>Retained earnings</p> Signup and view all the answers

    What does the Income Statement report?

    <p>Revenues, expenses, and net income</p> Signup and view all the answers

    What is EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) a measure of?

    <p>Operating performance excluding certain expenses</p> Signup and view all the answers

    What does the Balance Sheet provide a snapshot of?

    <p>A company's financial position at a specific point in time</p> Signup and view all the answers

    What does Net Operating Working Capital represent?

    <p>Difference between operating current assets and operating current liabilities</p> Signup and view all the answers

    What is Tax Loss Carryforward?

    <p>The ability to use losses from previous years to offset future taxable income</p> Signup and view all the answers

    What does the Statement of Cash Flows provide information about?

    <p>The cash inflows and outflows during a specific period</p> Signup and view all the answers

    What is Progressive Tax?

    <p>A tax system where the tax rate increases as the taxable income increases</p> Signup and view all the answers

    What is the difference between net operating working capital (NOWC) and total net operating capital?

    <p>NOWC represents working capital acquired with investor-supplied funds, while total net operating capital represents total capital needed to run the business.</p> Signup and view all the answers

    What is Return on Invested Capital (ROIC) a measure of?

    <p>The rate of return that operations are generating.</p> Signup and view all the answers

    What does Market Value Added (MVA) represent?

    <p>It represents the difference between the market value of a firm's stock and the amount of equity its shareholders have supplied.</p> Signup and view all the answers

    How is Economic Value Added (EVA) different from accounting profit?

    <p>EVA includes the cost of equity capital while accounting profit does not.</p> Signup and view all the answers

    Which provision in the corporate tax code allows a company to carry forward prior cumulative operating losses indefinitely?

    <p>The carryforward provision</p> Signup and view all the answers

    What are S corporations in the United States?

    <p>S corporations are taxed as partnerships or proprietorships but have unlimited liability benefits.</p> Signup and view all the answers

    What is taxed as ordinary income when received by a corporation?

    <p>Interest income</p> Signup and view all the answers

    What is the primary advantage of an S Corporation?

    <p>Avoiding double taxation</p> Signup and view all the answers

    What is the purpose of the balance sheet?

    <p>To show the financial position at a specific point in time</p> Signup and view all the answers

    What does NOPAT focus on?

    <p>Operational profitability</p> Signup and view all the answers

    Why is free cash flow considered the most important measure of cash flow?

    <p>It provides a comprehensive view of a company's ability to generate cash after meeting its operational and capital expenditure needs</p> Signup and view all the answers

    What is pass-through taxation associated with?

    <p>Partnerships</p> Signup and view all the answers

    What might cause an individual to prefer setting up a business as a proprietorship or a partnership rather than as a corporation?

    <p>Simplicity and compliance costs</p> Signup and view all the answers

    What is the difference between the balance sheet and the income statement?

    <p>The income statement reports on operations over a period of time, while the balance sheet offers a dynamic view of financial performance.</p> Signup and view all the answers

    "If a “typical” firm reports $20 million of retained earnings on its balance sheet, can the firm definitely pay a $20 million cash dividend?" What is the answer to this question?

    <p>$20 million can be impacted by various considerations and constraints for cash dividend payment.</p> Signup and view all the answers

    "Which is a better measure of the performance of a company’s operations?" What is the answer according to the text?

    <p><strong>NOPAT</strong> is better.</p> Signup and view all the answers

    What is the primary advantage of a proprietorship or partnership over a corporation, in terms of tax considerations?

    <p>Simplicity and compliance costs</p> Signup and view all the answers

    What does net income include that makes it a broader measure of a company's financial performance?

    <p>Capital structure and tax considerations</p> Signup and view all the answers

    What is the purpose of the balance sheet?

    <p>To offer a static view of the firm’s financial position at a specific point in time</p> Signup and view all the answers

    Why is operating capital considered a crucial financial metric for stakeholders?

    <p>To assess short-term liquidity and operational efficiency</p> Signup and view all the answers

    What is the most important measure of cash flow for investors, analysts, and management?

    <p>Free cash flow</p> Signup and view all the answers

    Which measure focuses on a company's operational profitability by excluding interest and taxes?

    <p>NOPAT</p> Signup and view all the answers

    What does pass-through taxation help proprietors and partners avoid?

    <p>Double taxation on profits</p> Signup and view all the answers

    Which tax considerations might cause an individual to prefer setting up a business as a proprietorship or partnership rather than as a corporation?

    <p>The ability to avoid double taxation on profits.</p> Signup and view all the answers

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