Fin Flash Cards

Which of the following are advantages of the corporate form of organization? 1 Ability to raise large sums of equity capital 2 Ease of ownership transfer 3 Profits taxed at the corporate level 4 Limited liability for all owners

1, 2 and 4

Which one of the following will increase cash flow from assets but not affect the operating cash flow? a. Decrease in cost of goods sold b. Increase in depreciation c. Sale of a fixed asset d. Increase in accounts receivable e. Increase in sales

c. Sale of a fixed asset

Shareholders' equity is equal to: a. total assets plus total liabilities. b. net fixed assets minus total liabilities. c. fixed assets minus long-term debt plus net working capital. d. net working capital plus total assets. e. total assets minus net working capital.

c. fixed assets minus long-term debt plus net working capital.

If a firm has a negative cash flow from assets every year for several years, the firm: a. is repaying debt every year. b. must also have a negative cash flow from operations each year. c. may be continually increasing in size. d. is operating at a high level of efficiency. e. has annual net losses.

c. may be continually increasing in size.

A negative cash flow to stockholders indicates a firm: a. paid dividends that exceeded the amount of the net new equity. b. had a negative cash flow from assets. c. received more from selling stock than it paid out to shareholders. d. repurchased more shares than it sold. e. had a positive cash flow to creditors.

c. received more from selling stock than it paid out to shareholders.

An income statement prepared according to GAAP: a. reflects the net cash flows of a firm over a stated period of time. b. reflects the financial position of a firm as of a particular date. c. records expenses based on the matching principle. d. distinguishes variable costs from fixed costs. e. records revenue when payment for a sale is received.

c. records expenses based on the matching principle.

Tim has been promoted and is now in charge of all fixed asset purchases. In other words, Tim is in charge of:

capital budgeting.

Stadford, Inc. is financed with 40 percent debt and 60 percent equity. This mixture of debt and equity is referred to as the firm's:

capital structure

Net working capital is defined as: a. available cash minus current liabilities. b. current assets minus current liabilities. c. total assets minus total liabilities. d. the depreciated book value of a firm's fixed assets. e. the value of a firm's current assets.

current assets minus current liabilities

The goal of financial management is to increase the: a. dividends paid per share. b. future value of the firm's total equity. c. book value of equity. d. current market value per share. e. number of shares outstanding.

current market value per share

Which one of the following statements concerning the balance sheet is correct? a. current assets are equal to total assets minus net working capital. b. shareholders' equity is equal to net working capital minus net fixed assets plus long-term debt c. Net working capital is equal total assets minus total liabilities. d. Assets are listed in descending order of liquidity. e. Total assets equal total liabilities minus total equity.

d. Assets are listed in descending order of liquidity.

The corporate tax structure in the U.S. is based on a:

modified flat-rate tax

The financial statement that summarizes a firm's accounting value as of a particular date is called the: A. Liquidity position B. Balance Sheet C. Income Statement D. Cash flow statement E. Periodic operating statement

B. Balance Sheet

Ted current owns 100 shares of publicly traded stock which he would like to sell. Which one of the following provides the most efficient means for Ted to sell his shares? 1. Private placement transction 2. Secondary market transaction 3. Stakeholder purcahse 4. Issuer sponsored Dutch auction 5. Proxy statement

2. Secondary market transaction

Which one of the following statements is correct? 1. All Dutch auction sales are secondary market transactions 2. All stock transactions are secondary market transactions. 3. All stock trades between existing shareholders are secondary market transactions. 4. All secondary markets are dealer markets. 5. All secondary markets are broker markets.

3. All stock trades between existing shareholders are secondary market transactions.

Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant? 1. A decrease in dividends paid 2. A decrease in the cash flow to creditors 3. An increase in net capital spending 4. An increase in the change in net working capital 5. An increase in depreciation

5. An increase in depreciation

Morgantown Movers has net working capital of $11,300, current assets of $31,200, equity of $53,400, and long-term debt of $11,600. What is the amount of the net fixed assets? a. $32,900 b. $31,800 c. $53,700 d. $45,500 e. $48,100

Aggregation of all assets 53,400 - 11,300 + 11,600 = 53,700 c. $53,700

Lester's Fried Chick'n purchased its building 11 years ago at a cost of $139,000. The building is currently valued at $179,000. The firm has other fixed assets that cost $66,000 and are currently valued at $58,000. To date, the firm has recorded a total of $79,000 in depreciation on the various assets. The company has current liabilities of $36,600 and net working capital of $18,400. What is the total book value of the firm's assets? a. $331,000 b. $379,000 c. $241,000 d. $181,000 e. $339,000

