CFIN 5th Edition by Besley – Test Bank

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INSTANT DOWNLOAD COMPLETE TEST BANK WITH ANSWERS

 

CFIN 5th Edition by Besley – Test Bank

 

Sample  Questions

 

 

  1. ​The finance function is relatively independent of most other corporate functions. Marketing decisions, for example, might affect the firm’s need for funds but are not affected by conditions in financial markets or other financing issues.

 

  1. True

*b. False

 

 

  1. Two key limitations of the proprietorship form of business involve potential difficulty in raising the necessary capital and the presence of unlimited personal liability for business debts.​

 

*a. True

  1. False

 

 

  1. The disadvantages associated with a proprietorship are similar to those under a partnership. One exception to this is the formal nature of the partnership agreement and the commitment of the partners’ personal assets. As a result, partnerships do not have difficulty raising large amounts of capital.​

 

  1. True

*b. False

 

 

  1. A proprietorship is an unincorporated business owned by one individual and the owner benefits from the limited liability for business, which limits his losses to what he has invested in the company.​

 

  1. True

*b. False

 

 

  1. The corporate charter is a document filed with the secretary of the state in which the firm is incorporated that provides information about the company, including its name, address, directors, and amount of capital stock.​

 

*a. True

  1. False

 

 

  1. In general, the role of the financial manager is to plan for the acquisition and use of funds so as to maximize the value of the firm.​

 

*a. True

  1. False

 

 

  1. The financial manager must execute his or her duties independent of the cash flow activities of the firm in order to properly maximize the value of the firm.​

 

  1. True

*b. False

 

 

  1. A hostile takeover involves an attempt by one group of stockholders to solicit votes from other stockholders in order to put a new management team into place and is usually motivated by low stock price.​

 

  1. True

*b. False

 

 

  1. The proper goal of the financial manager should be to maximize the firm’s expected profit, because this will add the most wealth to each of the individual shareholders (owners) of the firm.​

 

  1. True

*b. False

 

 

  1. The decision framework of the financial managers that seek that combination of assets, liabilities, and capital which will generate the largest expected projected income over the relevant time horizon is most useful for carrying out the firm’s objective.

 

  1. True

*b. False

 

 

  1. The riskiness inherent in a firm’s earnings per share (EPS) depends on both the types of projects the firm takes on and the manner in which the projects are financed.​

 

*a. True

  1. False

 

 

  1. If a firm raises its product prices beyond reasonable levels, it will simply lose its market share.​

 

*a. True

  1. False

 

 

  1. If a firm’s managers want to maximize stock price, it is in their best interests to operate efficient, low-cost plants, develop new and safe products that consumers want, and maintain good relationships with customers, suppliers, creditors, and the communities in which they operate.​

 

*a. True

  1. False

 

 

  1. A financial manager’s task is to make decisions concerning the acquisition and use of funds for the greatest benefit of the firm.​

 

*a. True

  1. False

 

 

  1. Incentive compensation plans are used to attract and retain top managerial talent as well as to align the interests of management with shareholders.​

 

*a. True

  1. False

 

 

  1. In a competitive marketplace, if managers deviate too far from making decisions that are consistent with stockholder wealth maximization, they risk being disciplined by the market. Part of this discipline involves the threat of being taken over by groups who are more aligned with stockholder interests.​

 

*a. True

  1. False

 

 

  1. Having the manager’s compensation tied to the company’s performance increases the agency problem that corporations face.​

 

  1. True

*b. False

 

 

  1. Managers of firms using accounting manipulations to inflate current earnings are likely to generate long-term benefits to the shareholders of the firm.​

 

  1. True

*b. False

 

 

  1. In a competitive marketplace “good ethics” is a wonderful idea but an impractical standard. There are simply too few benefits to be gained from maintaining high business ethics.​

 

  1. True

*b. False

 

 

  1. No firm can take cost-increasing, socially responsible actions in a competitive marketplace and expect to continue to compete, even if those cost-increasing actions yield significant benefits to the firm.​

 

  1. True

*b. False

 

 

  1. Cultural differences do not impact the multinational corporations as they expand into different geographic regions.​

 

  1. True

*b. False

 

 

  1. Exchange rate risk is the risk that the cash flows from a foreign project will be worth less than those same cash flows denominated in the parent company’s home currency.​

 

*a. True

  1. False

 

 

  1. The term multinational corporation is used to describe a firm that operates in two or more countries.​

 

*a. True

  1. False

 

 

  1. Nations do not have the sovereignty to expropriate the assets of a firm without compensation.​

 

  1. True

*b. False

 

 

  1. Industrial groups are organizations comprised of companies in different industries with common ownership interests, which include firms necessary to sell and manufacture products.​

 

*a. True

  1. False

 

 

  1. ​Assuming everything else equal, one of the concepts to consider to make sound financial decisions is that _____.

 

  1. ​the riskier assets always have lower market value
  2. ​the riskier assets are more valuable than (preferred to) less risky assets

*c. ​the sooner cash is received, the more valuable it is

  1. ​investors always prefer short-term, low value, and high-risk assets
  2. ​investors always achieve higher returns from less risky assets

 

 

  1. ​The success of financial institutions depends on _____.

 

*a. ​the understanding of the factors that cause interest rates and other returns in the financial markets to rise and fall

  1. ​the environmentally responsible behavior of the shareholders of corporations
  2. ​the expectations of long-term investors in the company
  3. ​the awareness of the shareholders regarding the regulations that affect public corporations
  4. ​the prior knowledge of the decisions that public corporations make concerning their cash flows

 

 

  1. Which of the following is true of the investment function of finance?​

 

  1. ​Investment function determines the most socially responsible behavior of the corporations

*b. ​Investment function determines the values, risks, and returns associated with financial assets as stocks and bonds.

  1. ​Investment function determines the optimal mix of securities based on the environment friendly behavior of the corporations.
  2. ​Investment function determines the regulations applicable to a public corporation.
  3. ​Investment function determines additional information about the procedures used to construct and report financial statements.

 

 

  1. Identify a true statement about the financial services provided by organizations.​

 

  1. ​Financial services organizations invest only in environmentally responsible public corporations.
  2. ​Financial services include services provided by banks and insurance companies only.
  3. ​Financial services organizations make investment decisions based solely on the socially responsible behavior of corporates.
  4. ​Financial services organizations provide comparative cash flow positions of competing corporations to investors to help them with investment decisions.

*e. ​Financial services organizations help individuals and companies determine how to invest money to achieve their financial goals.

 

 

  1. Financial services refer to functions provided by organizations that _____.​

 

  1. ​deal with the most efficient management of the human resources
  2. ​ensure that regulations of the Sarbanes-Oxley Act are followed by public corporations
  3. ​recommend the most environment friendly method of operations to a corporation
  4. ​deal with achieving maximum earning per share for the shareholders

*e. ​deal with the management of money

 

 

  1. Which of the following functions deals with the management of money?​

 

  1. ​Marketing
  2. ​Investment

*c. ​Financial services

  1. ​Information systems
  2. ​Managerial finance

 

 

  1. Which of the following is true of financial services provided by persons working in banks, insurance companies, and brokerage firms?​

 

  1. ​Persons working in banks, insurance companies, and brokerage firms help investors achieve the highest earnings per share.

*b. ​Persons working in banks, insurance companies, and brokerage firms help individuals and companies determine how to invest money to achieve their financial goals.

  1. ​Persons working in banks, insurance companies, and brokerage firms help corporations fulfil the regulations required by the Sarbanes-Oxley Act.
  2. ​Persons working in banks, insurance companies, and brokerage firms help public corporations follow environment-friendly practices.
  3. ​Persons working in banks, insurance companies, and brokerage firms help corporations make decisions concerning their cash flows, including both inflows and outflows.

 

 

  1. Which of the following is true of financial institutions?​

 

  1. ​Financial institutions are the regulators of interest rates and other returns in financial markets.

*b. ​Financial institutions require an understanding of factors that cause interest rates and other returns in the financial markets to rise and fall.

  1. ​Financial institutions are accountable and responsible in reporting financial information for publicly traded corporations.
  2. ​Financial institutions are required by the Sarbanes-Oxley Act to disclose the environment-friendly measures taken by investment corporations.
  3. ​Financial institutions require public corporations to adopt socially responsible work practices.

