FIN 3715 Exam 1

BHP BILLITON (ASX: BHP.AX) Using the above information, how much would you pay for a share of BHP Billiton stock? A) $41.91 B) $41.93 C) $41.65 D) $41.59

B) $41.93

WASHINGTON POST CO B (NYSE: WPO) Using the above information, how much would you receive if you sold a share of Washington Post stock? A) $683.00 B) $677.62 C) $678.50 D) $677.64

B) $677.62

Financial decisions require that you weigh alternatives in strictly monetary terms.

False

Convex Industries has inventories of $218 million, current assets of $1.4 billion, and current liabilities of $504 million. What is its quick ratio? A) 1.17 B) 0.94 C) 2.81 D) 2.35

D) 2.35 ($1400 - $218 ) / $504 = 2.35

What will be the effect on the balance sheet if a firm buys a new processing plant through a new loan?

The Assets side will increase under Net property, plant, and equipment with the net effect of the new processing plant, while the Liabilities side will correspondingly show the new debt that was incurred in paying for the plant.

What are the main differences between the NYSE and NASDAQ stock markets?

The NYSE has a physical location, a geographical address where traders gather to trade, but NASDAQ is an electronic market. Moreover, while the NYSE has one specialist in each stock, NASDAQ has multiple market makers serving the functions of both matching buyers and sellers and trading on their own account.

Briefly discuss the issues in the agency conflict problem.

The agency conflict problem arises out of the principal-agent relationship existing between the shareholders and managers of a corporation. Although managers are required to put the shareholders interest ahead of their own, in practice they tend to put their own interest ahead of the shareholders interests.

Explain some of the measures taken to reduce the agency conflict problem.

The agency conflict problem can be reduced by taking measures that align the managers interests with those of the shareholders. For example, incentive-based compensation, such as employee stock options, helps align the interests of these two constituents.

21) How does a firm select the date for preparation of its balance sheet?

The balance sheet is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st.

How can we perform a cost-benefit analysis in case they are occurring in different currencies?

We need to convert costs and benefits occurring in different currencies to one base currency before performing any analysis.

What are the main differences between a partnership and a sole proprietorship?

While a sole proprietor has the same identity as its single owner, a partnership of general partners has the same identity as its partners. Each general partner is responsible for the decisions taken by that partner as well as any other general partner.

A 30-year mortgage loan is a ________. A) long-term liability B) current liability C) current asset D) long-term asset

A) long-term liability

A sole proprietorship is owned by ________. A) one person B) two or more persons C) shareholders D) bankers

A) one person

The Valuation Principle shows hoe to make the costs and benefits of a decision comparable so that we can evaluate them properly.

True

The income statement reports the firms revenues and expenses, and it computes the firms bottom line of net income, or earnings.

True

The principal goal of a financial manager is to maximize the wealth of the stockholders.

True

Whenever a good trades in a competitive market, the price determines the value of the good.

True

What is the most common type of firms in the United States and the world? A) sole proprietorships B) partnerships C) limited partnerships D) corporations

A) sole proprietorships

Which of the following types of firms does NOT have limited liability? A) sole proprietorships B) limited partnerships C) corporations D) none of the above

A) sole proprietorships

In most corporations, to whom does the chief financial officer report? A) shareholders B) the board of directors C) the chief executive officer D) the controller

C) the chief executive officer

What are the four financial statements that all public companies must produce?

1. balance sheet 2. income statement 3. statement of cash flows 4. statement of stockholders equity

How is a corporation different from most of the other forms of business organizations?

A corporation has a separate legal identity from those of its owners. This separation gives the owners limited liability for the actions of the corporation. The down side is the process of double taxation for each dollar earned by the corporation, once when it is earned by the corporation and subsequently when it is passed on to the owners.

What are the main differences between a limited partnership and a limited liability corporation?

A limited partnership is required to have at least one general partner. A limited liability corporation is similar to a limited partnership but without the general partner.

STRIDER How much money would a stock exchange make from buying and selling 500 shares of the stock under the conditions shown above? A) $250 B) $3,000 C) $5,875 D) $210,375

A) $250 (421.25 - 420.75) × 500 = $250

In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but the gross margin increased from 2.8% to 3.9% between those years, by what amount was the cost of sales reduced? A) $330,000 B) $660,000 C) $264,000 D) $462,000

A) $333,000 [($30 × 3.9%) - ($20 × 2.8%)] × 1,000,000 = $330,000

Which of the following would be more typically the responsibility of a controller rather than a treasurer? A) overseeing accounting and tax functions B) capital budgeting C) managing credit D) making investment decisions

A) overseeing accounting and tax functions

Which of the following would be best considered to be an agency conflict problem in the behavior of the following financial managers? A) Bill chooses to pursue a risky investment for the companys funds because his compensation will substantially rise if it succeeds. B) Sue instructs her staff to skip safety inspections in one of the companys factories, knowing that it will likely fail the inspection and incur significant costs to fix. C) James ignores an opportunity for his company to invest in a new drug to fight Alzheimers disease, judging the drugs chances of succeeding as low. D) Michael chooses to enhance his firms reputation at some cost to its shareholders by sponsoring a team of athletes for the Olympics.

A) Bill chooses to pursue a risky investment for the companys funds because his compensation will substantially rise if it succeeds.

Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information? A) Company A is less likely than Company B to have sufficient working capital to meet its short-term needs. B) Company A has greater leverage than Company B. C) Company A has less leverage than Company B. D) Company A and Company B have roughly equivalent enterprise values.

A) Company A is less likely than Company B to have sufficient working capital to meet its short-term needs.

Which of the stock markets listed below is the smallest, as judged by trading volume? A) Deutsche Börse B) London Stock Exchange C) NASDAQ D) NYSE Euronext (US)

A) Deutsche Börse

Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 at the end of each of the next five years. Steve concludes that in five years he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steves major error in reasoning when making this decision? A) He ignores the fact that the costs and benefits of the investment are not stated in the same terms. B) He ignores the benefits of consuming the $1.00 today against the benefits of consuming the $1.00 five years from now. C) He fails to consider the costs of not consuming the $1.00 today. D) He considers that the value of the cash he may have in the future is the same as the value of cash he has today.

