FIRE 311 homework & Practice exam multiple choice questions ch 1-4
What does the phrase limited liability mean in a corporate context?
Owners' liability is limited to the amount they invested in the firm. Stockholders are not responsible for any encumbrances of the firm; in particular, they cannot be required to pay back any debts incurred by the firm.
The balance sheet shows the assets, liabilities, and stockholders' equity of a firm over a given length of time. True False
False
The management of public companies is not legally required to disclose any off−balance sheet transactions. True False
False
What type of transaction activity is: 1An entrepreneur contributes his own money to start a new business.
Financing
What type of transaction activity is: The business buys a machine.
Investing
What type of transaction activity is: The business purchases inventory.
Operating
What type of transaction activity is: The business repays a loan.
financing
What type of transaction activity is: The business sells inventory to customers.
operating
Suppose Big Bank offers an interest rate of 9.5% on both savings and loans, and Bank Enn offers an interest rate of 10.0% on both savings and loans. What would you expect to happen to the interest rates the two banks are offering? A. Both banks would increase their interest rates. B. Both banks would decrease their interest rates. C. Big Bank would decrease the interest rate and Bank Enn would increase its rate. D. Big Bank would increase its interest rate and Bank Enn would decrease its rate.
D. Big Bank would increase its interest rate and Bank Enn would decrease its rate.
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 adds the cash that flows from investors to a firm. B. It removes the cash used for investment purposes. C. It subtracts all expenses and costs related to a firm's operating activities. D. It adds all non−cash entries related to a firm's operating activities.
D. It adds all non−cash entries related to a firm's operating activities.
What is the most important difference between a corporation and all other organizational forms? (Select all the choices that apply.) A. A corporation is a legal entity separate from its owners. This means ownership shares in the corporation can be freely traded. B. A corporation is a legal entity separate from its owners. This means ownership shares in the corporation can be traded upon permission from the board of directors. C. None of the other organizational forms share this characteristic. D. Most organizational forms share this characteristic.
A. A corporation is a legal entity separate from its owners. This means ownership shares in the corporation can be freely traded. C. None of the other organizational forms share this characteristic.
The disadvantages of organizing a firm as a corporation?: (Select all the choices that apply.) A. Income to a corporation is subject to double taxation, once at the corporate level and again when received by the owners in the form of a dividend. B. The life of the business usually ends with the death of any of the owners. C. The corporation is more complicated and more expensive to set up than other business entities. D. Corporate liabilities can be passed on to the shareholders, thus making stock ownership primarily the realm of wealthy investors.
A. Income to a corporation is subject to double taxation, once at the corporate level and again when received by the owners in the form of a dividend. C. The corporation is more complicated and more expensive to set up than other business entities. Your answer is correct.
How do financial institutions help with risk-bearing? (Select all the choices that apply.) A. Insurance companies spread out risk by pooling premiums together from policy holders and pay the claims of those who have an accident, fire, medical need or die. This process spreads the financial risk of these events out across a large pool of policyholders and the investors in the insurance company. B. Mutual funds and pension funds take your savings and spread them out among the stocks and bonds of many different companies, limiting your exposure to any one company. C. Investment companies will deny any attempt by an investor to concentrate their investment in one single company as this would violate their role in spreading out risk. D. Financial institutions not only assist with the risk-bearing of savers and investors, but must also be concerned about their own risk, spreading their loans out among a variety of clientele.
A. Insurance companies spread out risk by pooling premiums together from policy holders and pay the claims of those who have an accident, fire, medical need or die. This process spreads the financial risk of these events out across a large pool of policyholders and the investors in the insurance company. B. Mutual funds and pension funds take your savings and spread them out among the stocks and bonds of many different companies, limiting your exposure to any one company. D. Financial institutions not only assist with the risk-bearing of savers and investors, but must also be concerned about their own risk, spreading their loans out among a variety of clientele.
What role do investment banks play in the economy? (Select all the choices that apply.) A. Investment banks advise companies in major financial transactions such as buying or selling companies or divisions. B. Investment banks assist companies in raising capital by issue of stocks and bonds on behalf of corporate clients. C. Investment banks provide financial planning advice to individual investors. D. Investment banks are the primary vendors of mutual funds.
A. Investment banks advise companies in major financial transactions such as buying or selling companies or divisions. B. Investment banks assist companies in raising capital by issue of stocks and bonds on behalf of corporate clients.
A wood processing company purchases a new machine for its factory at a significant cost. This equipment has an expected useful life of 10 years and per tax rules cannot be expensed in the year when it is purchased. 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 subtracted from Gross Profit on the income statement and therefore, not be recorded separately on the statement of cash flows. C. It will be depreciated over time on the income statement and subtracted as Inventory on the statement of cash flows. D. It will be depreciated over time 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.