 

 

  1. As financial institutions in other countries are generally less regulated than in the United States, _____.​

 

  1. ​foreign banks invest in less socially responsible companies only

*b. ​foreign banks provide businesses with a greater variety of services than U.S. banks

  1. ​foreign banks invest to maximize investment corporations’ earnings
  2. ​foreign banks provide investment opportunities in illegal business plans also
  3. ​foreign banks are required to fulfill the regulations of the Sarbanes-Oxley Act

 

 

  1. The investment function of finance _____.

 

  1. ​takes decision regarding the cash flow of the investment corporation
  2. ​determines the expenses incurred on ensuring the socially acceptable behavior of the investment corporation

*c. ​determines the values, risks, and returns associated with such financial assets

  1. ​is required to ensure that 50 percent of investments are in environment-friendly corporations
  2. ​ensures that the corporations payout maximum dividends per share

 

 

  1. The success of financial institutions requires an understanding of _____.​

 

  1. ​regulations regarding the maximization of wealth applicable to the corporations

*b. ​regulations that affect these financial institutions

  1. ​the environment-friendly manufacturing methods adopted by various corporations
  2. ​the socially responsible behavior required to be demonstrated by these institutions
  3. ​their accountability in reporting the financial information for a publicly traded company

 

 

  1. The treasurer of a company is a key subordinate of the _____.​

 

  1. ​controller

*b. ​financial vice president

  1. ​chief executive officer
  2. ​credit manager
  3. ​director of capital budgeting

 

 

  1. The controller of a company is a key subordinate of the _____.​

 

  1. ​treasurer

*b. ​financial vice president

  1. ​chief financial officer
  2. ​credit manager
  3. ​director of capital budgeting

 

 

  1. The credit manager is supervised by the _____.​

 

*a. ​treasurer

  1. ​inventory manager
  2. ​director of capital budgeting
  3. ​vice president of finance
  4. ​controller

 

 

  1. ​The accounting and tax departments are the responsibility of the _____.

 

  1. ​treasurer
  2. ​inventory manager
  3. ​director of capital budgeting
  4. ​vice president of finance

*e. ​controller

 

 

  1. Everything else equal, including firm size, dollar sales, type of product sold, and so forth, the primary difference between proprietorship and partnership business forms is that _____.​

 

*a. ​a partnership has more owners than a proprietorship

  1. ​the combined personal liability associated with a partnership is significantly less than the combined personal liability associated with a proprietorship
  2. ​a partnership is generally easier to form than a proprietorship
  3. ​the annual growth rate of a proprietorship is limited by law, whereas the growth rate of a partnership is always potentially unlimited
  4. ​many more businesses are formed as partnerships than proprietorships

 

 

  1. Which of the following statements is correct?​

 

  1. ​The corporate bylaws are the set of rules drawn up by the state to enable managers to run the firm in accordance with state laws.

*b. ​Procedures for electing corporate directors are contained in bylaws.

  1. ​Procedures that govern changes in the bylaws of the corporation are contained in the corporate charter.
  2. ​Although most companies design a charter, only the bylaws are legally required to be filed with the secretary of state in order for a corporation to be in official existence.
  3. ​The declaration of the activities that the firm will pursue and the number of directors are included in the corporate charter.

 

 

  1. Which of the following statements is correct?​

 

  1. ​A hostile takeover is the primary method of transferring ownership interest in a corporation.
  2. ​The corporation is a legal entity created by the state and is a direct extension of the legal status of its owners and managers, that is, the owners and managers are the corporation.
  3. ​Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.

*d. ​In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in financial markets than other organizational forms.

  1. ​Although stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm’s managers in the same way.

 

 

  1. Which of the following statements is correct?​

 

  1. ​In a partnership, liability for other partners’ misdeeds includes but is limited to the amount a particular partner has invested in the business.
  2. ​Partnerships must be formed according to specific rules, which include the filing of a formal written agreement with state authorities where the partnership does business.
  3. ​A fast growth company would be more likely to set up a partnership for its business organization than would a slow-growth company.

*d. ​Under partnership law, if any partner is unable to meet his or her pro rata claim in the event the partnership goes bankrupt, the remaining partners must make good on the unsatisfied claims.

  1. ​A major disadvantage of a partnership as a form of business organization is the high cost and practical difficulty of its formation.

 

 

  1. Which of the following statements is correct?​

 

  1. ​A major disadvantage of a regular partnership or a corporation as a form of business is the fact that they do not offer their owners limited liability, whereas proprietorships do.
  2. ​An advantage of the corporate form for many businesses is the fact that the corporate tax rate always exceeds the personal tax rate, which is the rate at which proprietorships and partnerships are taxed.

*c. ​There are more partnerships and sole proprietorships than corporations in the U.S., but corporations produce more goods and services than do other forms of business.

  1. ​Because corporations enjoy the benefits of limited liability, easy transferability of ownership interest, unlimited life, and favorable tax status relative to the situation for partnerships and proprietorships, most large businesses choose to incorporate.
  2. ​Because lawyers have the incorporation process so automated (e.g., word processors for drawing up the necessary papers), it is less expensive to form a corporation than to form a proprietorship or partnership.

 

 

  1. Which of the following statements about the corporate form of business organization is correct?​

 

*a. ​A corporation has the legal authority to act like a person when conducting business.

  1. ​In the United States, corporations generate a lower percentage of total annual sales than either partnerships or proprietorships.
  2. ​Corporations generally are smaller than either partnerships or proprietorships.
  3. ​One of the most important features of the corporate form of business organization is that stockholders have unlimited liability.
  4. ​Corporations can operate under different degrees of formality, ranging from informal, oral understandings to formal agreements filed with the secretary of the state in which the corporations does business.

 

 

  1. ​In the United States, the most common form of business is the _____, and the form of business that generates most of the sales and profits is the _____.

 

  1. ​corporation; corporation
  2. ​corporation; proprietorship
  3. ​proprietorship; partnership

*d. proprietorship; corporation

  1. ​corporation; partnership

 

 

  1. Compared to corporations, what is the primary disadvantage of partnerships as forms of business organizations?​

 

  1. ​The tax rates applied to partnerships are higher than the tax rates applied to corporations.
  2. ​Any dividends paid to the owners of a partnership business are taxed twice, once at the partnership level and once at the personal, or individual level.
  3. ​Partnerships generally are more complex to form (start up) than corporations.
  4. ​Partnerships have unlimited lives whereas corporations do not.

*e. ​The owners of a partnership, that is, the partners, have unlimited liability when it comes to business obligations whereas the owners of a corporation have limited liability.

 

 

  1. ​Which of the following forms of business offers limited personal liability but the company’s income can be taxed like a partnership?

 

  1. ​Limited liability partnership

*b. ​Limited liability company

  1. ​Corporation
  2. ​Sole proprietorship
  3. ​Partnership

 

 

  1. Identify a true statement about a limited liability company (LLC).​

 

  1. ​A limited liability company can be taxed as a corporation only.
  2. ​One of the owners of a limited liability company is designated as a general partner with unlimited personal financial liability.
  3. ​A limited liability company has no more than 100 stockholders.
  4. ​One of the owners of a limited liability company can participate in the management of the business.

*e. ​A limited liability company can have more than one type of stock outstanding.

 

 

  1. If a limited liability company (LLC) is taxed like a partnership, _____.​

 

*a. ​income passes through to the owners

  1. ​income is taxed twice
  2. ​the owners have unlimited tax liability
  3. ​the shareholders pay tax on dividends received by them
  4. ​dividends are taxed on capital gain rate

 

 

  1. Identify a true statement about a limited liability company (LLC).​

 

  1. ​A limited liability company (LLC) has a maximum of 100 stockholders.

*b. ​A limited liability company (LLC) offers the limited personal liability associated with a corporation.

  1. ​A limited liability company (LLC) has only one type of stock (membership interest).
  2. ​A limited liability company (LLC) is taxed as a partnership and the stockholders are subject to double taxation.
  3. ​A limited liability company (LLC) is liable for the negligence, irresponsibility, or similar acts committed by any partner.

 

 

  1. Which of the following is true of a general partner of a limited liability partnership (LLP)?​

 

*a. ​A general partner of a limited liability partnership (LLP) is fully personally liable for all business debts.

  1. ​A general partner of a limited liability partnership (LLP) is liable for the negligence, irresponsibility, or similar acts committed by any other partner.
  2. ​A general partner of a limited liability partnership (LLP) is considered as an investor only.
  3. ​A general partner of a limited liability partnership (LLP) is liable only to the extent of his/her investment in the partnership.
  4. ​A general partner of a limited liability partnership (LLP) is taxed for the limited partners’ share of the partnership’s income.

 

 

  1. A limited partner in a limited liability partnership (LLP) _____.​

 

  1. ​is responsible for the general management of the business

*b. ​is liable for only the amount invested in the partnership

  1. ​is responsible for negligence, irresponsibility, or similar acts committed by any other partner
  2. ​is liable to pay tax on the general partner’s share of partnership income
  3. ​is personally liable for the partnership debts

 

 

  1. ​Identify a true statement about a limited liability partnership (LLP).

 

  1. ​A general partner of a limited liability partnership is responsible for the negligence and irresponsibility of limited partners.
  2. ​A limited partner of a limited liability partnership is responsible for the general management of the partnership business.
  3. ​A general partner of a limited liability partnership is liable to pay tax on all the partnership income.

*d. ​A general partner of a limited liability partnership is personally liable for all business debts.

  1. ​A limited partner responsible for the negligence and irresponsibility of general partners.

 

 

  1. It is possible to limit the liability faced by some of the partners in a business by establishing a(n) _____.​

 

*a. ​limited liability partnership (LLP)

  1. ​general partnership
  2. ​sole proprietorship
  3. ​S Corporation
  4. ​limited liability company (LLC)

 

 

  1. Identify a true statement about an S corporation.​

 

  1. ​An S Corporation is required to have more than 100 stockholders.
  2. ​An S Corporation is required to have more than one type of stock outstanding.