A) He ignores the fact that the costs and benefits of the investment are not stated in the same terms.

A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded? A) It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows. B) It will be depreciated over time on the income statement and subtracted as Inventory on the statement of cash flows. C) It will be depreciated over time on the income statement and therefore not be recorded separately on the statement of cash flows. D) It will be subtracted from Gross Profit on the income statement and therefore, not be recorded separately on the statement of cash flows.

A) It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows.

A firm that provides tax services to the public intends to offer a premium tax-return service at a higher price than their current services. The managers of the company ask experts in marketing to determine how much an effective ad campaign for such a service would cost, and by how much sales would increase. They consult experts in economics to calculate the increases in revenue from the success of the campaign, experts in operations to determine the cost of offering the service, and experts in strategy to anticipate possible counter-moves by competitors. Which of the following points about the role of financial managers does this example illustrate? A) Real-world decisions are complex and require information from many sources if the decisions are to be valid. B) Determining the costs associated with making a decision is easier than determining the potential benefits of the decision. C) All of the costs and benefits associated with a decision can never be fully identified. D) Ultimately the decision whether to take a certain course of action rests with the financial managers of a company.

A) Real-world decisions are complex and require information from many sources if the decisions are to be valid.

Alaska North Slope Crude Oil (ANS) $71.75/bbl West Texas Intermediate Crude Oil (WTI) $73.06/bbl As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,150 bbl of Alaska North Slope (ANS) crude oil for 10,000 bbl of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 bbl of WTI crude, what should you do? A) Sell 10,000 bbl WTI crude on the market and use the proceeds to purchase and refine ANS crude. B) Do nothing; refine the 10,000 bbl of WTI crude. C) Trade the 10,000 bbl WTI crude with the other refiner and refine the 10,150 bbl of ANS crude. D) Trade the 10,000 bbl WTI crude with the other refiner and then sell the 10,150 bbl of ANS crude.

A) Sell 10,000 bbl WTI crude on the market and use the proceeds to purchase and refine ANS crude

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true? A) Since net working capital is negative, the company will not have enough funds to meet its obligations. B) Since net working capital is high, the company will likely have little difficulty meeting its obligations. C) Since net working capital is very high, the company will have ample money to invest after it meets its obligations. D) Since net working capital is nearly zero, the company is well run and will have little difficulty attracting investors.

A) Since net working capital is negative, the company will not have enough funds to meet its obligations.

Which of the following is the LEAST likely explanation for a firms high ROE? A) The firm is growing. B) The firm is able to find investment opportunities that are very profitable. C) The firm has very efficient use of its assets. D) The firm enjoys high sales margins.

A) The firm is growing.

On August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share, which were sold in an online auction in a bid to make the shares more widely available. Which of the following statements best describes why these are considered a primary market transaction? A) The transaction was between the corporation and investors. B) Shares of Google from this time onward could be traded between investors on a stock exchange. C) The shares were the first to be privately issued by Google. D) Google was at the time a recently founded company seeking capital with which to expand.

A) The transaction was between the corporation and investors.

What is the main problem in using a balance sheet to provide an accurate assessment of the value of a companys equity? A) Valuable assets such as the companys reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet. B) The balance sheet does not accurately represent the book value of assets held by the company. C) The equity shown on the balance sheet does not reflect the market capitalization of the company. D) Knowing at a single point in time what assets a firm possesses and the liabilities a firm owes does not give any indication of what those assets can produce in the future.

A) Valuable assets such as the companys reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet.

Which of the following firms would be expected to have a high ROE based on that firms high profitability? A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals B) a low-end retailer that has a low mark-up on all items it sells C) a brokerage firm that has high levels of leverage D) a grocery store chain that has very high turnover, selling many multiples of its assets per year

A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals

What is the most common way that agency conflict problems are addressed in most corporations? A) by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders B) by terminating the employment of employees who are found to have put their own interests above those of the company C) by using disinterested outside bodies to adjudicate between managers and shareholders when such conflicts arise D) by prosecuting managers who have been found to have illegally used company moneys for their own benefit

A) by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders

A factory owner wants his workers to produce as many widgets as they can so he pays his workers based on how many widgets they produce. However, in order to make sure that the workers do not rush and produce a large number of poorly made widgets, he checks the widgets at random at various stages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. How is this factory owner seeking to solve the agency conflict problem in this case? A) by supplying incentives so the agents act in the way principal desires B) by ensuring that all workers co-operate to maximize the gains of their section C) by making the agents into principals themselves D) by maximizing the information that the principal obtains about the behavior of the agents

A) by supplying incentives so the agents act in the way principal desires

Which ratio would you use to measure the financial health of a firm by assessing that firms leverage? A) debt-equity or equity multiplier ratio B) market-to-book ratio C) market debt-equity ratio D) current or quick ratio

A) debt-equity or equity multiplier ratio

Which of the following is NOT an operating expense? A) interest expense B) depreciation and amortization C) selling, general, and administrative expenses D) research and development

A) interest expense

What is the bid-ask spread? A) the difference in price available for an immediate sale of a stock and the immediate purchase of the stock B) all of the costs and fees that a stock exchange charges in order to process a transaction C) the rise or fall in the value of a stock between the time it is acquired by an investor and sold by that investor D) the difference in the selling price of a stock between different exchanges

A) the difference in price available for an immediate sale of a stock and the immediate

Whose interests should a financial manager consider paramount when making a decision? A) the stockholders who have risked their money to become owners of the company B) the employees and associated stakeholders who are employed by the company C) the public who consume the companys goods and services D) the senior management and associated colleagues at the executive level within the company

A) the stockholders who have risked their money to become owners of the company

What role does Generally Accepted Accounting Principles (GAAP) play in the accounting process?

