FINANCE MIDTERM T/F

On the balance sheet, total assets must always equal the sum of total liabilities plus equity. TRUE
Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books. TRUE
The income statement shows the difference between a firm’s income and its costs–i.e., its profits–during a specified period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm’s reported profits and its actual cash flow for the same period. TRUE
EBIT stands for earnings before interest and taxes, and it is often called “operating income.” TRUE
Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing TRUE
Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm’s taxes. FALSE
The statement of cash flows has four main sections, one each for operating, investing, and financing activities, and one that shows a summary of the cash and cash equivalents at the end of the year. TRUE
The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders’ equity. TRUE
The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm’s future earnings and dividends, and the riskiness of those cash flows. TRUE
Companies typically provide four basic financial statements: the fixed income statement, the current income statement, the balance sheet, and the cash flow statement. FALSE. Balance sheet, income statement, statement of cash flows, and statement of stockholder’s equity
The amount shown on the December 31, 2011 balance sheet as “retained earnings” is equal to the firm’s net income for 2011 minus any dividends it paid. FALSE
If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a video while the balance sheet is more like a snapshot. TRUE
EBITDA stands for earnings before interest, taxes, debt, and assets. FALSE
Typically, the statement of stockholders’ equity starts with total stockholders’ equity at the beginning of the year, adds net income, subtracts dividends paid, and ends up with total stockholders’ equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, and will result in a substantial amount of retained earnings shown on the balance sheet. TRUE
Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations. TRUE
The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance. TRUE
If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow. FALSE
The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date. FALSE
The present value of a future sum increases as either the discount rate or the number of periods per year increases, other things held constant. TRUE
A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership. FALSE
Because the U.S. tax system is a progressive tax system, a taxpayer’s marginal and average tax rates are the same FALSE
Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value FALSE
In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the stock price on a specific target date. FALSE
If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a slideshow while the balance sheet is more like a snapshot. TRUE
The statement of cash flows has three main sections, one each for operating, investing, and financing activities; plus one that shows a summary of the cash and cash equivalents at the end of the year. TRUE
In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the stock price in the long run, or the stock’s “intrinsic value”. TRUE
In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the expected EPS. FALSE
Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value. TRUE
The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date. TRUE

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