Corporate managers work for the owners of the corporation. Consequently, they should make decisions that are in the interests of the owners, rather than in their own interests. What strategies are available to shareholders to help ensure that managers are motivated to act this way? Shareholders can do the following: (Select all the choices that apply.) A. Mount hostile takeovers. B. Ensure that employees are paid with company stock and/or stock options. C. Ensure that all employees are paid a percentage of the company's revenue D. Ensure that underperforming managers are fired. E. Write contracts that ensure that the interests of the managers and shareholders are closely aligned.
A. Mount hostile takeovers. B. Ensure that employees are paid with company stock and/or stock options. D. Ensure that underperforming managers are fired. E. Write contracts that ensure that the interests of the managers and shareholders are closely aligned.
What checks are there on the accuracy of a public companies quarterly and annual statements? (Select all the choices that apply.) A. Public companies must use a common set of rules and standard format when they prepare their reports. B. Corporations are required to hire a neutral party, known as an auditor, to check the annual financial statements, ensure that the statements are prepared according to GAAP and provide evidence to support the reliability of the information. C. In addition to the auditor's role in reviewing the financial statements, the Sarbanes-Oxley Act requires both the CEO and the CFO to personally attest to the accuracy of the financial statements presented to shareholders and to sign a statement to that effect. D. When an auditor is not available, a corporation's CFO or the CEO can certify that financial statements are prepared according to GAAP.
A. Public companies must use a common set of rules and standard format when they prepare their reports. B. Corporations are required to hire a neutral party, known as an auditor, to check the annual financial statements, ensure that the statements are prepared according to GAAP and provide evidence to support the reliability of the information. C. In addition to the auditor's role in reviewing the financial statements, the Sarbanes-Oxley Act requires both the CEO and the CFO to personally attest to the accuracy of the financial statements presented to shareholders and to sign a statement to that effect.
What four financial statements can be found in a firm's 10-K filing? What checks are there on the accuracy of these statements? Every public company is required to produce quarterly and annual financial statements. Those statements are: (Select all the choices that apply.) A. The statement of financial position. B. The income statement. C. The statement of cash flows. D. The statement of stockholders' equity. E. The statement of stockholders' liabilities.
A. The statement of financial position. B. The income statement. C. The statement of cash flow D. The statement of stockholders' equity.
What are the main advantages of organizing a firm as a corporation? The advantages are: (Select all the choices that apply.) A. There is no limit on the number of owners a corporation may have, thus allowing the corporation to raise substantial amounts of capital. B. The life of the business can continue beyond the death of any of the owners. C. The corporation can use the assets of the owners to pay for corporate liabilities. This attracts smaller investors to the corporation. D. The liability of the owners is limited to the amount of their investment in the firm.
A. There is no limit on the number of owners a corporation may have, thus allowing the corporation to raise substantial amounts of capital. B. The life of the business can continue beyond the death of any of the owners. D. The liability of the owners is limited to the amount of their investment in the firm.
Which of the following is NOT a reason why a firm's financial managers must take great care when making investment decisions? A. These investment decisions determine the corporation's mix of debt and equity. B. These investment decisions typically involve substantial costs which must be carefully weighed against their potential benefits. C. These investment decisions determine whether the firm will add value for its owners. D. These investments determine the long−term directions in which the company may move.
A. These investment decisions determine the corporation's mix of debt and equity.
Investments by wealthy individuals and endowments is a major source of money for each of the following EXCEPT ________. A. mutual funds B. venture capital funds C. hedge funds D. private equity funds
A. mutual funds
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−SEC B. 10−K C. 10−Q D. 10−A
B. 10−K
Suppose Big Bank offers an interest rate of 9.5% on both savings and loans, and Bank Enn offers an interest rate of 10.0% on both savings and loans. Which bank would experience a surge in the demand for loans? Which bank would receive a surge in deposits? A. Big Bank would experience a surge in the demand for deposits, as will Bank Enn. B. Big Bank would experience a surge in the demand for loans, while Bank Enn would receive a surge in deposits. C. Big Bank would experience a surge in the demand for loans, as will Bank Enn. D. Big Bank would experience a surge in deposits, while Bank Enn would receive a surge in loans.