All firms quoted on a U.S. exchange are required to use GAAP in their financial reporting process. This standardization process makes it easier to adjust and/or compare the financial figures across different firms.

What role do external auditors play in a firms financial reporting process?

As the name implies, external auditors act as third party monitors to a firms financial reporting process.

In a trade with the government of an oil producing nation, a manufacturer will deliver 13 Caterpillar D9 tractors, with a value of $320,000 per tractor, and receive 45,000 barrels of oil, valued at $120 per barrel. What is the net benefit of this trade to the manufacturer? A) $744,000 B) $1,240,000 C) $992,000 D) $1,488,000

B) $1,240,000

Alaska North Slope Crude Oil (ANS) $71.75/bbl West Texas Intermediate Crude Oil (WTI) $73.06/bbl As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $78 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,150 bbl of Alaska North Slope (ANS) crude oil for 10,000 bbl of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 bbl of WTI crude, the added benefit (cost) to you if you take the trade is closest to ________. A) ($1550) B) $1550 C) ($3475) D) $3475

B) $1550

Alaska North Slope Crude Oil (ANS) $71.75/bbl West Texas Intermediate Crude Oil (WTI) $73.06/bbl As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you just purchased 9950 bbl of WTI crude at the current market price, the total revenue (cost) to you if you were to refine this crude oil and sell the unleaded gasoline is closest to ________. A) ($766,150) B) $766,150 C) ($770,032) D) $770,032

B) $766,150

U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form? A) 10-A B) 10-K C) 10-Q D) 10-SEC

B) 10-K

PERNEX INC What is the bid-ask spread on the stock shown above? A) 1 cent B) 3 cents C) 6 cents D) 12 cents

B) 3 cents

Put the following steps of the financial cycle in the correct order. I. Money flows to companies who use it to fund growth through new products. II. People invest and save their money. III. Money flows back to savers and investors. A) I, II, and III B) II, I, and III C) III, II, and I D) II, III, and I

B) II, I, and III

Why is the stock price of a company an indication of the performance of the companys senior managers? A) Well-run companies are invariably highly profitable, which leads to a higher share price. B) In general, people want to invest in a well-managed corporation, which will drive up the price of shares. C) Investors who can see that a company is well-run will hold on to their shares, even if the company faces setbacks, since they know that the stock price will likely rise again. D) Larger companies tend to be better run and so have higher stock prices.

B) In general, people want to invest in a well-managed corporation, which will drive up the price of shares.

Which of the following statements regarding the cost-benefit analysis is NOT correct? A) The first step in evaluating a project is to identify its costs and benefits. B) In the absence of competitive markets, we can use one-sided prices to determine exact cash values. C) Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker. D) Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations.

B) In the absence of competitive markets, we can use one-sided prices to determine exact cash values.

Accounts payable is a ________. A) long-term liability B) current asset C) long-term asset D) current liability

D) current liability

A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company? A) Investors may consider this firm to be a growth company. B) Investors believe the companys assets are not likely to be profitable since its market value is worth less than its book value. C) The firms market value is more than its book value. D) The value of the firms assets is greater than their liquidation value.

B) Investors believe the companys assets are not likely to be profitable since its market value

Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet? A) It subtracts all expenses and costs related to a firms operating activities. B) It adds all non-cash entries related to a firms operating activities. C) It adds the cash that flows from investors to a firm. D) It removes the cash used for investment purposes.

B) It adds all non-cash entries related to a firms operating activities.

Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows? A) It would be an expense on the income statement so it would be reflected in operating cash flows. B) It would be an addition to property, plant and equipment so it would be an investing activity. C) It would be an addition to cash so it would be reflected in the change in cash. D) None of the above answers is correct.

B) It would be an addition to property, plant and equipment so it would be an investing activity.

A company that produces racing motorbikes has several models that sell well within the motorcycle racing community and which are very profitable for the company. Despite having a profitable product, why must this company take care to ensure that it has sufficient cash on hand to meet its obligations? A) Profits from the sales of popular models will be lost when returned to the shareholders in the form of dividends. B) New models will require a lot of money to develop and bring to market before they generate any revenue. C) The company will have built up debts which must be repaid in order to bring the current models to market. D) Equity must be raised to finance the development of new models to replace the existing models.

B) New models will require a lot of money to develop and bring to market before they generate any revenue.

Heavy Duty Company, a manufacturer of power tools, decides to offer a rebate of $130 on its 16-inch mid-range chain saw, which currently has a retail price $490. Heavy Dutys marketers estimate that, as a result of the rebate, sales of this model will increase from 60,000 to 80,000 units next year. The profit margin for Heavy Duty before the rebate is $180. Based on the given information, is the decision to give the rebate a wise one? A) No, since costs are $7,800,000 more than benefits. B) No, since costs are $6,800,000 more than benefits. C) Yes, since the benefits are $3,400,000 more than the costs. D) Yes, since the benefits are $7,300,000 more than the costs.

B) No, since costs are $6,800,000 more than benefits.

Which of the following is a measure of the aggregate price level of collections of pre-selected stocks? A) NASDAQ B) S&P 500 C) NYSE D) Euronext

B) S&P 500

Why is a stock exchange like NASDAQ considered a secondary market? A) It trades the second largest volume of shares in the world. B) Shares sold on it are exchanged between investors without any involvement of the issuing corporation. C) The exchange has rules that attempt to ensure that bid and ask prices do not get too far apart. D) NASDAQ is called a secondary market because NYSE is considered a primary market.

B) Shares sold on it are exchanged between investors without any involvement of the issuing corporation.

