Finance Exam
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
Rank the ease (from easiest to hardest) of turning the following assets into cash.
-Cash Equivalents -Accounts Receivable -Inventory -Plant and Equipment
Which of the following show why a corporation is the most important form of business?
-Corporations can enter into contracts -Corporations can sue and be sued -A corporation is a separate legal entity with the ability to acquire and exchange property
Which of the following are examples of non-cash items on an income statement?
-Deferred taxes -Depreciation
Which of the following statements are true about fixed assets?
-Fixed assets can be tangible or intangible -Fixed assets have a long-term assets and can be either tangible or intangible
Which of these questions can be answered by reviewing a firm's balance sheet?
-How much debt is used to finance the firm? -What is the total amount of assets the firm owns?
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
Which of the following are examples of current assets?
-Inventory -Cash
A general partnership has which of the following characteristics?
-It is difficult to transfer ownership -Each owner has unlimited liability for all firm debts
Which of the following are tangible fixed assets?
-Land -Plant
When a corporation is formed, it is granted which of the following rights?
-Legal powers to sue -Provincial citizenship for jurisdictional purposes -The ability to issue stock
Which of the following are included in a firm's capital structure?
-Long-term debt -Equity
Which of the following, according to the textbook, are possible financial goals for a company?
-Minimize costs -Maximize profits -Survival
Which of the following are period costs?
-Selling costs -General Expenses -Administrative expenses
Which of the following are true about shareholders' equity?
-Shareholders' equity is the difference between the value of a firm's assets -Shareholders' equity is a residual claim on a firm's assets
A corporation received cash from financial markets by selling _____________ and _____________.
-Stocks -Bonds
Which of the following are considered non-owner stakeholders in a company?
-Suppliers -Government -Employees
Which of the following are important when considering a partnership?
-Taxation of partnership income -Personal liability for firm's debts -Fund raising limitations
Which of the following are found on an income statement?
-The operations section -The non-operating section
Which of the following are included in a firm's inventory according to GAAP?
-Work in progress -Raw materials -Finished goods
Liabilities usually involve which of these?
-require a cash payout within a stated period of time -obligations of the firm
Which of the following are disadvantages of a sole proprietorship?
-unlimited liability -difficulty in raising cash -limited life of the enterprise
Which one of the following statements is correct concerning ratio analysis?
A single ratio is often computed differently by different individuals.
A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts?
Accounts receivable
If you hire a real estate company to sell your house, you are most apt to encounter which of the following?
Agency problem
In March, Al purchased 10 video games for his store's inventory. In April, he sold five games on credit card and received the payment in May. The income should be reported in the month of
April
An organization must prepare ______________ and bylaws when forming a corporation.
Articles of incorporation
The lowest Moody's bond rating that is considered to be an investment-grade rating is
Baa.
In large firms, financial activity is usually associated with which top officer?
Chief financial officer
Which one of these parties cannot be a stakeholder of a firm?
Firm's creditors
What does GAAP stand for?
Generally Accepted Accounting Principles
Which one of these is handled differently in calculating cash flows for accounting versus financial purposes?
Interest expense
Enterprise value is computed as
Market capitalization + Market value of interest-bearing debt - Cash
A current liability is defined as debt that must be repaid within which period?
One year
Which ratio computes the amount of net income generated by each $1 of sales?
Profit margin
Which of the following is a variable cost in the short run?
Raw materials used in production
Which of the following are generally included in a bond indenture?
Security description and basic terms
Which of the following statements concerning a sole proprietorship is correct?
The life of the firm is limited to the life span of the owner.
Which corporate officer is responsible for managing the firm's cash?
Treasurer
Dividends are a cash flow from
a firm to the financial markets.
A balance sheet reflects a firm's ____________ value on a particular date.
accounting
The relationship between stockholders and management can best be described as an ______________ relationship.
agency
When making financial decisions related to assets, you should
always consider market values.
Fixed Assets
are those that will last a long time.