*c. ​The income of an S Corporation passes through the company to the owners.

  1. ​The income of an S Corporation is taxed twice, at the corporate level and the owner level.
  2. ​The income of an S Corporation is taxed as capital gains to the owners.

 

 

  1. Which of the following is a feature of an S Corporation?​

 

  1. ​An S Corporation is required to have more than 100 stockholders.
  2. ​An S Corporation is required to have more than one type of stock outstanding.
  3. ​The income of an S Corporation is taxed as capital gains to the owners.
  4. ​The income of an S Corporation is taxed twice, at the corporate level and the owner level.

*e. ​The income of an S Corporation is taxed the same as income earned by proprietorships and partnerships.

 

 

  1. The primary goal of a publicly owned firm interested in serving its stockholders should be to _____.​

 

  1. ​minimize the debt used by a firm
  2. ​maximize expected EPS
  3. ​minimize the chances of losses

*d. ​maximize the stock price per share

  1. ​maximize expected net income

 

 

  1. Shareholders can ensure that firms pursue goals that are in their best interest by _____.​

 

  1. ​binding the management with stockholder-sponsored proposals
  2. ​ensuring that management is working towards maximizing current earnings
  3. ​compensating managers on the basis of the firm’s best performance in the last five years
  4. ​actively implementing remedies to realign management decisions with the interests of investors

*e. ​providing incentives to managers to motivate them to take actions that maximize stock prices

 

 

  1. ​Which of the following should be the primary goal pursued by the financial manager of a firm?

 

  1. ​Maximizing net income (profits)
  2. ​Maximizing the firm’s net worth, or book value

*c. ​Maximizing dividends paid to common stockholders

  1. ​Minimizing variable operating expenses
  2. ​Maximizing the market value of the firm’s stock

 

 

  1. The primary goal of a financial manager should be to _____.​

 

  1. ​minimize operating costs
  2. ​minimize interest payments
  3. ​minimize tax payments
  4. ​maximize operating income each year

*e. ​maximize the value of the firm’s stock

 

 

  1. Which of the following statements is correct?​

 

  1. ​Given the multi-owner nature of most large corporations, the agency costs associated with perquisite consumption are not really a problem.
  2. ​Managers may operate in the stockholders’ best interests, but they may also operate in their own personal best interests. As long as managers stay within the law, there simply are not any effective controls that stockholders can implement to control managerial decision making.

*c. ​The potential for agency problems is greatest when individual stockholders own extremely small proportions of the companies and managers have little, if any, of their own wealth tied up in these companies.

  1. ​An agency relationship exists when one or more persons hire another person to perform some service but withhold decision-making authority from that person.
  2. ​Managers rule out any potential conflicts of interest with the shareholders by selling the firm’s stock to outsiders.

 

 

  1. ​Which of the following actions is consistent with social responsibility but is not necessarily inconsistent with stockholder wealth maximization?

 

  1. ​Selling a smokestack “scrubber” to follow the firm’s air pollution policy to overlook conditions mandated by law.
  2. ​Dumping effluent discharge into a river, where it ruins the drinking water of the community around the plant. The installation of machinery to treat the effluents is very expensive.

*c. ​Investing in a smokestack filter to reduce sulphur-dioxide emissions in order to reduce the current tax being levied on the firm by the state for its pollution.

  1. ​Making a large corporate donation to the local community in order to fund a recreation complex that will be used by the firm’s employees only.
  2. ​Consider buying out the competitor’s business in an attempt to establish monopoly for its product in the market.

 

 

  1. Which of the following statements is correct?​

 

  1. ​The optimal dividend policy is the one that satisfies the shareholders because they supply the firm’s capital.
  2. ​The use of debt financing has no effect on earnings per share (EPS) or stock price.

*c. ​The riskiness of projected EPS can impact the firm’s value.

  1. ​Stock price is dependent on the projected EPS and the use of debt but not on the timing of the earnings stream.
  2. ​Dividend policy is one aspect of the firm’s financial policy that is determined directly by the shareholders.

 

 

  1. Which of the following statements is correct?​

 

  1. ​Other things held constant, it is generally safer to invest money in a proprietorship than in a corporation.
  2. ​There really is no difference between a general partnership and a corporation, because both have multiple owners and both offer limited liability to the owners.
  3. ​If you are planning to start a business, which you will run as the sole employee, and if you expect the business to earn $1,000,000 per year before taxes, you always can minimize the total taxes you pay by setting up the business as a corporation.
  4. ​According to the text, “agency problems” tend to increase when managers own larger relative amounts of the company’s stock.

*e. ​Maximizing the income statement item “net income” might not be the best goal for a corporation if the managers are interested in maximizing the economic welfare of the firm’s stockholders (that is, the firm’s stock price).

 

 

  1. Paying Payroll Service (PPS) recently declared bankruptcy. The price of PPS’s stock has dropped from approximately $10 per share one year ago to $1 today. You can imagine that stockholders are not happy that the value of their stock has dropped so significantly. At the same time, the financial position of the firm was deteriorating, PPS executives increased their salaries and perquisites substantially. Nothing they did violated any laws or was considered an unethical act. We would most likely describe this situation as _____.​

 

*a. ​an agency problem

  1. ​an accounting glitch
  2. ​an appropriate use of the tax laws
  3. ​an appropriate action, because executive compensation should always be increased substantially each year
  4. ​acceptable, because it is obvious that the executives were trying to maximize the value of the firm, which is what the shareholders want them to do

 

 

  1. ​All else equal, in which of the following forms of business would the possibility of an agency problem be the greatest?

 

*a. ​A U.S. corporation in which individual stockholders own extremely small proportions of the company.

  1. ​A proprietorship in which the owner is actively managing the business operations.
  2. ​A partnership in which all the partners share management and decision-making responsibilities equally.
  3. ​A foreign corporation with concentrated ownership that is, relatively few owners.
  4. ​A U.S. corporation that gives company shares as incentives to its managers.

 

 

  1. ​Identify the internal factor that influences the stock prices of a firm.

 

  1. ​Legal constraints

*b. ​Capital structure

  1. ​Tax laws
  2. ​General level of economic activity
  3. ​Conditions in the stock market

 

 

  1. Which of the following statements is true of agency problems?​

 

  1. ​Regardless of economic conditions, if a firm’s stock price falls during the year, this indicates that the firm’s managers must not be acting in the best interests of the shareholders.
  2. ​One method of controlling agency problems is to engage in the taking of “poison pills.”

*c. ​One of the best means to control agency problems is to require the managers and other important decision makers of the firm to also be owners of the firm.

  1. ​Agency problems probably would not exist if the important decisions of a firm were made by persons who have no vested interests, such as ownership, in the firm.
  2. ​Shareholders solve the agency problems by hostile takeover of the firm from the managers.

 

 

  1. The management’s primary goal is stockholder wealth maximization, which, translates into _____.​

 

*a. ​maximizing the value of the firm as measured by the price of its common stock

  1. ​maximizing the earnings per share of the stockholders
  2. ​maximizing the dividend received by stockholders
  3. ​maximizing the net income earned by the company
  4. ​maximizing the managerial compensation (incentives)

 

 

  1. Stock price maximization requires _____.​

 

  1. ​sale of high-quality goods and services at the highest possible prices

*b. ​efficient, low-cost plants that produce high-quality goods and services

  1. ​the development of products that can be sold at a higher price to consumers
  2. ​investment in high-cost plants to manufacture efficiently
  3. ​investment in one business establishment to cut the operational cost of multiple establishments

 

 

  1. Actions that help a firm increase the price of its stock also _____.​

 

  1. ​result in manufacturing of low-quality products
  2. ​result in inflation

*c. ​require the development of products that consumers want and need

  1. ​require investment in high-cost manufacturing plants
  2. ​result in sale of goods and services at highest possible prices

 

 

  1. Identify the external factor that affects the value of a firm’s stock.​

 

  1. ​Capital structure decisions

*b. ​General level of economic activity

  1. ​Capital budgeting decisions
  2. ​Dividend policy decisions
  3. ​Cash flow of the firm

 

 

  1. Which of the following mathematical expressions computes earnings per share?​

 

  1. ​Earnings per share = Net Income × Number of outstanding shares of common stock
  2. ​Earnings per share = (Net Income + Dividend Paid) ÷ Number of outstanding shares of common stock

*c. ​Earnings per share = Net Income ÷ Number of outstanding shares of common stock

  1. ​Earnings per share = (Net Income – Dividend Paid) ÷ Number of outstanding shares of common stock
  2. ​Earnings per share = (Net Income – Dividend Paid) × Number of outstanding shares of common stock

 

 

  1. Which of the following statements is true of earnings per share?​

 

  1. ​A company is liable to pay tax on the earnings per share of stockholders.
  2. ​Earnings per share can be maximized by changing from corporation to sole proprietorship form of organization.
  3. ​A company can maximize its value by maximizing earnings per share.