Book value = 139,000 + 66,000 - 79,000 + 18,400 + 36,600 = 181,000 d. $181,000

Which one of the following is most apt to align management's priorities with shareholders' interests? a. Compensating managers with shares of stock that must be held for 3 years before the shares can be sold b. Increasing the number of paid holidays that long-term employees are entitled to receive c. Allowing employees to retire early with full retirement benefits d. Increasing employee retirement benefits e. Allowing a manager to decorate his or her own office once he or she has been in that office for a period of 3 years or more

Compensating managers with shares of stock that must be held for a minimum of 3 years

Global Exporters has total assets of $84,300, net working capital of $22,900, owner's equity of $38,600, and long-term debt of $23,900. What is the value of the current assets? a. $46,100 b. $24,300 c. $44,700 d. $38,900 e. $21,600

Current Liabilities = 84,300 - 38,600 - 23,900 = 21,800 Current assets = 21,800 + 22,900 = 44,700 c. $44,700

Which one of the following parties can sell shares of ABC stock in the primary market? A. Private individual shareholder B. Any corporation, other than the ABC company C. Institutional shareholder D. ABC company E. Any of the Above

D. ABC company

Which one of the following is an intangible fixed asset? A. Account Receivable B. Inventory. C. Machinery D. Copyright E. Building

D. Copyright

Which one of the following will decrease the net working capital of a firm? A. Obtaining a 5-year loan to buy equipment B. Obtaining a 3-year loan and using the proceeds to buy inventory C. Selling inventory at a profit. D. Making a payment on a long-term debt E. Collecting a payment from a credit customer

D. Making a payment on a long-term debt

Delivery trucks are classified as: A. current assets B. non-cash expenses C. intangible fixed assets D. tangible fixed assets E. current liabilities

D. tangible fixed assets

Working capital management includes which one of the following? a. Deciding whether to purchase a new machine or fix a current machine b. Determining which customers will be granted credit c. Deciding which new projects to accept d. Establishing the target debt-equity ratio e. Determining how many new shares of stock should be issued

Determining which customers will be granted credit

Which one of the following is a capital structure decision? a. Setting the terms of sale for credit sales b. Determining the optimal inventory level c. Selecting new equipment to purchase d. Determining when suppliers should be paid e. Establishing the preferred debt-equity level

Establishing the preferred debt-equity level

Which one of the following is a working capital decision? a. How much cash should the firm keep in reserve? b. What debt-equity ratio is best suited to our firm? c. Which type of debt is best suited to finance our inventory? d. How should the firm raise additional capital to fund its expansion? e. What is the cost of debt financing?

How much cash should the firm keep in reserve?

Maria is the sole proprietor of an antique store that she has operated at the same location for the past 16 years. The store rents the space in which it is located but does own all of the inventory and fixtures. The store has an outstanding loan with the local bank but no other debt obligations. There are no specific loan covenants or assets pledged as security for the loan. Due to a sudden and unexpected downturn in the economy, the store is unable to generate sufficient funds to pay the loan payments due to the bank. Which of the following options does the bank have to collect the money it is owed? I. Sell the inventory and use the cash raised to apply to the debt II. Sell the store fixtures and use the cash raised to apply to the debt III. Take funds from Maria's personal account at the bank to pay the store's debt IV. Sell any assets Maria personally owns and apply the proceeds to the store's debt

I, II, III, and IV

Which of the following are effective means of aligning management goals with shareholder interests? I. Employee stock options II. Threat of a takeover III. Management bonuses tied to performance goals IV. Threat of a proxy fight

I, II, III, and IV

Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners? a. Sole proprietorship b. Limited liability company c. Corporation d. Limited partnership e. General partnership

Limited partnership

The primary goal of financial management is to maximize which one of the following for a corporation? a. Number of shares outstanding b. Current profits c. Market value of existing stock d. Revenue growth e. Market share

Market value of existing stock

What is the goal of financial management for a sole proprietorship? a. Maximize the market value of the equity b. Minimize the tax impact on the proprietor c. Decrease long-term debt to reduce the risk to the owner d. Maximize net income given the current resources of the firm e. Minimize the reliance on fixed costs

Maximize the market value of the equity

The concept of marginal taxation is best exemplified by which one of the following? a. Kirby's paid $120,000 in taxes while its primary competitor only paid $80,000 in taxes. b. The Blue Moon paid $2.20 in taxes for every $10 of revenue last year. c. Mitchell's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes. d. Johnson's Retreat only paid $45,000 on total revenue of $570,000 last year. e. Burlington Centre paid no taxes last year due to carryforward losses.

