,Essentials of Corporate Finance, 10e (Ross)
Chapter 2 Financial Statements, Taxes, and Cash Flow
1) Net working capital is defined as:
A) the depreciated book value of a firm's fixed assets.
B) the value of a firm's current assets.
C) available cash minus current liabilities.
D) total assets minus total liabilities.
E) current assets minus current liabilities.
Answer: E
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Net working capital
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market
value.
Bloom's: Remember
AACSB: Analytical Thinking
2) The accounting statement that measures the revenues, expenses, and net income of a firm over
a period of time is called the:
A) statement of cash flows.
B) income statement.
C) GAAP statement.
D) balance sheet.
E) net working capital schedule.
Answer: B
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Income statement
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Bloom's: Remember
AACSB: Analytical Thinking
,3) The financial statement that summarizes a firm's accounting value as of a particular date is
called the:
A) income statement.
B) cash flow statement.
C) liquidity position.
D) balance sheet.
E) periodic operating statement.
Answer: D
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Balance sheet
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market
value.
Bloom's: Remember
AACSB: Analytical Thinking
4) Which one of the following decreases net income but does not affect the operating cash flow
of a firm that owes no taxes for the current year?
A) Indirect cost
B) Direct cost
C) Noncash item
D) Period cost
E) Variable cost
Answer: C
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Noncash items
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Bloom's: Remember
AACSB: Analytical Thinking
, 5) Which one of the following terms is defined as the total tax paid divided by the total taxable
income?
A) Average tax rate
B) Variable tax rate
C) Marginal tax rate
D) Absolute tax rate
E) Contingent tax rate
Answer: A
Difficulty: 1 Easy
Section: 2.3 Taxes
Topic: Taxes
Learning Objective: 02-03 Explain the difference between average and marginal tax rates.
Bloom's: Remember
AACSB: Analytical Thinking
6) The tax rate that determines the amount of tax that will be due on the next dollar of taxable
income earned is called the:
A) average tax rate.
B) variable tax rate.
C) marginal tax rate.
D) fixed tax rate.
E) ordinary tax rate.
Answer: C
Difficulty: 1 Easy
Section: 2.3 Taxes
Topic: Taxes
Learning Objective: 02-03 Explain the difference between average and marginal tax rates.
Bloom's: Remember
AACSB: Analytical Thinking
7) Cash flow from assets is defined as:
A) the cash flow to shareholders minus the cash flow to creditors.
B) operating cash flow plus the cash flow to creditors plus the cash flow to shareholders.
C) operating cash flow minus the change in net working capital minus net capital spending.
D) operating cash flow plus net capital spending plus the change in net working capital.
E) cash flow to shareholders minus net capital spending plus the change in net working capital.
Answer: C
Difficulty: 1 Easy
Section: 2.4 Cash Flow
Topic: Cash flow from assets
Learning Objective: 02-04 Determine a firm's cash flow from its financial statements.
Bloom's: Remember
AACSB: Analytical Thinking
Chapter 2 Financial Statements, Taxes, and Cash Flow
1) Net working capital is defined as:
A) the depreciated book value of a firm's fixed assets.
B) the value of a firm's current assets.
C) available cash minus current liabilities.
D) total assets minus total liabilities.
E) current assets minus current liabilities.
Answer: E
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Net working capital
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market
value.
Bloom's: Remember
AACSB: Analytical Thinking
2) The accounting statement that measures the revenues, expenses, and net income of a firm over
a period of time is called the:
A) statement of cash flows.
B) income statement.
C) GAAP statement.
D) balance sheet.
E) net working capital schedule.
Answer: B
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Income statement
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Bloom's: Remember
AACSB: Analytical Thinking
,3) The financial statement that summarizes a firm's accounting value as of a particular date is
called the:
A) income statement.
B) cash flow statement.
C) liquidity position.
D) balance sheet.
E) periodic operating statement.
Answer: D
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Balance sheet
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market
value.
Bloom's: Remember
AACSB: Analytical Thinking
4) Which one of the following decreases net income but does not affect the operating cash flow
of a firm that owes no taxes for the current year?
A) Indirect cost
B) Direct cost
C) Noncash item
D) Period cost
E) Variable cost
Answer: C
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Noncash items
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Bloom's: Remember
AACSB: Analytical Thinking
, 5) Which one of the following terms is defined as the total tax paid divided by the total taxable
income?
A) Average tax rate
B) Variable tax rate
C) Marginal tax rate
D) Absolute tax rate
E) Contingent tax rate
Answer: A
Difficulty: 1 Easy
Section: 2.3 Taxes
Topic: Taxes
Learning Objective: 02-03 Explain the difference between average and marginal tax rates.
Bloom's: Remember
AACSB: Analytical Thinking
6) The tax rate that determines the amount of tax that will be due on the next dollar of taxable
income earned is called the:
A) average tax rate.
B) variable tax rate.
C) marginal tax rate.
D) fixed tax rate.
E) ordinary tax rate.
Answer: C
Difficulty: 1 Easy
Section: 2.3 Taxes
Topic: Taxes
Learning Objective: 02-03 Explain the difference between average and marginal tax rates.
Bloom's: Remember
AACSB: Analytical Thinking
7) Cash flow from assets is defined as:
A) the cash flow to shareholders minus the cash flow to creditors.
B) operating cash flow plus the cash flow to creditors plus the cash flow to shareholders.
C) operating cash flow minus the change in net working capital minus net capital spending.
D) operating cash flow plus net capital spending plus the change in net working capital.
E) cash flow to shareholders minus net capital spending plus the change in net working capital.
Answer: C
Difficulty: 1 Easy
Section: 2.4 Cash Flow
Topic: Cash flow from assets
Learning Objective: 02-04 Determine a firm's cash flow from its financial statements.
Bloom's: Remember
AACSB: Analytical Thinking