*d. ​Earnings per share is used in measuring the firm’s potential for generating future cash flows.

  1. ​A high earnings per share in the current period results in lower future risk position of the business.

 

 

  1. Which of the following statements is true of a hostile takeover?​

 

  1. ​A hostile takeover results when a management wants the firm to be taken over.

*b. ​A hostile takeover occurs when a firm’s stock is undervalued relative to its potential.

  1. ​A hostile takeover retains the managers of the acquired firm at their previous positions.
  2. ​A hostile takeover refrains managers to take actions that maximize stock prices.
  3. ​A hostile takeover results in poor management and inefficient operations.

 

 

  1. Which of the following actions should be taken by managers to avoid takeover threats?​

 

*a. ​Managers should take action to maximize stock prices.

  1. ​Managers should declare lower dividends.
  2. ​Managers should let the stockholders take the capital structure decisions.
  3. ​Managers should take decisions that decrease the firm’s expected future cash flows.
  4. ​Managers should ensure that high-quality goods and services are sold at the highest possible prices.

 

 

  1. Identify a true statement about business ethics.​

 

  1. ​Business ethics decrease shareholders’ trust in the company.
  2. ​Business ethics result in recurring fines and legal expenses.
  3. ​Business ethics attract business from customers who appreciate and support political parties.
  4. ​Business ethics reduce the economic viability of the communities where these firms operate.

*e. ​Business ethics attract and keep employees of the highest caliber.

 

 

  1. Which of the following statements concerning a firm’s quest to maximize wealth is correct?​

 

  1. ​In extremely competitive industries, we would expect firms would voluntarily engage in many socially beneficial projects to try to maximize their stocks’ values.
  2. ​Actions that maximize a firm’s stock price are inconsistent with maximizing social welfare.
  3. ​The concepts of social responsibility and ethical responsibility on the part of corporations are completely different and neither is relevant in maximizing stock price.
  4. ​In a competitive market, if a group of firms does not spend resources making social welfare improvements, but another group does, in general, this will not affect the second group’s ability to attract funds.

*e. ​If the government did not mandate socially responsible corporate actions, such as those relating to product safety and fair hiring practices, most firms in competitive markets probably would not pursue such policies voluntarily.

 

 

  1. The 11 “titles” in the Sarbanes-Oxley Act of 2002 establish standards for accountability and responsibility of financial reporting information for major corporations. Which of the following activities does the act provide rules that a corporation must abide by?​

 

  1. The corporation must have a committee that consists of an internal director nominated from the board to oversee the firm’s audits.​
  2. ​The corporation’s internal auditor will render an unbiased (independent) opinion concerning the firm’s financial statement.
  3. ​The corporation must maximize social welfare through funding of environmentally friendly activities.

*d. ​The corporation must provide additional information about the procedures used to construct and report financial statements.

  1. ​The firm’s CEO and CFO must certify audit reports submitted to the Securities Exchange Commission.

 

 

  1. Which of the following is an example of ethical behavior of the management of a corporation?​

 

  1. ​Executives of the corporation are pursuing their personal interest.
  2. ​Payment of bribe by the management of the corporation to foreign governments to obtain business.
  3. ​The management of the corporation uses confidential information for personal gain.
  4. ​The management actions are often resulting in large gains for themselves and large losses for stockholders.

*e. ​The management takes steps to adhere to laws and regulations relating to product safety.

 

 

  1. The 11 sections (titles) in the Sarbanes-Oxley Act of 2002 _____.​

 

  1. ​require corporations to payout all the earnings as dividend

*b. ​establish standards for accountability and responsibility in reporting financial information

  1. ​allow management to take actions resulting in large gains to them and losses to stockholders
  2. ​allow management to use confidential information for personal gains
  3. ​require stockholders to make capital structure decisions

 

 

  1. The Sarbanes-Oxley Act of 2002 requires a publicly-traded corporation to _____.​

 

  1. ​keep confidential the procedures used to construct and report financial statements.
  2. ​have an internal audit team that render an unbiased (independent) opinion concerning the firm’s financial statements

*c. ​have a committee that consists of outside directors to oversee the firm’s audits

  1. ​increase the certainty of the expected cash flows
  2. ​adopt the primary goal of stockholder wealth maximization

 

 

  1. The Sarbanes-Oxley Act of 2002 requires the chief executive officer of a publicly-traded corporation to _____.​

 

  1. ​keep confidential the procedures used to construct and report financial statements.

*b. ​certify financial reports that are submitted to the Securities and Exchange Commission.

  1. ​pursue interests that result in large gains for them and large losses for stockholders
  2. ​oversee the corporation’s audit and attest the audit report
  3. ​render an unbiased (independent) opinion concerning the firm’s financial statements

 

 

  1. ​Which of the following is a reason for a company to go international?

 

  1. ​The company manufactures products that have saturated foreign markets.
  2. ​The company holds a patent for the best production technology for its products.

*c. ​The company is manufacturing the finished product in their country at a very high production cost.

  1. ​The company has the best access to the basic resources in their country needed to sustain their primary business.
  2. ​The company faces political and regulatory hurdles in other countries.

 

 

  1. Which of the following statements is correct?​

 

*a. ​Financial institutions in other countries generally are less regulated than in the United States.

  1. ​One reason domestic firms “go global” is to sell products in saturated markets.
  2. ​Often firms can avoid regulatory hurdles that apply to foreign manufacturers by establishing manufacturing units in the country where the hurdles apply.
  3. ​One of the advantages associated with doing business in international markets is that all countries report their financial statements in the US dollar.
  4. ​Cultural differences among countries gives advantage to a multinational firm to use the same marketing strategy that is, packaging, advertising, and so forth.in every country in which it operates.

 

 

  1. Which of the following is true of corporations that operate in several different countries?​

 

*a. ​A nation may expropriate the assets of multinational corporations without compensation.

  1. ​Differences in legal systems of host nations make it easy for executives trained in one country to operate effectively in another.
  2. ​Cash flows in various parts of a multinational corporate system are denominated in one currency.
  3. ​Multinational corporations have the advantage of uniform attitudes toward risk taking from one country to the next.
  4. ​Uniformity of tax-laws across different nations result in proper coordination and control of subsidiaries.

 

 

  1. Which of the following is true of stockholders in continental Europe?​

 

  1. ​The stocks of corporations are widely dispersed among a large number of different investors, both individuals and institutions.

*b. ​Many stockholders assign banks their proxy votes for the directors of the companies.

  1. ​Banks are major stockholders of corporations in continental Europe.
  2. ​Major stockholders of closed corporations are not involved in the firms’ daily operations.
  3. ​Stockholders in continental Europe are often family units resulting from the universal banking relationship existing in the United States.

 

 

  1. Which of the following statements is true of the concentrated organizational structures of non-U.S. firms?​

 

  1. ​The concentrated organizational structures of non-U.S. firms permit managers to focus more on short-term earnings.
  2. ​The concentrated organizational structures of non-U.S. firms result in easier access to credit in times of financial difficulty.
  3. ​The concentrated organizational structures of non-U.S. firms make it difficult to change managers.
  4. ​The concentrated organizational structures of non-U.S. firms reduce the managerial focus on wealth maximization.

*e. ​The concentrated organizational structures of non-U.S. firms result from the universal banking relationships that exist outside the United States.

 

 

  1. Which of the following results is due to the greater concentration of ownership in non-U.S. firms?​

 

  1. ​The greater concentration of ownership in non-U.S. firms makes it easy to change managers.

*b. ​The greater concentration of ownership in non-U.S. firms permits greater monitoring and control by individuals or groups.

  1. ​The greater concentration of ownership in non-U.S. firms results in difficult access to credit in times of financial difficulty.
  2. ​The greater concentration of ownership in non-U.S. firms results in greater focus of managers on short-term goals of the firm.
  3. ​The greater concentration of ownership in non-U.S. firms results in reduced involvement of stockholders in the firms’ daily operations.

 

 

  1. Industrial groups are _____.​

 

  1. ​owned and managed by the Securities and Exchange Commission

*b. ​organizations that tie together all the functions of production and sales from start to finish

  1. ​organizations that encompass firms involved in financing and marketing only
  2. ​privately held companies and the stock of such firms are not traded publicly
  3. ​led by the firm involved with manufacturing and distribution of products

 

 

  1. Which of the following statements is true of the firms that operate in several different countries?​

 

  1. ​The currency values of several different countries do not fluctuate.
  2. ​Cash flows of various parts of a multinational corporate system are always denominated in the same currencies.

*c. ​Institutional differences among countries can cause significant problems in coordination of subsidiaries.

  1. ​No nation places constraints on the transfer of corporate resources.
  2. ​Within homogeneous geographic regions, different countries have uniform cultural heritages that shape values and influence the role of business in the society.

 

 

  1. Which of the following statements increases the complexity of the manager’s task in a multinational corporation?​

 

*a. The currency values of different countries in which a firm operate experience fluctuations.​

  1. ​Cash flows in various parts of a multinational corporate system are often denominated in the same currencies.
  2. ​All the countries in which a firm operates have uniform political and economic institutions.
  3. ​The management personnel of a firm in different countries are fluent in English and several other languages.
  4. ​No nation can place constraints on the transfer of corporate resources.