A companys board of directors chooses to provide a comprehensive health care plan for the families of all employees, despite the large cost. They argue that this will not only increase the number of employees who stay with the firm, and thus reduce some costs involved in employee turnover, but also increase the employees diligence and industry. What general principle is being argued by the board of directors? A) In a conflict between stakeholders in a company, the most important stakeholder is not always the stockholders. B) Some activities that decrease shareholders wealth may have intangible benefits which increase the strength of the company overall. C) When a conflict of interest arises between shareholders and other stakeholders, in general, the correct solution is the one that creates the greatest good for the greatest number of stakeholders. D) Ethical decisions should be assessed on their moral value, not on their value in dollars and cents.

B) Some activities that decrease shareholders wealth may have intangible benefits which increase the strength of the company overall.

23) What is the process of double taxation for the stockholders in a C corporation? A) Their shares are taxed when they are both bought and sold. B) The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them. C) The owners of a corporation are taxed when they receive dividend payments and when they make a profit from the sale of shares. D) The corporation must pay taxes on any profits it makes, and the capital raised by the sale of shares is also subject to taxation.

B) The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them.

A company intends to install new management software for its warehouse. The software will cost $47,000 to buy and will cost an additional $148,000 to install and implement. It is anticipated that it will save the company $44,000 through reductions in staff and $69,000 in general inventory costs in the first year after installation. What is the total benefit to the company in the first year if they choose to install the software? A) $56,500 B) $45,200 C) $113,000 D) $79,100

C) $113,000

A printing company prints a brochure for a client and then bills them for this service. At the time the printing companys financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded? A) The sale will be added to Net Income on the income statement and retained in Net Income on the statement of cash flows. B) The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows. C) The sale will not be added to Net Income on the income statement but added to Net Income on the statement of cash flows. D) The sale will neither be added to Net Income on the income statement nor used to adjust Net Income on the statement of cash flows.

B) The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows.

A limited liability company is essentially ________. A) a limited partnership without limited partners B) a limited partnership without a general partner C) just another name for a limited partnership D) just another name for a corporation

B) a limited partnership without a general partner

What is a competitive market? A) a market in which goods have a different ask price and bid price B) a market in which a good can be bought and sold at the same price C) a market in which a good is sold at a lower price than that for which it can be bought D) a market in which a good is bought for a lower price than that for which it can be sold

B) a market in which a good can be bought and sold at the same price

A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows? A) as an outflow under operating activities B) as an outflow under investment activities C) as an outflow under financial activities D) not recorded on the statement of cash flows

B) as an outflow under investment activities

How do the shareholders of most corporations exercise their control of that corporation? A) by voting on issues that concern them B) by electing members of a board of directors C) by vetting the decisions of the board of directors D) by providing oversight of the day-to-day running of the corporation

B) by electing members of a board of directors

The financial manager of a well-regarded book publishing firm wishes to buy a small Internet publishing company to provide an avenue for sale of its materials online. In order to raise the funds to make this purchase, the financial manager decides to sell more stock in the company. How is the financial manager raising funds in this case? A) by increasing the debt burden carried by the company B) by raising the companys equity by encouraging new owners to take a stake in the company C) by decreasing the ratio of equity to debt held by the company D) by increasing the value of shares held by the existing owners of the company

B) by raising the companys equity by encouraging new owners to take a stake in the company

A corporate raider gains a controlling fraction of the shares of a poorly managed company and replaces the board of directors. How does the corporate raider hope to make a profit in this case? A) by the sale of the assets held by the company that hold most of its value B) by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors C) by motivating the board of directors and other stakeholders in the company to make difficult short-term decisions that will increase the long-term viability of the company D) by removing the employees expectations of the continued poor performance of the company

B) by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors

Which of the following is NOT considered to be an operating expense on the income statement? A) administrative expenses and overhead B) corporate taxes C) salaries D) depreciation and amortization

B) corporate taxes

Cash is a ________. A) long-term asset B) current asset C) current liability D) long-term liability

B) current asset

Whenever a good trades in a competitive market, the ________ determines the value of the good. A) supply B) price C) demand D) cost

B) price

A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet? A) the depreciation over the last year in the value of the vehicles owned by the company B) revenue received for the delivery of items that have not yet been delivered C) a loan which must paid back in two years D) prepaid rent on the offices occupied by the company

B) revenue received for the delivery of items that have not yet been delivered

9) Which of the following is NOT a financial statement that every public company is required to produce? A) income statement B) statement of sources and uses of cash C) balance sheet D) statement of stockholders equity

B) statement of sources and uses of cash

What is a firms gross profit A) the difference between the sales and other income generated by the firm, and all costs, taxes, and expenses incurred by a firm in a given period B) the difference between sales revenues and the costs C) the difference between sales revenues and cash expenditures associated with those sales D) all of the above

B) the difference between sales revenues and the costs

The notes to the financial statements would LEAST likely be used for which of the following purposes? A) to provide information regarding the context in which these financial numbers were generated B) to disclose the financial implications of any off-balance sheet transactions C) to show how the value of assets listed in the financial statements were arrived at D) to explain the method of accounting that was used in the preparation of the financial statements

B) to disclose the financial implications of any off-balance sheet transactions

TOYOTA INDUSTRIES (Frankfurt TAH.F) Based on the information shown above, how much would you receive from selling 2,000 shares of the above stock? A) €40,840 B) €40,740 C) €41,000 D) €42,560

B) €40,740

An elderly relative offers to sell you their used 1958 Cadillac Eldorado for $52,000. You note that very similar cars are selling on the open market for $87,000. You dont care for classic cars and would rather buy a new Ford Explorer for $35,000. What is the net value of buying the Cadillac? A) $87,000, since the Cadillac could be sold for this price. B) $52,000, since the Cadillac could be bought for this price. C) $35,000, since this is the difference between purchase and resale price of the Cadillac. D) $35,000, since this is the value of the car that you really want to buy.

C) $35,000, since this is the difference between purchase and resale price of the Cadillac.

