Managerial Finance Exam 1

According to GAAP, when is income reported?

When it is earned or accrued

U.S. corporations pay tax at a rate of

flat 21%

Physical assets are termed ______ assets.

tangible

a common-size balance sheet expresses accounts as a percentage of

total assets

what is the correct representation of the total debt ratio

(total assets- total equity)/(total assets)

Business finance is broadly concerned with?

-What long term investments to take on -Where will you get the long-term financing to pay off your investments -How will you manage day-to-day finance

what companies were involved in corporate scandals that led to Sarbenes-Oxley

Enron, WorldCom, Tyco

compute Return on Assets (ROA)

Net Income/Total Assets

return on equity equation

Net Income/Total Equity

what creates problems with financial statement analysis

The firm and its competitors operate under different regulatory environments. The firm or its competitors are conglomerates The firm or its competitors are global companies.

how is the average income tax rate computed

Total tax bill/Total taxable income

what questions can be answered by reviewing a firm's balance sheet

What is the total amount of assets the firm owns? how much debt is used to finance the firm?

the relationship between stockholders and management can best be described as

an agency relationship

the short run is

an imprecise period of time

an organization must prepare _______ and bylaws when forming a corporation

articles of incorporation

the short run is a period when there are

both fixed and variable

what three subjects is the financial manager concerned with

capital budgeting capital structure working capital management

What are components of cash flow from assets

capital spending operating cash flow change in net working capital

Non-cash items do not affect

cash flow

In finance, the value of a firm depends on its ability to generate

cash flows`

In large firms, financial activity is usually associated with which top officer?

chief financial officer

What position generally reports to the chief financial officer

controller and treasurer

The Sarbanes-Oxley Act is intended to strengthen protection against

corporate accounting fraud and financial malpractice

What are the four basic areas of finance

corporate finance, investments, financial institutions, international finance

public limited companies and joint stock companies are other names for

corporations

How is inventory turnover calculated?

cost of goods sold/average inventory

assets can be categorized as

current and fixed assets tangible and intangible assets

the current ratio computes the relationship between

current assets and current liabilities

"increasing shareholder wealth" means increasing the

current common stock value

The more debt a firm has, the greater its:

degree of financial leverage

Cash flow refers to the

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

Cash flow to stockholders is defined as:

dividends paid minus net new equity raised

When a firm smooths earnings to please investors, it is called ________.

earnings management

Net capital spending is equal to:

ending net fixed assets minus beginning net fixed assets plus depreciation.

the goal of financial management is to increase the value of

existing shares of stock

who are considered non-owner stakeholders in a company

government employees suppliers

the information needed to compute the profit margin can be found on the

income statement

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will

increase

Cash flow to creditors is defined as:

interest paid minus net new borrowing

inventory turnover is cost of goods sold divided by

inventory

what are defining features of the primary market

is it the market where initial public offerings are made proceeds from the sale of securities goes to the issuing firm

For a mature firm, operating cash flow:

is usually positive is a sign of trouble if negative over a long period of time

if a company has inventory, the quick ratio will always be _____ the current ratio

less than

the times interest earned ratio is a measure of

long-term solvency

in a shareholder-manager relationship, who is the agent

managers

the _____ tax rate is the tax rate paid on the next dollar of income

marginal

Price Earnings Ratio

market price per share/earnings per share

the price at which willing buyers and sellers would trade is called

market value

The DuPont identity shows that __________ times total asset turnover ties equity multiplier equals ROE

net profit margin

The cash flow that results from the firm day-to-day activities of producing and selling is called

operating cash flow

earnings management is a controversial practice in which corporations ______ or ______ their earnings to "smooth out" dips and surges and keep investors calm

overstate; understate

where does cash generated by a corporation typically go

paid to shareholders and creditors to pay corporate taxes reinvested in the firm

a business without separate legal authority formed by two or more people is known as a

partnership

A positive operating cash flow indicates that the firm is generating enough cash to:

pay everyday cash outflows

return on assets (ROA) is a measure of

profitability

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value

The profit margin is equal to net income divided by

sales

what represents the receivables turnover ratio

sales/ accounts receivable

When one owner or creditor sells to another, the transaction takes place in the _________ market.

secondary

someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm is a

stakeholder

_______ can be used to encourage managers to maximize the value of the stock

stock options

managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of

stock options

owners of a corporation are called

stockholders or shareholders

A corporation receives cash from financial markets by selling ________ and _________.

stocks and bonds

a shareholder's liability is limited to

the amount the shareholder invested in the corporation

a shareholder's liability is limited to?

the amount the shareholder invested in the corporation

changes in capital spending can be negative if

the firm sold more assets than it purchased

what is true of financial ratios

they are used for comparison purposes they are developed from a firm's financial information

what is the main goal of financial management

to maximize current share value

in a common-size income statement, each item is expressed as a percentage of

total sales

How many owners does a partnership have?

two or more

What kind of liability does a sole proprietorship have?

unlimited

financial leverage refers to a firm's

use of debt in its capital structure

a good financial decision will increase what

value of firms existing stock market value of shareholders' equity

according to GAAP when is revenue recognized on an income statement

when earnings process is virtually completed when the value of an exchange of goods or services is known or reliably determined

Common-size statements are best used for comparing:

year-to-year for your firm firms of different sizes competitors

what is true of a sole proprietorship

It is the simplest type of business to form. A proprietorship has a limited life.

a balance sheet reflects a firm's

accounting value on a specific date

net earnings refers to income earned

after interest and taxes

If you hire a real estate company to sell your house, you are most apt to encounter?

agency problem

the conflict of interest between an agent and a principal is called

an agency problem