Liquidity refers to the ease of changing
assets to cash
Your ___________ tax rate measures the total taxes you pay dividend by your total taxable income.
average
Book value is
based on historical cost.
The short run is a period when there are ___________ costs.
both fixed and variable costs
The rules by which corporations govern themselves are called
bylaws.
The statement of cash flow explains changes in
cash and equivalents
A current assets is best defined as
cash and other assets owned by the firm that should convert to cash within the next year.
Current Assets
comprises those that have short lives.
The officer responsible for corporate tax reporting is the
controller
Net working capital equals
current assets minus current liabilities
Net working capital is best defined as
current assets minus current liabilities.
The quick ratio is calculated as
current assets minus inventory, divided by current liabilities.
According to the Fisher effect, a decrease in the rate of inflation will
decrease the nominal rate, but not affect the real rate.
The ________________ premium is that portion of a nominal interest rate or bond yield that represents compensation for the possibility of nonpayment by the bond issuer.
default risk
The income statement
determines the aftertax income of a firm.
Some of the cash flow generated by a firm goes back to the financial markets in the form of
dividends and debt payments.
Non-cash items refer to
expenses charged against revenues that do not directly affect cash flows.
On a common-size income statement, depreciation will be
expressed as a percentage of sales.
Bond prices are quoted as a percentage of the
face value.
On a balance sheet, patents and trademarks are classified as
fixed assets
Fixed costs are costs that will not change in the short run due to
fixed commitments over a stated period of time
Debt securities
increase a firm's cost of doing business.
When a firm pays out fewer dividends, it ___________ the accounting value of its retained earnings.
increases
Interest rate risk _______________________________________ as the time to maturity increases.
increases at a decreasing rate
EBITDA is the abbreviation for earnings before
interest, taxes, depreciation, and amortization.
Short-term finance
is concerned with managing net working capital.
The carrying value or book value of assets
is determined under GAAP and is based on the cost of the assets.
A limited liability company's owners have ___________ liability.
limited
A(n) _________ asset is one that can be quickly converted into cash without significant loss in value.
liquid
Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are often referred to as
liquidity measures.
Capital budgeting is concerned with making and managing expenditures on
long-term assets.
An upward sloping yield indicates
long-term rates are higher than medium-term rates.
When you are making a financial decision, the most relevant tax rate is the ___________ rate.
marginal
Your ____________ tax rate is the percentage of the next taxable dollar of income you earn that is payable as a tax.
marginal
The price at which willing buyers and sellers would trade is called __________ value.
market
The accounting equation shows that stockholders' equity equals assets ________ liabilities.
minus
The percentage change in the amount of money you have as the result of an investment is called the _____________ rate of return.
nominal
The yield to maturity on a bond is the rate
of return currently required by the market.
A sole proprietorship is a business owned by ____ person.
one
Bond ratings
only assess the possibility of default.
A bond with both a face value and a market value of $1,000 is called a ______________ bond.
par value
A business formed by two or more people and has no separate legal authority is known as a
partnership.
A stakeholder is best described as
person or entity, other than a stockholder or creditor, who potentially has a claim on a firm's cash.
Long-term debt securities that are issued but not offered to the general public are referred to as
privately placed.
A deferred call provision is designed to
prohibit the calling of a bond prior to a certain date.
The parts of an indenture that protect the interests of the lender by limited certain actions that a company might take during the term of the loan are called
protective covenants.
How is income defined?
revenue minus expenses
A total asset turnover measures of .84 means that a firm has $0.84 in
sales for every $1 in total assets.
Bonds backed by assets with long-term payments are referred to as
securitized bonds.
The owners of a corporation are called
shareholders
Agency costs refer to
the costs of any conflicts of interest between stockholders and management.
The issuance of new equity shares is a cash flow from
the financial markets to a firm.
The Securities Act of 1933 focuses on
the issuance of new securities.
A common-size balance sheet will express accounts receivable as a percentage of
total assets.
The officer responsible for managing the firm's cash flows is the
treasurer.
Ratios that measures how efficiently a firm uses its assets to generate sales are known as _______________ ratios.
utilization