Alaska North Slope Crude Oil (ANS) $71.75/bbl West Texas Intermediate Crude Oil (WTI) $73.06/bbl As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,100 bbl of Alaska North Slope (ANS) crude oil for 9950 bbl of West Texas Intermediate (WTI) crude oil. Assuming you just purchased 9950 bbl of WTI crude at the current market price, the total revenue (cost) to you if you take the trade is closest to ________. A) $755,650 B) $766,150 C) $767,600 D) $776,650

C) $767,600

You own 1000 shares of Newstar Financial stock, currently trading for $57 per share. You are offered a deal where you can exchange these stocks for 900 shares of Amback Financial Group stock, currently trading at $63 per share. What is the value of this trade, if you choose to make it? A) -$320 B) -$340 C) -$300 D) $300

C) -$300

A metal fabrication company is pricing raw supplies of aluminum. The following are the costs to the company to receive one ton of aluminum from various sources. Which source offers the best price for aluminum per ton? A) 3010 U.S. dollars per ton B) 3185 Australian dollars per ton, with $0.953 U.S. = 1 AUD C) 5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL D) 105,517 Indian rupees per ton, with $0.029 U.S. = 1 INR

C) 5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL

Which of the following balance sheet equations is INCORRECT? A) Assets - Liabilities = Shareholders equity B) Assets = Liabilities + Shareholders equity C) Assets - Current liabilities = Long-term liabilities D) Assets - Current liabilities = Long-term liabilities + Shareholders equity

C) Assets - Current liabilities = Long-term liabilities

Which of the following organization forms has the most revenue? A) S corporation B) limited partnership C) C corporation D) limited liability company

C) C corporation

In which of the following ways is a limited liability company like a corporation? A) It was created and developed first in the United States. B) It can choose to be considered a partnership for tax purposes. C) Its owners liability is restricted to their investment. D) It is directly managed by the owners.

C) Its owners liability is restricted to their investment.

Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm. Which of the following statements regarding their respective relationships to the firm is correct? A) Joe has no management authority within the partnership. B) Jane is legally involved in the managerial decision making of the firm. C) Janes liability for the firms debts consists solely of her investment in the firm. D) Withdrawal of Jane from the partnership will dissolve the partnership.

C) Janes liability for the firms debts consists solely of her investment in the firm.

Which of the following is typically the major factor in limiting the growth of sole proprietorships? A) The organizational structure of such firms tends to become extremely complicated over time. B) It is extremely difficult to transfer control of such firms to a new owner if the present owner dies or wishes to sell the firm. C) The amount of money that can be raised by such firms is limited by the fact that the single owner must make good on all debts. D) Investors have a great deal of control over the day-to-day running of such firms, leading to confusion when conflicts in direction arise.

C) The amount of money that can be raised by such firms is limited by the fact that the single owner must make good on all debts.

Which of the following best describes why the left and right sides of a balance sheet are equal? A) In a properly run business, the value of liabilities will not exceed the assets held by the company. B) By definition, the assets plus the liabilities will be the same as the stockholders equity. C) The assets must equal liabilities plus stockholders equity because stockholders equity is the difference between the assets and the liabilities. D) By accounting convention, the assets of a company must be equal to the liabilities of that company.

C) The assets must equal liabilities plus stockholders equity because stockholders equity is the difference between the assets and the liabilities.

Which of the following amounts would be included on the right side of a balance sheet? A) the value of government bonds held by the company B) the cash held by the company C) the amount of deferred tax liability held by the company D) the amount of money owed to the company by customers who have not yet paid for goods and services they have received

C) the amount of deferred tax liability held by the company

Which of the following is NOT a reason why a firms financial managers must take great care when making investment decisions? A) These investment decisions determine whether the firm will add value for its owners. B) These investments determine the long-term directions in which the company may move. C) These investment decisions determine the corporations mix of debt and equity. D) These investment decisions typically involve substantial costs which must be carefully weighed against their potential benefits.

C) These investment decisions determine the corporations mix of debt and equity.

The exchanges in which of the following countries or regions do NOT accept the International Financial Reporting Standards set out by the International Accounting Standards Board? A) Germany B) France C) United States D) United Kingdom

C) United States

A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet? A) commercial paper held by the company B) the inventory of chemicals used to produce the drugs made by the company C) a patent for a drug held by the company D) the cash reserves of the company

C) a patent for a drug held by the company

WorldCom classified $3.85 billion in operating expenses as long-term investments. How would this make WorldComs financial statements more attractive to investors? A) by decreasing depreciation B) by reducing capital expenditures C) by raising its reported earnings D) by boosting its cash flows

C) by raising its reported earnings

The major components of stockholders equity are ________. A) cash, common stock, and paid-in surplus B) common stock, paid-in surplus, and net income C) common stock, paid-in surplus, and retained earnings D) common stock, liabilities, and retained earnings

C) common stock, paid-in surplus, and retained earnings

Which of the following people may not manage the operations of a firm in which they are part or full owners? A) stockholders in S corporations B) stockholders in C corporations C) limited partners in a limited partnership D) general partners in a limited partnership

C) limited partners in a limited partnership

Which of the following is NOT a role of financial institutions? A) moving funds from savers to borrowers B) spreading out risk-bearing C) printing money for borrowers D) moving funds though time

C) printing money for borrowers

A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firms management discussion and analysis (MD&A)? A) that a large number of funds were allocated to advertising to increase awareness of the firms brand in new areas it had expanded into this year B) that some senior members of the management team have retired in this financial year C) that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages D) that the firm has plans to expand into the organic food business in the next financial year by purchasing several small organic food retailers

C) that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages

Which of the following best describes why a firm produces financial statements? A) to use as a tool when planning future investments within a firm B) to increase the intrinsic value of a firm C) to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short- and long-term financial condition of a business D) to show the daily activities a firm has undertaken in the previous financial year, and what activities are planned for the near future

C) to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short- and long-term financial condition of a business

Gross profit is calculated as ________. A) total sales - cost of sales - selling, general, and administrative expenses - depreciation and amortization B) total sales - cost of sales - selling, general, and administrative expenses C) total sales - cost of sales D) none of the above