 

 

  1. The prices at which the currency of one country can be converted into the currencies of other countries are known as _____.​

 

  1. ​procurement prices
  2. ​political risk costs

*c. ​exchange rates

  1. ​conversion costs
  2. ​transfer prices

 

 

  1. Which of the following is a problem when a firm tries to coordinate and control the worldwide operations of its subsidiaries?​

 

  1. The management personnel of its subsidiaries are fluent in several languages.​
  2. ​The countries in which the subsidiaries are located do not place constraints on the transfer of corporate resources.

*c. ​Cash flows in different subsidiaries are denominated in different currencies.

  1. ​The terms of trade determined after negotiation with the host government and the multinational corporation are well aligned to the firm’s policies.
  2. ​All the countries in which the subsidiaries are based have homogeneous cultural heritages.

 

 

  1. Which of the following is an assumption of most of the traditional models in finance?​

 

  1. ​No nation can place constraints on the transfer of corporate resources.

*b. ​A competitive marketplace exists in which the terms of trade are determined by the participants.

  1. ​Cash flows in various parts of a multinational corporate system are always denominated in the same currencies.
  2. ​The exchange rate is determined by direct negotiation between the host government and the multinational corporation.
  3. ​The ability to curtail unprofitable operations is uniform in all the countries in which subsidiaries operate.

 

 

  1. Which of the following statements is true of the terms under which companies compete?​

 

  1. ​The governments of subsidiary countries establish the terms of competition and trade on various transactions.
  2. ​The terms under which companies compete is determined by the fluctuations in the exchange rate of the currencies of subsidiary countries.

*c. ​The terms under which companies compete is determined by direct negotiation between the host government and the multinational corporation.

  1. ​The ability to curtail unprofitable operations determines the terms under which companies compete.
  2. ​The terms under which companies compete in a competitive marketplace are established by the host government.
  1. The information contained in the annual report is used by investors to form expectations about future earnings and dividends.

 

*a. True

  1. False

 

 

  1. Noncash assets are expected to produce cash over time but the amount of cash they eventually produce could be higher or lower than the values at which the assets are carried on the books.​

 

*a. True

  1. False

 

 

  1. The book value of shares are often equal to their market value.​

 

  1. True

*b. False

 

 

  1. Funds supplied by common stockholders mainly include capital stock, paid-in capital, and retained earnings, while total equity is comprised of common equity plus preferred stock.

 

*a. True

  1. False

 

 

  1. The balance sheet is a financial statement measuring the flow of funds into and out of various accounts over time while the income statement measures the progress of the firm at a point in time.

 

  1. True

*b. False

 

 

  1. The values or accounting numbers that are reported on the balance sheet are market values.

 

  1. True

*b. False

 

 

  1. Retained earnings is the amount of cash that has been generated by the firm through its operations but has not been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts and thus, these cash accounts, when added together, will always be equal to the total retained earnings of the firm.

 

  1. True

*b. False

 

 

  1. A firm’s net income reported on its income statement must equal the operating cash flows on the statement of cash flows.

 

  1. True

*b. False

 

 

  1. A firm’s net income is the most appropriate measure to determine whether the management is maximizing the firm’s stock price.

 

  1. True

*b. False

 

 

  1. Ratio analysis involves a comparison of the relationships between financial statement accounts to analyze the financial position and strength of a firm.

 

*a. True

  1. False

 

 

  1. A decline in the inventory turnover ratio suggests that the firm’s liquidity position is improving.

 

  1. True

*b. False

 

 

  1. The degree to which the managers of a firm attempt to magnify the returns to owners’ capital through the use of financial leverage is captured in debt management ratios.

 

*a. True

  1. False

 

 

  1. Determining whether a firm’s financial position is improving or deteriorating requires analysis of more than one set of financial statements. Trend analysis is one method of measuring a firm’s performance over time.

 

*a. True

  1. False

 

 

  1. A simple approach to trend analysis is to construct graphs.

 

*a. True

  1. False

 

 

  1. Different accounting practices will not have an impact on the comparative ratio analysis of the firms.

 

  1. True

*b. False

 

 

  1. The balance sheet will have historical values and that will have an impact on the ratios of the firm.

 

*a. True

  1. False

 

 

  1. The Securities and Exchange Commission (SEC) was created to develop and approve a set of common international accounting rules.

 

  1. True

*b. False

 

 

  1. In 2010, the Securities and Exchange Commission (SEC) announced its support for Generally Accepted Accounting Principles (GAAP).

 

  1. True

*b. False

 

 

  1. The Securities and Exchange Commission (SEC) allowed publicly traded foreign companies to use the International Financial Reporting Standards (IFRS) rather than the Generally Accepted Accounting Principles (GAAP).

 

*a. True

  1. False

 

 

  1. Which of the following financial statements is included in the annual reports of a company?​

 

  1. ​Statement of changes in long-term financing
  2. ​Fund flow statement
  3. Statement of principles​
  4. ​Proxy statement

*e. ​Statement of cash flows

 

 

  1. Which of the following statements is true about the annual report of a company?​

 

  1. ​The annual report contains four basic financial statements: the income statement; balance sheet; statement of cash flows; and statement of changes in long-term financing.
  2. ​The annual report does not provide any information about a firm’s future prospects.

*c. ​The key importance of annual report information is that it is used by investors when they form their expectations about the firm’s future earnings and dividends.

  1. ​The annual report provides no relevant information for use by financial analysts or by the investing public.
  2. ​The annual report is a report issued by each of the shareholders to the corporation and it contains information about the performance of the shares of the firm held by the shareholders.

 

 

  1. Which of the following information in an annual report describes the firm’s performance during the past year and also provides information regarding new developments that will affect future performance of the firm?​

 

  1. ​Basic financial statements

*b. ​Discussion of operations

  1. ​Proxy statements
  2. ​DuPont chart
  3. ​Memorandum of understanding

 

 

  1. Which of the following financial statements shows a firm’s financing activities (how funds were generated) and investment activities (how funds were used) over a particular period of time?​

 

  1. ​Balance sheet
  2. ​Income statement
  3. ​Statement of retained earnings

*d. ​Statement of cash flows

  1. ​Proxy statement

 

 

  1. Which of the following statements shows the portion of the firm’s earnings that has been saved rather than paid out as dividends?​

 

  1. ​Balance sheet
  2. ​Income statement

*c. ​Statement of retained earnings

  1. ​Statement of cash flows
  2. ​Proxy statement

 

 

  1. Which of the following financial statements includes information about a firm’s assets, equity, and liabilities?​

 

  1. ​Income statement
  2. Cash flow statement​

*c. ​Balance sheet

  1. ​Statement of retained earnings
  2. ​Statement of changes in long-term financing

 

 

  1. Which of the following actions can be considered a source of cash when constructing a statement of cash flows?​

 

  1. ​Decrease in equity
  2. ​Decrease in accounts payable
  3. ​Increase in inventory

*d. ​Increase in long-term bonds

  1. ​Increase in fixed assets

 

 

  1. Which of the following is an example of a current asset?​

 

*a. ​Inventory

  1. ​Retained earnings
  2. ​Accounts payable
  3. ​Plant and equipment
  4. ​Common stock

 

 

  1. Which of the following accounts contains the actual money that can be spent by a firm?​

 

  1. ​Retained earnings
  2. ​Notes payable
  3. ​Net worth
  4. ​Common stock

*e. ​Cash and equivalents

 

 

  1. In which order will assets be listed in a balance sheet?​

 

  1. ​In ascending order of the value of the asset
  2. ​In alphabetical order
  3. ​In ascending order of the date of purchase of asset

*d. ​In order of liquidity

  1. ​In order of importance for the company

 

 

  1. _____ is an example of a long-term investment of a firm.​

 

  1. ​Retained earnings

*b. ​Equipment

  1. ​Accounts receivable
  2. ​Common stock
  3. ​Long-term bonds

 

 

  1. ​How is the book value per share calculated?

 

*a. ​Book value per share = Common equity ÷ Total number of shares outstanding

  1. ​Book value per share = Total shares issued × Per share par value
  2. ​Book value per share = Current assets – Current liabilities
  3. ​Book value per share = Total assets ÷ Total number of shares outstanding
  4. ​Book value per share = Earnings available to common stockholders ÷ Total number of shares outstanding

 

 

  1. The book value of 4 million shares of Zircon Global Ltd. is $34 million. What is the book value per share of Zircon Global Ltd?​

 

  1. ​$136.00 per share

*b. ​$8.50 per share

  1. ​$4.00 per share
  2. ​$0.60 per share
  3. ​$30.00 per share

 

 

  1. ​The book value per share of Topaz General Ltd. is $10 per share and the company has a total of 4 million shares. Calculate the total book value of common equity of the company.

