Finance Chapter 1

Which of the following are true of a sole proprietorship?

A proprietorship has a limited life, it is one of the simplest types of businesses to form

The Sarbanes-Oxley Act requires corporate officers to do which of the following?

Accept responsibility for material errors in the annual report, confirm the validity of the annual financial report, list any deficiencies in internal controls

Which of the following is an example of a current liability

Accounts payable

Costs incurred due to a conflict of interest between stockholders and management are called ______ costs

Agency

The relationship between stockholders and management can best be described as a(n) ______

Agency

The conflict of interest between an agent and a principal is called a(n):

Agency problem

_____ budgeting is the process of making and managing expenditures on long-term assets

Capital

The primary purpose of issuing debt or equity shares is to raise _____ for the firm

Cash

Corporate finance studies the relationship between which of the following?

Cash flows, stock values, business decisions

Which of the following are examples of current assets?

Cash, accounts receivable, inventory

The federal government taxes which of the following?

Corporate earnings and shareholder dividends

Which of the following are features of a corporation?

Corporations can sue and be sued; corporations can enter into contracts; a corporation is a separate legal entity with the ability to acquire and exchange property

It is not desirable to achieve the financial goal of profit maximization with which of the following?

Cost-cutting; critical inventory reduction; maintenance deferment

A bad financial decision is defined as a decision that _____ owners' equity

Decreases

The purchase of unneeded artwork for an executives office is an example of what type of agency cost?

Direct

Some of the cash flow generated by a firm goes back to the financial markets in the form of:

Dividends and debt payments

A general partnership has which of the following characteristics?

Each owner has unlimited liability for all firm debts; it is difficult to transfer ownership; difficult to raise large amounts of cash; inexpensive and easy to form

What are the two basic classifications under which most potential financial goals fall?

Earning or increasing profits; controlling risks

Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?

Enron, WorldCom, Tyco

True or false: The Sarbanes-Oxley Act provides incentives for companies to go public in US markets

False

The controller is responsible for which of the following tasks?

Financial accounting, tax reporting and payments

Identify which assets last a long time and include items such as equipment, land, machinery or buildings

Fixed

On a balance sheet, patents and trademarks are classified as:

Fixed assets

How is ownership transferred in a corporation?

Gifting or selling shares of stock

A good financial decision will do which of the following?

Increase market value of shareholders' equity; increase the value of the firm's existing stock

The life of a corporation:

Is unlimited

The purpose of the Securities Act of 1933 was to provide the basic regulatory framework for which function?

Issuing new securities

A corporation is a distinct ______ entity and as such can have a name and take advantage of the legal powers of natural persons

Legal

Over time, value will be created if the cash raised in the financial markets is _____ the cash paid out to bondholders and stockholders

Less than

Net working capital is defined as current assets minus current:

Liabilities

Businesses are motivated ot organize as corporations because stockholders in a corporation have _____ liability for corporate debts

Limited

Corporate bonds are generally classified as:

Long-term debt

Which of the following are included in a firm's capital structure?

Long-term debt, equity; the mix of debt and equity is referred to an a firm's capital structure

A tresurer's responsibilities typically include:

Making financial plans, handling cash flows, managing capital expenditure decisions

Since _____ and ownership are separated, a corporation's life is unlimited

Management

The goal of a for-profit business is to _____ the value of existing owners' equity

Maximize

Assuming interest rates are positive and are greater than the inflation rate, one dollar received today is worth ____ one dollar received next year

More than

The 1934 Securities Exchange Act restricts anyone who has access to _____ information from trading on that information

Non-public

A current liability is defined as debt that must be repaid within which period of time?

One year

Indirect agency costs are often due to lost:

Opportunities

When a corporation is formed, it is granted which of the following rights?

Provincial citizenship for jurisdictional purposes, the ability to issue stock

Which one of these is an important mechanism used by unhappy stockholders to replace current management?

Proxy fight

Which of the following is true concerning government regulations?

Regulation can help reduce conflicts of interest between managers and shareholders; regulation can be costly to a firm; regulation can help ensure firms disclose relevant information to investors

Most investors have an aversion to:

Risk

The owners of a corporation are called:

Shareholders

Which one of the following parties would be the last party to receive payment if a firm were to close?

Shareholders

Shareholders' equity is the difference between which of the following?

Shareholders' equity = total assets - total debt

Which of the following statements are true about shareholders' equity?

Shareholders' equity is the difference between the value of a firm's assets and its debt; shareholders' equity is a residual claim on a firm's assets

A current asset has a _____ life

Short; current assets are short-term assets, on the balance sheet for less than one year

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

Stakeholder

Which of the following can be used to encourage managers to act in the best interests of the shareholders?

Stock options and bonuses; managerial compensation tied to performance

_____ are frequently used to encourage key managers to maximize the value of the firm's stock

Stock options; threat of a hostile takeover

A corporation receives cash from financial markets by selling _____ and _____

Stocks; bonds

Which of the following are possible financial goals for a company?

Survival, maximize profits, minimize costs

A shareholder's liability is limited to which of these?

The amount the shareholder invested in the corporation

The primary responsibility of financial managers is to increase the value of:

The existing shares of stock

What is the main goal of financial management?

To maximize current share value

Which corporate officer is responsible for managing the firm's cash?

Treasurer

Which of the following positions generally report to the cheif financial officer?

Treasurer, controller

True or false: Accounting profit does not adequately account for cash flow.

True, accounting profit records sales made and expenses incurred but not the timing of cash receipts and expenditures

Which are examples of fixed assets?

Warehouse, equipment

An organization must prepare ____ and bylaws when forming a corporation

articles of incorporation

A firm's balance sheet shows a snapshot of its finances:

at a point in time

The rules used by a corporation to regulate its existence are known as:

by laws

Since ownership in a corporation can be dispersed over a huge number of stockholders, it can be argued that ____ effectively controls the firm

Management