C) total sales - cost of sales

Which of the following is NOT an advantage of a sole proprietorship? A) single taxation B) ease of setup C) unlimited liability D) no separation of ownership and control

C) unlimited liability

GenCorp. has a total debt of $140 million and stockholders equity of $50 million. It also has 26 million shares outstanding, with a market price of $4.00 per share. What is GenCorps market debt-equity ratio? A) 0.67 B) 1.08 C) 2.80 D) 1.35

D) 1.35 140 / ($4.00 × 26) = 1.35

Stella places a market order with her broker to buy 1,000 shares of OneWorld Corp. The broker buys 1,000 shares at $15.80 each, and sells them to Stella at $15.95 each. He also charges a commission of $12.00. What is bid-ask spread in this case? A) $162 B) $120 C) $210.00 D) $150

D) $150 (15.95 - 15.80) X 1,000 = 150

A company has a share price of $22.15 and 118 million shares outstanding. Its market-to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value? A) $1.9 billion B) $3.044 billion C) $4.566 billion D) $3.8 billion

D) $3.8 billion Market cap = $22.15 × 118 = $2.614 billion; Book value of equity = $2.614 / 4.2 = 0.622 billion; Debt = $0.622 × 3.2 = 1.991 ; Enterprise value = $2.614 + $1.991 - $0.800 = $3.805 billion

You have a used CD store. At an estate sale, you can purchase 230 compact discs for $356.5. You believe you could sell the CDs for an average of $3.05 each. What is the net benefit of buying the CDs at the estate sale and selling them in your store? A) $445 B) $545 C) $645 D) $345

D) $345

Alaska North Slope Crude Oil (ANS) $71.75/bbl West Texas Intermediate Crude Oil (WTI) $73.06/bbl As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you currently have 10,000 bbl of WTI crude, the added benefit (cost) to you if you were to sell the 10,000 bbl of WTI crude and use the proceeds to purchase and refine ANS crude is closest to ________. A) ($1400) B) $1400 C) ($3908) D) $3908

D) $3908

Alaska North Slope Crude Oil (ANS) $71.75/bbl West Texas Intermediate Crude Oil (WTI) $73.06/bbl As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $78 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you currently have 10,000 bbl of WTI crude, the total benefits to you if you were to sell the 10,000 bbl of WTI crude and use the proceeds to purchase and refine ANS crude is closest to ________. A) $794,274 B) $780,000 C) $781,550 D) $784,091

D) $784,091

GOLD SEAM CORP Based on the information shown above, what would it cost to buy 1,000 shares of the above stock? A) $91,110 B) $91,300 C) $91,320 D) $91,650

D) $91,650

What is the major advantage corporations have over other business entities? A) It is easier for a corporation to raise capital than other forms of businesses. B) A corporation is treated as a separate legal entity for tax and legal purposes. C) A corporations shares can be freely traded among its shareholders. D) All of the above are advantages that a corporation has over other business forms.

D) All of the above are advantages that a corporation has over other business forms.

Why is the personal decision a financial manager makes as to whether to buy or to rent an apartment as a personal residence most like the professional decision that manager makes as to whether her firm should try to acquire a stake in a fast growing new Internet-based company? A) Both decisions involve the purchase of assets that are essential for the existence of the investor B) Both decisions involve the rental of a useful asset. C) Both decisions have the potential to affect the firm. D) Both decisions should be made based upon the tradeoff benefits and costs across time.

D) Both decisions should be made based upon the tradeoff benefits and costs across time.

Which of the following is the overarching principle that a financial manager should follow when making decisions? A) Decisions should generate the greatest benefits for the firm. B) Decisions should provide benefit to the firm without incurring costs. C) Decisions should be on behalf of the firms owners that give the greatest benefit to those owners, the firms employees and the firms other stakeholders. D) Decisions should increase the value of the firm to its investors.

D) Decisions should increase the value of the firm to its investors.

Which of the following features of a corporation is LEAST accurate? A) The owners identity is separate from a corporation. B) The owners of a corporation are not liable for any obligations the corporation enters into. C) Changes in ownership do not result in the dissolution of the corporation. D) Earnings from a corporation are taxed only once.

D) Earnings from a corporation are taxed only once.

A typical company has many types of shareholders, from individuals holding a few shares, to large institutions that hold very large numbers of shares. How does a financial manager ensure that the priorities and concerns of such disparate stockholders are met? A) The financial manager should seek to make investments that do not harm the interests of the stockholders. B) The decisions taken by the financial manager should be solely influenced by the benefit to the company since, by maximizing its fitness, he or she will also maximize the benefits of that company to the shareholders. C) The financial manager should consider the interests and concerns of large shareholders a priority so the needs of those who hold a controlling interest in the company are met. D) In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment.

D) In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment.

Which of the following should be true for an asset to be considered liquid? A) It pays regular dividends. B) It can be bought and sold at an organized stock market or bourse. C) It is offered for sale on both primary and secondary markets. D) It can be easily bought and sold and the selling price is very close to the buying price at a given point in time.

D) It can be easily bought and sold and the selling price is very close to the buying price at a given point in time.

Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned? A) It includes entries for the depreciation of assets. B) It does not include entries for expenditures on inventory. C) It does not include entries for collection of money from account receivables. D) It includes cash inflows from services rendered.

D) It includes cash inflows from services rendered.

Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy protection against the seizure of its property? A) The number of owners, and hence the spread of risk among these owners, is not limited. B) Its owners are liable for any obligations it enters into. C) The state in which a corporation is incorporated provides safeguards against any wrongdoing by the corporation. D) It is a legally defined, artificial entity that is separate from its owners.

D) It is a legally defined, artificial entity that is separate from its owners.

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements? A) It ensures that the market value of assets and debt are reported accurately. B) It ensures that information on the performance of public companies is reported on cash-basis accounting. C) It ensures that important budgetary information is not omitted. D) It makes it easier to compare the financial results of different firms.