 

  1. ​$4 million
  2. ​$10 million
  3. ​$400 million

*d. ​$40 million

  1. ​$100 million

 

 

  1. Which of the following statements is true about net worth?​

 

  1. ​A firm’s net worth should be higher than the stockholders’ equity.
  2. ​A firm’s net worth should be equal to 50 percent of the value of the total assets of the firm.

*c. ​A firm’s net worth is equal to total assets minus total liabilities.

  1. ​On liquidation of a firm, the common stockholders’ will receive the exact amount shown in the equity section of the balance sheet.
  2. ​The net worth of a firm is the amount to be paid by the shareholders to the firm on liquidation of the firm.

 

 

  1. Amber Devices Ltd. has total assets worth $850 million and total liabilities worth $475 million at the end of December 31, 2016. What is the amount of money received by the stockholders, if Amber liquidates all of its assets and pays off all of its outstanding debt?​

 

  1. ​$850 million
  2. ​$475 million
  3. ​$1,325 million
  4. ​$175 million

*e. ​$375 million

 

 

  1. The amount received by a firm’s stockholders if the firm were to liquidate its assets and pay off all of its outstanding debt is the firm’s:​

 

*a. ​net worth.

  1. ​retained earnings.
  2. ​cash equivalents.
  3. ​accruals.
  4. ​market value.

 

 

  1. How is the net worth of a firm calculated?​

 

  1. ​Net worth = Current assets minus current liabilities
  2. ​Net worth = Total assets minus current liabilities
  3. ​Net worth = Total liabilities minus current assets

*d. ​Net worth = Total assets minus total liabilities

  1. ​Net worth = Total liabilities minus current liabilities

 

 

  1. Which of the following is considered as a liability in the balance sheet of a firm?​

 

  1. ​Accounts receivable

*b. ​Corporate bonds

  1. ​Retained earnings
  2. ​Common stock
  3. ​Plant and equipment

 

 

  1. Ruby Enterprises Ltd. has long-term bonds worth $20 million, retained earnings of $45 million, accounts payable of $10 million, notes payable of $12 million, and inventory worth $18 million. What is the value of total liabilities of Ruby Enterprises?​

 

*a. ​$42 million

  1. ​$105 million
  2. ​$87 million
  3. ​$60 million
  4. ​$85 million

 

 

  1. ​Which of the following is an example of a firm’s long-term debt?

 

  1. ​Common stock
  2. ​Retained earnings
  3. ​Accounts payable

*d. ​Corporate bonds

  1. ​Accounts receivable

 

 

  1. Which of the following is true about the book value and market value of a firm’s debt?​

 

  1. ​The book value of a firm’s debt will be higher than the market value of the firm’s debt.

*b. ​The book value of a firm’s debt will be equal to the market value of the firm’s debt.

  1. ​The book value of a firm’s debt will be equal to the market value of firm’s assets.
  2. ​The market value of a firm’s debt will be higher than the book value of firm’s assets.
  3. ​The market value of a firm’s debt will be equal to the market value of a firm’s assets.

 

 

  1. How is the net working capital calculated?​

 

  1. ​Net working capital = total liabilities minus retained earnings
  2. ​Net working capital = total assets minus current assets
  3. ​Net working capital = total liabilities minus current liabilities

*d. ​Net working capital = current assets minus current liabilities

  1. ​Net working capital = total equity minus retained earnings

 

 

  1. Which of the statements is true about the values recorded in the balance sheet of a firm?​

 

  1. ​The book values of a firm’s assets will be equal to the market values of the firm’s assets.
  2. ​The book values of a firm’s liabilities will be higher than the market values of the firm’s liabilities.
  3. ​The equity section of a firm’s liability represents the difference between the market value of the firm’s assets and the market value of the firm’s liabilities.
  4. ​The book values of a firm’s assets will be higher than the market values of the firm’s assets.

*e. ​The book values of a firm’s debt will be very close to the market values of the firm’s liabilities.

 

 

  1. ​Which of the following is true about a common size balance sheet?

 

  1. ​The assets, liabilities, and equities are reported at its market value.
  2. ​The assets, liabilities, and equities are reported as a percentage of common stock.

*c. ​The assets, liabilities, and equities are reported as a percentage of total assets.

  1. ​The assets, liabilities, and equities are arranged in the alphabetical order.
  2. ​The assets, liabilities, and equities are reported as a percentage of the assets, liabilities, and equities of a competing firm.

 

 

  1. The equity section of a firm’s balance sheet contains _____.​

 

*a. ​retained earnings

  1. ​current assets
  2. ​corporate bonds
  3. ​dividends
  4. ​noncash assets

 

 

  1. Retained earnings is the total amount of:​

 

  1. ​income that is distributed as dividends to the shareholders.
  2. ​debt not repaid in the current year.
  3. ​depreciation charged on the firm’s assets.

*d. ​income that is saved and reinvested in assets.

  1. ​profit retained by a firm to pay taxes.

 

 

  1. The firm’s statement of retained earnings reports changes in:​

 

  1. ​the amount of dividends paid.

*b. ​the common equity accounts.

  1. ​the interest on debt account.
  2. ​the amount of net income.
  3. ​the amount of depreciation.

 

 

  1. How is a firm’s retained earnings at the end of the year calculated?​

 

  1. ​Retained earnings = Beginning balance of retained earnings minus net income in the current year plus net loss in the previous year
  2. ​Retained earnings = Beginning balance of retained earnings plus net income in the current year plus dividends paid in the current year

*c. ​Retained earnings = Beginning balance of retained earnings plus net income in the current year minus dividends paid in the current year

  1. ​Retained earnings = Beginning balance of retained earnings minus net loss in the previous year minus dividends paid in the current year
  2. ​Retained earnings = Beginning balance of retained earnings minus net income in the current year plus dividends paid in the current year

 

 

  1. ​Helium Brands Ltd. has a beginning balance of retained earnings of $185 million. Helium has a net income of $48 million and has paid a dividend of $15 million in the current year. The ending balance of retained earnings is:

 

  1. ​$248 million.
  2. ​$185 million.
  3. ​$170 million.
  4. ​$137 million.

*e. ​$218 million.

 

 

  1. The statement of retained earnings for Redwood Systems Ltd. shows a retained earnings balance of $300 million on December 31, 2016. In 2016, Redwood had a net income of $60 million and the firm had paid dividends of $20 million to its stockholders. What was the beginning balance of retained earnings for Redwood on January 1, 2016?​

 

  1. ​$300 million

*b. ​$260 million

  1. ​$380 million
  2. ​$340 million
  3. ​$220 million

 

 

  1. A firm’s net income as reported on its income statement is known as _____.​

 

  1. ​operating cash flow
  2. ​net cash flow
  3. ​noncash income

*d. ​accounting profit

  1. ​net sales

 

 

  1. How is net cash flow calculated if depreciation is the only noncash item in a firm’s income statement?​

 

*a. ​Net cash flow = Net income + Depreciation and amortization

  1. ​Net cash flow = Accounting profit – Depreciation and amortization
  2. Net cash flow = Accounting profit – Operating cash flow
  3. ​Net cash flow = Fixed assets + Depreciation and amortization
  4. ​Net cash flow = Operating cash flow – Depreciation and amortization

 

 

  1. Which of the following financial statements summarizes the revenue generated and the expenses incurred by a firm during the accounting period?

 

  1. ​Balance sheet
  2. ​Statement of cash flows
  3. ​Statement of retained earnings

*d. ​Income statement

  1. ​Proxy statement

 

 

  1. What is the first item in an income statement used to determine the net income of a firm?​

 

  1. ​Earnings before tax
  2. ​Operating costs

*c. ​Net sales

  1. ​Gross profit
  2. ​Retained earnings

 

 

  1. How is net income calculated in an income statement?​

 

  1. ​Net income = Net operating income + Interest
  2. ​Net income = Gross profit – Retained earnings
  3. ​Net income = Net sales – Variable operating costs

*d. ​Net income = Earnings before taxes – Taxes

  1. ​Net income = Net cash flow + Depreciation

 

 

  1. Which of the following is considered by analysts when comparing the results of two firms?​

 

  1. ​Total assets

*b. ​Net operating income

  1. ​Net sales
  2. ​Gross profit
  3. ​Retained earnings

 

 

  1. Violet Solutions Ltd. has net sales of $850 million, variable operating costs of $475 million, and fixed operating costs including depreciation of $100 million. What is the net operating income of Violet Solutions?

 

  1. ​$1,425 million
  2. ​$1,325 million
  3. ​$750 million
  4. ​$375 million

*e. ​$275 million

 

 

  1. ​What is the appropriate measure used to examine whether a management is maximizing the firm’s stock price?

 

  1. ​Retained earnings
  2. ​Net income

*c. ​Cash flows

  1. ​Earnings per share
  2. ​Accounting profits

 

 

  1. ​Which of the following is an example of a noncash item reported in the income statement of a firm?

 

  1. ​Taxes
  2. ​Dividends
  3. ​Interest

*d. ​Depreciation

  1. ​Net sales

 

 

  1. Sapphire Industries Ltd. has a net income of $60 million and the total depreciation on its assets is $20 million. The net cash flow of Sapphire Industries is:​

 

*a. ​$80 million.