B. Big Bank would experience a surge in the demand for loans, while Bank Enn would receive a surge in deposits.
Which of the following statements is FALSE? A. The income statement is put together at a specific point in time (end of a business quarter, or business year) and so the sale could be in one period and the cash received in another period. B. Depreciation is a current expense of a cash outflow in the current period. C. Companies depreciate fixed assets (such as office furniture, equipment, machinery, and buildings) over an assigned time period, but the initial cash outlay for the fixed asset typically occurs at the time the asset is acquired by the firm. D. The income statement contains the set of expenses associated with the products or services sold during the current operating period, with those expenses not associated with current cash flow labeled as non−cash expense items.
B. Depreciation is a current expense of a cash outflow in the current period.
Which of the following best describes why the Valuation Principle is a key concept in making financial decisions? A. 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. B. It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly. C. It allows fixed assets and liquid assets to be valued correctly. D. It shows how to assign monetary value to intangibles such as good health and well−being.
B. It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.
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.
Bubba is a shrimp farmer. In an ironic twist, Bubba is allergic to shellfish, so he cannot eat any shrimp. Each day he has a one-ton supply of shrimp. The market price of shrimp is $10,800 per ton. Would this value change if he were not allergic to shrimp? Why or why not? (Select the best choice below.) A. Yes. If he is not allergic to shrimp, then he may prefer to eat the shrimp instead of selling it. B. No. As long as he can buy or sell shrimp at $10,800 per ton, his personal preference or use for shrimp is irrelevant to the value of the shrimp. C. No. Even if he isn't allergic to shrimp, he can't eat a ton of it. D. Yes. If he is allergic to shrimp, he puts a low value on it, but if he is not allergic to shrimp, he values it highly.
B. No. As long as he can buy or sell shrimp at $10,800 per ton, his personal preference or use for shrimp is irrelevant to the value of the shrimp.
What is the most important type of decision that the financial manager makes? A. The financial manager's most important job is to make the firm's payment decisions. B. The financial manager's most important job is to make the firm's investment decisions. C. The financial manager's most important job is to make the firm's dividend decisions. D. The financial manager's most important job is to make the firm's financing decisions.
B. The financial manager's most important job is to make the firm's investment decisions.
Bubba is a shrimp farmer. In an ironic twist, Bubba is allergic to shellfish, so he cannot eat any shrimp. Each day he has a one-ton supply of shrimp. The market price of shrimp is $10,800 per ton. What is the value of a ton of shrimp to him? A. The value of a tonne of shrimp to Bubba is less than $10,800 because Bubba is allergic to shellfish. B. The value of a tonne of shrimp to Bubba is $10,800 because that is the market price. C. The value of a tonne of shrimp to Bubba is more than $10,800 because he can wait for the market price to go up. D. The value of a tonne of shrimp to Bubba is less than $10,800 because shrimp is a perishable item.
B. The value of a tonne of shrimp to Bubba is $10,800 because that is the market price.
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. It is a legally defined, artificial entity that is separate from its owners. D. The state in which a corporation is incorporated provides safeguards against any wrongdoing by the corporation.
C. It is a legally defined, artificial entity that is separate from its owners.
Suppose Big Bank offers an interest rate of 9.5% on both savings and loans, and Bank Enn offers an interest rate of 10.0% on both savings and loans. What profit opportunity is available? A. Take a loan from Big Bank at 10.0% and save the money in Big Bank at 9.5%. B. Take a loan from Bank Enn at 10.0% and save the money in Big Bank at 9.5%. C. Take a loan from Big Bank at 9.5% and save the money in Bank Enn at 10.0%. D. Save at both banks.
C. Take a loan from Big Bank at 9.5% and save the money in Bank Enn at 10.0%.
You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true? A. The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. B. The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B. C. The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. D. No comparison can be made—we need to know the cash flows to calculate the present value.
C. The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.
You are a shareholder in a corporation which has elected subchapter S tax treatment. The corporation announces a profit of $6 per share, of which it retains $2 for reinvestment and distributes the rest as dividend payments. Given that the personal tax rate is 35%, how much tax must you pay per share? A.$ 2.52 B.$ 1.4 C.$ 2.1 D.$0
C.$ 2.1
The __________ refers to a corporation issuing new shares of stock and selling them to investors. After this initial transaction between the corporation and investors, the shares continue to trade in a _________ between investors without the involvement of the corporation.
Primary Market, secondary market
The shares of a _______ corporation are traded on an exchange (or "over the counter" in an electronic trading system) while the shares of a ______ corporation are not traded on a public exchange.
Public, Private
The profits and losses of the __________ are passed directly to shareholders and are not subject to corporate taxes, while the ___________ must first pay taxes on any profits before passing the after-tax profits on to shareholders.
S corporation, C corporation
________ can have no more than 100shareholders, all of whom must be U.S. citizens or residents. The _________ does not have any such restrictions on its shareholders.
S corporation, C corporation
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 False
True