D) It makes it easier to compare the financial results of different firms.

What are the requirements of section 404 of SOX? A) It requires that senior management return any profits or bonuses resulting from stock sales during any period covered by financial statements that must later be restated. B) It requires that auditors do not perform any non-auditing tasks for the companies they audit. C) It requires that audit partners rotate every five years. D) It requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process.

D) It requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process.

Which of the following best describes why the Valuation Principle is a key concept in making financial decisions? A) It shows how to assign monetary value to intangibles such as good health and well -being. B) It allows fixed assets and liquid assets to be valued correctly. C) It gives a good indication of the net worth of a person, item, or company and can be used to estimate any changes in that net worth. D) It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.

D) It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.

Which of the following is unique for an S corporation? A) The profits and losses of an S corporation are not taxed at the corporate level, but shareholders must include these profits and losses on their individual tax returns. B) The shareholders of an S corporation must include the firms profit and losses in their individual income taxes even if no money is distributed to them. C) There is a maximum limit on the number of shareholders for an S corporation. D) None of the above statements is unique.

D) None of the above statements is unique

Over 4/5ths of all U.S business revenue is generated by which type of firms? A) sole proprietorships B) partnerships C) limited partnerships D) corporations

D) corporations

Which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom? A) The usefulness of financial statements to investors is entirely dependent on the ethics of those constructing them. B) It is not possible to effectively evaluate a company unless all the financial statements are fully and correctly prepared. C) The information in financial statements should be viewed extremely critically. D) Readers of even fraudulent financial statements can spot signs of a firms financial health, if those statements are read fully and with care.

D) Readers of even fraudulent financial statements can spot signs of a firms financial health, if those statements are read fully and with care.

Why must care be taken when comparing a firms share price to its operating income? A) Both share price and operating income are related to the whole firm. B) Share price is a quantity related to the entire firm, while operating income is an amount that is related solely to equity holders. C) Both share price and operating income are related solely to equity holders. D) Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.

D) Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.

Which of the following statements regarding the balance sheet is INCORRECT? A) The balance sheet provides a snapshot of a firms financial position at a given point in time. B) The balance sheet lists a firms assets and liabilities. C) The balance sheet reports stockholders equity on the right-hand side. D) The balance sheet reports liabilities on the left-hand side.

D) The balance sheet reports liabilities on the left-hand side.

One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive? A) The assets should have been listed on the balance sheet as long-term assets. B) Cash raised by selling assets should not be recorded as revenue. C) The cash raised should have been recorded as short-term loans. D) The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement.

D) The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement.

What is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership? A) The owners of a limited liability company have personal obligation for debts incurred by the company. B) There is no separation between the company and its owners in a limited liability company. C) The owners of a limited liability company can withdraw from the company without the company being dissolved. D) The owners of a limited liability company can take an active role in running the company.

D) The owners of a limited liability company can take an active role in running the company.

Why in general do financial managers make financial decisions in a corporation, rather than the owners making these decisions themselves? A) It is best for the control of the finances of a corporation to be in the hands of a disinterested third party. B) The interests of the various owners may conflict with each other. C) The owners may not be U.S. citizens or residents. D) There are often many owners, and they can often change as they buy and sell stock.

D) There are often many owners, and they can often change as they buy and sell stock

Why is it difficult to determine the market price of a private corporations shares at any point in time? A) It is difficult to obtain enough information to accurately value such a company. B) The price of its shares is fixed by the owners. C) It has a limited number of owners. D) There is no organized market for its shares.

D) There is no organized market for its shares.

A wholesale food retailer is offered $15.60 per two-layer carton for 5000 cartons of peaches. The wholesaler can buy peaches from their growers at $13.20 per carton. Shipping costs $2.40 per carton, for the first 1000 cartons, and $1.90 per carton for every carton over that. Will taking this opportunity increase the value of the wholesale food retailer? A) No, the costs are $1500 more than the benefits. B) No, the costs and the benefits are the same. C) Yes, the costs are $2500 less than the benefits. D) Yes, the costs are $2000 less than the benefits.

D) Yes, the costs are $2000 less than the benefits.

Which of the following firms would be expected to have a high ROE? A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals B) a high-end fashion retailer that has a very high mark-up on all items it sells C) a brokerage firm that has high levels of leverage D) a grocery store chain that has very high turnover, selling many multiples of its assets per year

D) a grocery store chain that has very high turnover, selling many multiples of its assets per year

What is a firms net income? A) the difference between the sales and other income generated by a firm, and all costs, taxes, and expenses incurred by the firm in a given period B) the last or bottom line of the income statement C) a measure of the firms profitability over a given period D) all of the above

D) all of the above

Which of the following is a major duty of a financial manager? I. To make investment decisions II. To make financing decisions III. To manage cash flow from operating activities A) I only B) I and II only C) I and III only D) all of the above

D) all of the above

The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the ________. A) NYSE Enforcement Board B) Accounting Standards Board C) Securities and Exchange Commission (SEC) D) auditor

D) auditor

Which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders? A) by increasing the penalties to firms for providing false information B) by increasing the independence of auditors and clients C) by decreasing the non-audit fees that an auditor can receive from a client D) by forcing companies to audit financial statements they release

D) by forcing companies to audit financial statements they release

Which of the following is NOT a function of the board of directors? A) determining how top executives should be compensated B) monitoring the performance of the company C) answering to shareholders of the company D) day-to-day running of the company

D) day-to-day running of the company

A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO. A) shareholder proposal B) leveraged buyout C) shareholder action D) hostile takeover

D) hostile takeover

Investments by wealthy individuals and endowments is a major source of money for each of the following EXCEPT ________. A) private equity funds B) hedge funds C) venture capital funds D) mutual funds