  1. ​$60 million.
  2. ​$20 million.
  3. ​$40 million.
  4. ​$100 million.

 

 

  1. Determine the increase or decrease in cash for Rinky Supply Company for last year, given the following information. (Assume no other changes occurred during the past year.) Decrease in marketable securities           $25

Increase in accounts receivables             $50

Increase in notes payable                        $30

Decrease in accounts payable                 $20

Increase in accrued wages and taxes       $15

Increase in inventories                  $35

Retained earnings                           $5

 

  1. ​–$50
  2. ​+$40

*c. ​–$30

  1. ​+$20
  2. ​–$10

 

 

  1. Which of the following is considered a use of cash in a cash flow statement?​

 

  1. Increase in accrued wages​
  2. ​Increase in common stock
  3. ​Decrease in accounts receivable
  4. ​Decrease in inventory

*e. ​Increase in fixed assets

 

 

  1. Which of the following is considered a part of cash flow from a financing activity in a statement of cash flow?

 

*a. ​Increase in corporate bonds

  1. ​Decrease in accrued wages
  2. ​Increase in inventories
  3. ​Decrease in accounts payable
  4. ​Increase in fixed assets

 

 

  1. _____ is an example of cash flow from an investing activity in a cash flow statement.​

 

  1. ​Payment of dividends
  2. ​Repurchase of stock

*c. ​Purchase of equipment

  1. ​Purchase of inventory
  2. ​Repayment of debt

 

 

  1. Which of the following ratios shows the relationship between a firm’s cash and other current assets, and its current liabilities?

 

  1. ​Asset management ratios

*b. ​Liquidity ratios

  1. ​Debt management ratios
  2. ​Profitability ratios
  3. ​Market value ratios

 

 

  1. ​A firm’s current ratio has steadily increased over the past 5 years, from 1.9 to 3.8. What would a financial analyst probably conclude from this information?

 

  1. ​The firm’s fixed assets turnover has improved.

*b. ​The firm’s liquidity position has improved.

  1. ​The firm’s stock price has increased.
  2. ​The firm’s financial leverage has improved.
  3. ​The firm’s market value has increased.

 

 

  1. ​Which of the following transactions will not affect the quick ratio of a company?

 

  1. ​Inventory sold on credit
  2. ​Purchase of equipment
  3. ​Payment for accounts payable

*d. ​Accounts receivable collected

  1. ​Bank loan repaid

 

 

  1. ​Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0?

 

  1. Fixed assets are sold for cash.​
  2. ​Long-term debt is issued to pay off current liabilities.

*c. ​Accounts receivable are collected.

  1. ​Cash is used to pay off accounts payable.
  2. ​A bank loan is obtained, and the proceeds are credited to the firm’s checking account.

 

 

  1. If a company has a quick ratio of 1.0 and a current ratio of 2.0, then:

 

  1. ​the value of current assets is equal to the value of inventory.
  2. ​the value of current assets is equal to the value of current liabilities.
  3. ​the value of current liabilities is more than the value of current assets.

*d. the value of current liabilities is equal to the value of inventory.​

  1. ​the value of inventory is more than the value of current assets.

 

 

  1. ​Bicksler Corporation has a current ratio of 2.0 on 21stJuly. On 22ndJuly, Bicksler purchased (and received) raw materials on credit from its supplier. Assuming all other things are equal, how will this transaction affect the current ratio of Bicksler?

 

  1. ​The current ratio will increase.

*b. ​The current ratio will decrease.

  1. ​The current ratio will become equal to its quick ratio.
  2. The quick ratio will become more than its current ratio.​
  3. ​The current ratio will remain the same.

 

 

  1. A company will calculate changes in its balance sheet accounts based on the:

 

*a. ​ratio analysis.

  1. ​pro forma balance sheet construction.
  2. ​statement of cash flows construction.
  3. ​profit and loss analysis.
  4. ​pro forma income statement construction

 

 

  1. A firm obtains the funds needed to pay its current bills from its:​

 

  1. ​current liabilities.
  2. ​long-term assets.
  3. ​long-term liabilities.
  4. ​equity.

*e. ​liquid assets.

 

 

  1. Which of the following ratios is calculated to determine the liquidity of a firm?

 

  1. Inventory turnover ratio​

*b. ​Quick ratio

  1. ​Total assets turnover ratio
  2. ​Debt ratio
  3. ​Net profit ratio

 

 

  1. The balance sheet of Crimpson Solutions Ltd. has cash of $125 million, accounts receivable of $245 million, inventory of $160 million, and equipment worth $450 million. The company also has accounts payable of $120 million, notes payable of $280 million, and corporate bonds of $365 million. Crimpson’s current ratio is:

 

  1. ​2.5 times.
  2. ​1.56 times.

*c. ​1.325 times.

  1. ​0.565 times.
  2. ​1.855 times.

 

 

  1. Which of the following ratios measures how effectively a firm is managing its assets?

 

  1. ​Quick ratio
  2. ​Times interest earned ratio
  3. ​Profit margin ratio

*d. ​Inventory turnover ratio

  1. ​Price earnings ratio

 

 

  1. If an analyst’s goal is to determine how effectively a firm is managing its assets, which of the following sets of ratios would s/he examine?

 

  1. ​profit margin, current ratio, fixed charge coverage ratio
  2. ​quick ratio, debt ratio, time interest earned

*c. ​inventory turnover ratio, days sales outstanding, fixed asset turnover ratio

  1. ​total assets turnover ratio, price earnings ratio, return on total assets
  2. ​time interest earned, profit margin, fixed asset turnover ratio

 

 

  1. The days sales outstanding (DSO) ratio of a firm identifies:

 

*a. ​the average length of time a firm must wait after making a credit sale before receiving cash.

  1. ​how effectively the firm uses its plant and equipment to help generate sales.
  2. ​the extent to which a firm’s net operating income can safely decline.
  3. ​the profit (earnings) per dollar of sales.
  4. ​how much investors are willing to pay for the firm’s stock for each dollar of reported profits.

 

 

  1. A low inventory turnover ratio suggests that:

 

  1. ​the firm is using the first-in first-out (FIFO) method of inventory valuation.
  2. ​the cost of inventory of the firm is lower than that of the similar firms.

*c. ​the firm is holding excess stocks of inventory.

  1. ​the inventory of the firm is sold and restocked very often.
  2. ​the firm purchases all its inventory on credit.

 

 

  1. A firm has total assets of $500 million, including its accounts receivable, which is worth $120 million. The annual sales of the firm is $650 million. The days sales outstanding (DSO) ratio of the firm is:

 

  1. ​48 days.
  2. ​52 days.
  3. ​39 days.
  4. ​82 days.

*e. ​67 days.

 

 

  1. An inventory turnover ratio of 8.5 times indicates that:

 

  1. ​the inventory of the firm turns over after 8.5 days.
  2. ​the value of the inventory of the firm is 8.5 percent of the total assets of the firm.
  3. ​the value of sales of the firm is 8.5 times the value of its sales.

*d. ​the firm will restock its inventory every 43 days.

  1. ​the firm will sell its inventory once in 43 days.

 

 

  1. Which of the following is the formula to calculate a firm’s inventory turnover ratio?

 

  1. ​Inventory Turnover = Sales ÷ Inventory

*b. ​Inventory Turnover = Cost of goods sold ÷ Inventory

  1. ​Inventory Turnover = Inventory ÷ Current assets
  2. ​Inventory Turnover = Inventory ÷ Accounts receivables
  3. ​Inventory Turnover = (Sales – Cost of goods sold) ÷ Inventory

 

 

  1. The net fixed assets of Auburn Media Ltd. is $850 million. The sales of the firm is $1,420 million. The firm’s fixed assets turnover ratio is:

 

  1. ​1.35 times.
  2. ​2.42 times.

*c. ​1.67 times.

  1. ​2.8 times.
  2. ​3.45 times.

 

 

  1. Which of the following statements is true regarding debt ratios?

 

  1. ​Firms with relatively low debt ratios have higher expected returns when business is good.
  2. ​Firms with relatively low debt ratios are exposed to risk of loss when business is poor.
  3. ​Firms with relatively high debt ratios have higher expected returns when business is bad.

*d. ​Firms with relatively high debt ratios have higher expected returns when business is good.

  1. ​Firms with relatively low debt ratios have higher expected returns when business is poor.

 

 

  1. The extent to which the operating income can decline before a firm is unable to meet its annual interest costs can be found in:

 

  1. ​the fixed charge coverage ratio.
  2. ​the debt ratio.

*c. ​the times-interest-earned ratio.

  1. ​the return on equity.
  2. ​the profit margin.

 

 

  1. A firm has total interest charges of $10,000 per year, sales of $1 million, a tax rate of 40 percent, and a net profit margin of 6 percent. The firm’s times interest earned ratio is:

 

  1. ​16 times.
  2. 10 times.
  3. ​7 times.

*d. ​11 times.

  1. ​20 times.

