Principles of Finance Ch 1-3 Test

_________ ratios are a measure of the speed with which various accounts are converted into sales or cash.

Activity

All of the following are true about mortgage-backed securities EXCEPT:

All of the cash flows from these securities are guaranteed by the U.S. government.

Net profits after taxes are defined as

EBIT minus interest and taxes.

The rule-setting body, which authorizes GAAP is

FASB.

Which of the following are forums in which suppliers and demanders of funds can transact business directly?

Financial Markets

The part of finance concerned with design and delivery of advice and financial products to individuals, business, and government is called

Financial Services.

Which of the following provide savers with a secure place to invest funds and offer both individuals and companies loans to finance investments?

Commercial Banks

_______ evidence of the existence of a problem or outstanding management performance is provided by ratio analysis.

Inconclusive

Which of the following assist companies in raising capital, advise firms on major transactions such as mergers or financial restructuring, and engage in trading and market making activities?

Investment Banks

In an efficient market if a company announced sales of a new product are lower than expected, what would you expect to happen to the stock price?

It would decrease

Under which of the following legal forms of organization, is ownership readily transferable?

Corporation

Which of the following legal forms of organization's income is NOT taxed under individual income tax rate?

Corporation.

All of the following are true EXCEPT

Corporations pay taxes on all dividends received from other corporations, no matter their share of ownership.

________ analysis involves the comparison of different firms' financial ratios at the same point in time.

Cross-sectional

All of the following are examples of current assets EXCEPT

accruals.

The stockholder's annual report must include

all of the above- a balance sheet, an income statement, a statement of retained earnings, a statement of cash flows.

Firms that require funds from external sources can obtain them from

all of the above- financial markets, financial institutions, private placement.

Economic theories that the financial manager must be able to utilize for efficient business operations, include

all of the above- marginal analysis, profit-maximizing strategies, price theory, supply-and-demand analysis.

The analyst should be careful when conducting ratio analysis to ensure that

all of the above- the same accounting procedures were used, audited statements are used, the dates of the financial statements being compared are the same, the overall performance of the firm is not judged on a single ratio.

The Gramm-Leach-Biley Act

allows business combinations between commercial banks, investment banks and insurance companies.

The accountant recognizes revenues and expenses on

an accrual basis.

The over-the-counter (OTC) market is

an intangible market for unlisted securities.

A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might

decrease current liabilities by utilizing more long-term debt, thereby increasing the current and quick ratios.

A competitive market that allocates funds to their most productive use is called an

efficient market.

The 2002 Sarbanes-Oxley Act was designed to

eliminate the many disclosure and conflict of interest problems of corporations.

When home prices are falling we would expect

high mortgage default rates.

All of the following are functions of security exchanges EXCEPT

holding demand deposits.

The ________ provides a financial summary of the firm's operating results during a specified period.

income statement

Corporate owner's receive realizable return through

increase in share price and cash dividends.

A firm with a substandard net profit margin can improve its return on total assets by

increasing its total asset turnover.

Managerial finance

involves tasks such as budgeting, financial forecasting, cash management, and funds procurement.

Agency costs include all of the following EXCEPT

management reports to stockholders.

The ________ measures the percentage of profit earned on each sales dollar before interest and taxes.

operating profit margin

An ethics program is expected to have a _________ impact on the firm's share price.

positive

The ______ market is where securities are initially issued and the _______ market is where pre-owned securities (not new issues) are traded.

primary; secondary

Profit maximization as the goal of the firm is NOT ideal because

profit maximization does not consider risk.

Most businesses raise money by selling their securities in a

public offering.

The tax deductibility of various expenses such as general administrative expenses _______ their after-tax cost.

reduces

As the risk of a stock investment increases, investors'

require rate of return will increase.

The DuPont system merges the income statement and balance sheet into two summary measures of profitability:

return on total assets and return on equity.

The wealth of the owners of a corporation is represented by

share value

The primary concern of creditors when assessing the strength of a firm is the firm's

short-term liquidity.

About 75 percent of all business firms are

sole proprietorships.

The major securities traded in the capital markets are

stocks and bonds.

A recent ethics survey indicated the opinion that maintaining high ethical standards

strengthened a firm's competitive position.

The key participants in financial transactions are individuals, businesses, and governments. Individuals are net _______ of funds, and businesses are net ________ of funds.

suppliers; demanders

The conflict between the goals of a firm's owners and the goals of its non-owner managers is

the agency problem

Trading is carried out on the floor of the New York Stock Exchange by

the auction process.

Retained earnings on the balance sheet represents

the cumulative total of earning reinvested in the firm.

Wealth maximization as the goal of the firm implies enhancing the wealth of

the firm's stockholders.

One way often used to insure that management decisions are in the best interest of the stockholders is to

tie management compensation to the performance of the company's common stock price.

The ________ ratio may indicate that the firm will not be able to meet interest obligations due on outstanding debt.

times interest earened

The _________ ratio may indicate poor collections procedures or a lax credit policy.

average collection period

Long-term debt instruments used by both government and business are known as

bonds.

The net value of fixed assets is also called its

book value.

Career opportunities is financial services include all of the following EXCEPT

capital expenditures management.

If a corporation sells certain capital equipment for more than their initial purchase price, the difference between the sale price and the purchase price is called

capital gain

The primary emphasis of the financial manager is the use of

cash flow.

All of the following as considered stakeholders EXCEPT

competitors.

Accounting practices and procedures used to prepare financial statements are called

GAAP.