D) mutual funds

A U.S.-based manufacturer of sunscreen is contemplating using funds to purchase courtside advertising at major tennis matches such as the French Open and the Australian Open. Advertising at such well viewed international events will then raise the domestic sales of the manufacturers products. Which of the following factors is the most relevant when analyzing this decision? A) the cost of the machine used to produce the sunscreen B) the manufacturing process of the sunscreen C) the cost of the existing advertising campaign D) the cost of the courtside advertising at the tennis matches

D) the cost of the courtside advertising at the tennis matches

In which of the following relationships is an agency conflict problem LEAST likely to arise? A) the relationship between a hire-car company and the persons who hire that companys cars regarding the treatment of those cars B) the relationship between high-level military officers and the soldiers who serve under them regarding the willingness of the soldiery to take risks C) the relationship between a restaurateur and the suppliers of produce to that restaurant regarding the freshness of the produce supplied D) the relationship between a driver and the passengers in a car regarding the safe driving of that car

D) the relationship between a driver and the passengers in a car regarding the safe driving of that car

Which of the following is NOT one of the financial statements that must be produced by a public company? A) the balance sheet B) the income statement C) the statement of cash flows D) the statement of activities

D) the statement of activities

What is the most important duty of a firms financial officer? A) to ensure that the firm has enough cash on hand to meet its commitments at any given time B) to decide how to pay for investments C) to manage working capital D) to make investment decisions

D) to make investment decisions

State the names of some of the firms discussed in the chapter that had inaccurate reporting in their financial statements.

Examples of some firms that had practiced inaccurate reporting are Enron and WorldCom.

Financial statements are optional accounting reports issued periodically by a firm which present information on the past performance of the firm, a summary of the firms assets and the financing of those assets, and a prediction of the firms future performance.

False

If broker will buy a share of stock from you at $3.85 and sell it to you at $3.87, the ask price would be $3.85.

False

In most corporations, the owners exercise direct control of a corporation.

False

In the United States, publicly traded companies can choose whether or not they wish to release periodic financial statements.

False

International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that the U.S. will report according to IFRS before the second half of the twenty -first century.

False

It is generally not the duty of financial managers to ensure that a firm has the cash it needs for day-to-day transactions.

False

Partnerships are the most common type of business firms in the world.

False

Raising new capital by issuing bonds is an example of a commercial banking activity.

False

The balance sheet shows the assets, liabilities, and stockholders equity of a firm over a given length of time.

False

The fact that corporations shares are easily traded within the market has a net effect of acting as a disincentive for managers to favor the interests of shareholders over their own interests.

False

The management of public companies is not legally required to disclose any off -balance sheet transactions.

False

The shares of private corporations are traded on a stock market.

False

To enable costs and benefits to be compared, they are typically converted into cash value at the time the benefit is received.

False

Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements.

False

What is the role of an auditor in financial statement analysis?

Key points: 1. to ensure that the annual financial statements are prepared accurately 2. to ensure that the annual financial statements are prepared according to Generally Accepted Accounting Principles (GAAP) 3. to verify that the information used in preparing the annual financial statements is reliable

According to the text, did Enron and WorldCom follow Generally Accepted Accounting Principles (GAAP) in their financial reporting process?

Many of the problems of Enron and WorldCom were kept hidden from boards and shareholders, until it was too late. People felt that the accounting statements of these companies, while often remaining true to the letter of GAAP, did not present an accurate picture of the financial health of the company.

What is the principal guiding factor for the financial manager of a firm?

Maximizing stockholder wealth is the paramount guiding factor for a firms financial manager.

What is the need for the notes to the financial statements when a firms operations are already documented in the financial statements?

Not all actions of the firm can be directly converted to an entry on the financial statements. For example, the firm may be involved in off balance sheet transactions, which have to be reported through notes to the financial statements.

What is one of the main obstacles in cost-benefit analysis?

One of the main obstacles in the cost-benefit analysis is that not all benefits that are expected to occur in the future can be stated in dollar terms.

What is the term for the applicable price that I will pay, if I have to buy a stock?

The buyer of a stock pays the ask price when he buys the stock

What will be the effect on the income statement if a firm buys a new processing plant through a new loan?

The effect on the income statement will be in the form of a depreciation expense for the first year on the new processing plant.

How does a firm select the dates for preparation of its income statement?

The income statement is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st. Typically the income statement spans the flow between two adjacent balance sheets.

How can we cross check the statement of cash flows?

The last item in the statement of cash flows should equal the difference in cash balances between two adjacent balance sheets.

What will be the effect on the statement of cash flows if a firm buys a new processing plant through a new loan?

The new loan entry should show as a cash inflow for the firm, while the payment for the new processing plant will be entered as a cash outflow.

Explain the role played by some of the other management disciplines in financial decision making.

The role played by some of the other management disciplines include:Economics: to determine the effect of a price reduction or increase on net income. Marketing: to determine the increase in revenues resulting from an advertising campaign. Strategy: to determine a competitors response to a price decrease or increase.

What is the term for the applicable price that the seller gets when he sells a stock on the exchange?

The seller gets the bid price when he sells a stock on the exchange.

What is the general relation of the two types of prices quoted for a stock on a exchange?

The two prices are bid price and ask price. The ask price is higher than the bid price to deter a buyer from buying a stock and selling it back immediately, assuming everything else remains unchanged.

What are the terms for the two types of prices quoted for a stock on an exchange?

The two quotes associated with a stock quoted on the exchange are bid price and ask price.

A firms statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period.

True

Corporations have come to dominate the business world through their ability to raise large amounts of capital by sale of ownership shares to anonymous outside investors.

True

Costs and benefits must be put in common terms if they are to be compared.

True

In general, a successful firm will have a market-to-book ratio that is substantially greater than 1.

True

In general, if an action increases a firms value by providing benefits with a value greater than any costs involved, then that action is good for the firms investors.

True

Price-earnings ratios tend to be high for fast-growing firms.

True

Stock markets provide liquidity for a firms shares.

True

Stockholders equity is the difference between a firms assets and liabilities, as shown on the balance sheet.

True