Mitchell's Grocer increased sales by $52,000 last year and had to pay an additional $16,000 in taxes

The Embroidery Shoppe had beginning retained earnings of $18,670. During the year, the company reported sales of $83,490, costs of $68,407, depreciation of $8,200, dividends of $950, and interest paid of $478. The tax rate is 35 percent. What is the retained earnings balance at the end of the year? a. $21,883.25 b. $22,833.24 c. $30,393.95 d. $22,193.95 e. $23,783.24

NI = (83,490 - 68,407 - 8,200 - 478)(1-.35) = $4,163.25 Ending RE = 18,670 + 4,163.25 - 950 = 21,883.25 a. $21,883.25

The Good Life Store has sales of $79,600. The cost of goods sold is $48,200 and the other costs are $18,700. Depreciation is $8,300 and the tax rate is 34 percent. What is the net income? a. $2,904 b. $16,682 c. $11,204 d. $14,660 e. $8,382

Net Income = (79,600 - 48,200 - 18,700 - 8,300)(1-.34) = 2,904 a. $2,904

Plato's Foods has ending net fixed assets of $84,400 and beginning net fixed assets of $79,900. During the year, the firm sold assets with a total book value of $13,600 and also recorded $14,800 in depreciation expense. How much did the company spend to buy new fixed assets? a. $3,300 b. $37,400 c. -$23,900 d. $36,800 e. $32,900

New Fixed Asset purchases = 84,400 - 79,900 + 13,600 + 14,800 = 32,900 e. $32,900

Which one of the following situations is most apt to create an agency conflict? a. Giving all employees a bonus if a certain level of efficiency is maintained b. Rejecting a profitable project to protect employee jobs c. Hiring an independent consultant to study the operating efficiency of the firm d. Selling an underproducing segment of the firm e. Compensating a manager based on his or her division's net income

Rejecting a profitable project to protect employee jobs

Valerie bought 200 shares of Able stock today. Able stock has been trading for some time on the NYSE. Valerie's purchase occurred in which market?

Secondary market

Capital budgeting includes the evaluation of which of the following? - Size, timing, and risk of future cash flows - Size of future cash flows only - Size and timing of future cash flows only - Risk and size of future cash flows only - Timing and risk of future cash flows only

Size, timing, and risk of future cash flows

Which one of the following transactions occurred in the primary market? a. Maria gave 100 shares of Alto stock to her best friend. b. Gene purchased 300 shares of Alto stock from Ted. c. Terry sold 3,000 shares of Uno stock to his brother. d. South Wind Products sold 1,000 shares of newly issued stock to Mike. e. The president of Trecco, Inc. sold 500 shares of Trecco stock to his son.

South Wind Products sold 1,000 shares of newly issued stock to Mike.

Lester's BBQ has $121,000 in current assets and $109,000 in current liabilities. These values as referred to as the firm's:

Working Capital

Which one of the following is most apt to create a situation where an agency conflict could arise? a. Separating management from ownership b. Downsizing a firm c. Decreasing employee turnover d. Increasing the size of a firm's operations e. Reducing both management and non-management salaries

a. Separating management from ownership

Cash flow to creditors is equal to: a. beginning long-term debt minus ending long-term debt plus interest paid. b. ending total debt minus beginning total debt plus interest paid. c. beginning total liabilities minus ending total liabilities plus interest paid. d. cash flow from assets plus cash flow to stockholders. e. ending long-term debt minus beginning long-term debt plus interest paid.

a. beginning long-term debt minus ending long-term debt plus interest paid.

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

agency

Which one of the following will decrease the liquidity level of a firm? a. Proceeds from a long-term loan b. Cash purchase of inventory c. Collection of an account receivable d. Credit sale of inventory e. Cash sale of inventory

b. Cash purchase of inventory

An increase in which one of the following will increase operating cash flow for a profitable, tax-paying firm? a. Fixed expenses b. Depreciation c. Interest paid d. Net capital spending e. Inventory

b. Depreciation

Which one of the following relates to a negative change in net working capital? a. Purchase of net fixed assets b. Sale of net fixed assets c. Increase in current liabilities with no change in current assets for the period d. Increase in the inventory level e. Increase in current assets and decrease in current liabilities for the period

c. Increase in current liabilities with no change in current assets for the period

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period? a. Positive cash flow to stockholders b. Negative net capital spending c. Positive operating cash flow d. Negative cash flow to creditors e. Positive cash flow from assets

e. Positive cash flow from assets

Which one of the following best matches the primary goal of financial management? a. Increasing the market value of firm b. Transforming fixed costs into variable costs c. Increasing the dollar amount of each sale d. Increasing the firm's liquidity e. Increasing traffic flow within the firm's stores

increasing the market value of the firm

The daily financial operations of a firm are primarily controlled by managing the: a. long-term liabilities. b. capital structure. c. total debt level. d. capital budget. e. working capital.

working capital