 

 

  1. Alumbat Corporation has $800,000 in debt outstanding, and pays an interest rate of 10 percent annually on its bank loan. Alumbat’s annual sales are $3,200,000, its average tax rate is 40 percent, and its net profit margin on sales is 6 percent. If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result. Alumbat’s current times interest earned ratio is:

 

  1. ​2.4.
  2. ​3.4.
  3. ​3.6.
  4. ​4.0.

*e. ​5.0.

 

 

  1. ​Which of the following ratios recognizes that many firms lease rather than buying a long-term asset?

 

*a. ​Fixed charge coverage ratio

  1. ​Times interest earned ratio
  2. ​Debt ratio
  3. ​Net profit margin
  4. ​Equity multiplier ratio

 

 

  1. The debt ratio is calculated as:

 

  1. ​debt ratio = net operating income ÷ total debt.
  2. ​debt ratio = long-term liabilities ÷ current liabilities.
  3. ​debt ratio = sales ÷ total liabilities.

*d. ​debt ratio = total liabilities ÷ total assets.

  1. ​debt ratio = interest charges ÷ total liabilities.

 

 

  1. The proportion of a firm’s funds that is provided by shareholders is equal to:

 

  1. ​the debt ratio minus the times interest earned.

*b. ​1 minus the debt ratio.

  1. ​the times interest earned plus 1.
  2. ​the debt ratio minus the dividends paid.
  3. ​the fixed charge coverage ratio minus 1.

 

 

  1. Greenwood Builders Ltd. has a debt ratio of 35 percent and it has total assets of $750,000. What is the value of their total liabilities?​

 

  1. ​$750,000
  2. ​$1,000,000
  3. ​$450,000

*d. ​$262,500

  1. ​$153,200

 

 

  1. A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has a debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on a total debt of 5 percent, what is the firm’s return on total assets (ROA)?

 

  1. ​8.4%
  2. ​10.9%
  3. ​12.0%

*d. ​13.3%

  1. ​15.1%

 

 

  1. Selzer Inc. sells all of its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to 60 days, receivables of $150,000, total assets of $3 million, and a debt ratio of 0.64. The firm’s return on equity (ROE) is:

 

  1. ​7.1%.
  2. ​33.3%.

*c. ​3.3%.

  1. ​71.0%.
  2. ​8.1%.

 

 

  1. Suppose a firm has a growth rate equal to 8 percent, return on assets (ROA) of 10 percent, a debt ratio of 20 percent, and a current stock price of $36. The firm’s return on equity (ROE) is:

 

  1. ​14.0%.

*b. ​12.5%.

  1. ​15.0%.
  2. ​2.5%.
  3. ​13.5%.

 

 

  1. Assume that Meyer Corporation is 100 percent equity financed, and has the following information: ​ (1) Earnings before taxes = $1,500;

(2) Sales = $5,000;

(3) Dividend payout ratio = 60%;

(4) Total assets turnover = 2.0;

(5) Applicable tax rate = 30%

The firm’s return on equity is:

 

  1. ​25%.
  2. ​30%.
  3. ​35%.

*d. ​42%.

  1. ​50%.

 

 

  1. If a firm earns a net profit of $100,000 on sales of $2,000,000, its net profit margin is:

 

*a. ​5%.

  1. ​10%.
  2. ​15%.
  3. ​3.5%.
  4. ​1.5%.

 

 

  1. Market value ratios indicate:

 

  1. ​the effect of liquidity, asset management, and debt management on operating results.
  2. ​how much debt the firm has and whether it can take on more debt.
  3. ​the firm’s ability to meet its current obligations.
  4. ​how effectively a firm is managing its assets.

*e. ​what investors think of the company’s future prospects based on its past performance.

 

 

  1. The Charleston Company is a relatively small, privately owned firm. Last year the company had an after-tax income of $15,000 and 10,000 shares were outstanding. The owners were trying to determine the market value for the stock prior to taking the company public. A similar firm, which is publicly traded, had a price/earnings ratio of 5.0. Using only the information given, the market value of one share of Charleston’s stock is estimated as:​

 

  1. ​$10.00.

*b. ​$7.50.

  1. ​$5.00.
  2. ​$2.50.
  3. ​$1.50.

 

 

  1. Using the information below for WAM Inc., the market value per share is:​ Earnings after interest and taxes = $200,000

Earnings per share = $2.00

Stockholders’ equity = $2,000,000

Market/Book ratio = 0.20

 

  1. ​$20.00.
  2. ​$8.00.

*c. ​$4.00.

  1. ​$2.00.
  2. ​$1.00.

 

 

  1. Which of the following ratios indicate how much investors are willing to pay for the firm’s stock for each dollar of reported profits?

 

  1. ​Earnings per share ratio
  2. ​Market/book ratio

*c. ​Price/earnings ratio

  1. ​Return on equity ratio
  2. ​Net profit margin ratio

 

 

  1. ​Assuming that other things are constant, the price earnings (P/E) ratio:

 

*a. ​is higher for firms with high growth prospects and lower for riskier firms.

  1. ​is lower for firms with high growth prospects and higher for riskier firms.
  2. ​is not affected by the growth prospects of the firm.
  3. ​is equal to the market price of the share of the firm.
  4. ​is equal to the earnings per share of the firm.

 

 

  1. An analysis of a firm’s financial ratios over time used to determine the improvement or deterioration in its financial situation is called _____.​

 

  1. ​sensitivity analysis
  2. ​the DuPont chart
  3. ​ratio analysis
  4. ​benchmarking analysis

*e. ​trend analysis

 

 

  1. A comparison of a firm’s ratios with those of other firms in the same industry at the same point in time is called:​

 

  1. ​trend analysis.

*b. ​benchmarking.

  1. ​DuPont analysis.
  2. ​sensitivity analysis.
  3. ​cash flow analysis.

 

 

  1. Which of the following dissects a single ratio into two or more related ratios?

 

*a. ​DuPont analysis

  1. ​Ratio analysis
  2. ​Comparative analysis
  3. ​Trend analysis
  4. ​Benchmarking

 

 

  1. Emerald Corporation’s current ratio is 0.5, while Ruby (Emerald’s competitor) Company’s current ratio is 1.5. Both firms want to “window dress” their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?​

 

  1. ​The transactions will have no effect on the current ratios.
  2. ​The current ratios of both firms will be increased.
  3. ​The current ratios of both firms will be decreased.

*d. ​Only Emerald Corporation’s current ratio will be increased.

  1. ​Only Ruby Company’s current ratio will be increased.

 

 

  1. Pearl Automotive Ltd. has a current ratio of 2. The company wants to window dress its financial statements. Which of the following transactions will increase the current ratio of Pearl Automotive, assuming all other variables remain constant?

 

  1. ​Selling of inventory on credit
  2. ​Purchase of inventory on credit
  3. ​Collecting accounts receivable
  4. ​Purchase of fixed assets for cash

*e. ​Repayment of short-term loan

 

 

  1. If a firm’s existing quick ratio is 1.0, and all other variables remain unchanged, the quick ratio can be increased by:​

 

  1. ​repayment of a loan.
  2. ​selling of inventory on credit.

*c. ​receiving interest income.

  1. ​collecting accounts receivable.
  2. ​purchase of fixed assets for cash.

 

 

  1. ​Techniques employed by firms to make their financial statements look better than they actually are, are called:

 

  1. ​DuPont techniques.

*b. ​window-dressing techniques.

  1. ​trend analysis techniques.
  2. ​benchmarking.
  3. ​equity multipliers.

 

 

  1. A limitation of ratio analysis is that:​

 

  1. ​it is useful only for large, multidivisional firms.
  2. ​inflation, which distorts the firm’s balance sheet, is considered when calculating ratios.
  3. ​seasonal factors that distort the firm’s balance sheet are taken into account when calculating ratios.

*d. ​window-dressing techniques will change the ratios of a firm.

  1. ​statistical procedures are considered to analyze the net effects of a set of ratios.

 

 

  1. Which of the following was created to develop and approve a set of common International Financial Reporting Standards (IFRS)?

 

*a. ​International Accounting Standards Board (IASB)

  1. ​Securities and Exchange Commission (SEC)
  2. ​Generally Accepted Accounting Principles (GAAP)
  3. ​International Federation of Accountants
  4. ​International Accounting Standards Committee

 

 

  1. Which of the following accounting principles is used in the United States?

 

  1. ​International Accounting Standards Board (IASB)
  2. ​International Financial Reporting Standards (IFRS)

*c. ​Generally Accepted Accounting Principles (GAAP)

  1. ​National Advisory Accounting Standards (NAAS)
  2. ​Financial Accounting Standards Principles (FASP)

 

 

  1. All firms that are publicly traded in the United States will be required to adopt the _____ in the near future.

 

  1. ​Generally Accepted Accounting Principles (GAAP)
  2. ​Financial Accounting Standards Rules (FASR)
  3. ​Governmental Accounting Standards Principles (GASP)

*d. ​International Financial Reporting Standards (IFRS)

  1. ​National Advisory Accounting Standards (NAAS)

 

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