Intro to Finance Exam 1

Financial managers are more concerned with a firm's __________ than a firm's earnings per share when evaluating a potential acquisition.

Cash Flows

Which of the following positions typically reports to the chief financial officer (CFO)?

Controller

A __________ is a form of business organization that is considered an artificial being and has limited liability.

Corporation

Economic Value Added (EVA™) measures a firm's profits instead of simply measuring profits.

Economic; accounting

Which of the following is an example of an agency cost?

Executive stock options

One of the basic premises in finance is that when the risk of an investment is high, the rate of return required by the investor will be:

High

A return on assets (ROA) will always result in a return on equity (ROE).

Higher; higher

Which set of accounting standards are used by most firms outside the U.S.?

IFRS

Since accounting principles differ among countries, the overall global trend is for firms to begin using:

International Financial Reporting Standards

Which of these ratios is an asset management ratio?

Inventory turnover

The market price of a share of stock is determined by

Investors buying and selling stock

Which of these should be an input into the sales forecast?

Last year's sales

Which of the following is considered to be a financing activity?

Making a dividend payment

Which of the following is one of the primary functions of the financial manager?

Making financial decisions

Risk Management Association publishes financial data that can be used for peer group comparisons. Firms in this data set are initially grouped by;

NAICS code

Which type of income may be distributed to the company's owners or reinvested in the company?

Net Income

Which of these is not a component of the cash budget?

Net change in assets

A statement of cash flows has which three parts?

Operating, investing and financing

The value placed by the market on $1 of earnings is known as the;

P/E ratio

Which of the following is a component of a cash budget?

Wages

Which of the following is one of the primary questions addressed by financial managers?

Which projects should the firm invest resources in to increase shareholder wealth?

The phrase 'lumpy assets' refers to the fact that assets:

are often purchased in large, nondivisible components.

A limited liability company combines the:

limited liability of a corporation with the ownership of a partnership

The ability to rapidly convert an asset into cash without a significant loss in value is referred to as;

liquidity

Discretionary financing needs are set by:

management

The tax rate is the rate that will be applied to the next dollar of income.

marginal

In finance, we often assume that the current price of an asset reflects everything we know about that asset. This theory is known as:

market efficiency

The primary goal of the financial manager is to:

maximize shareholder wealth

A firm's external financing needs are computed as the predicted change in total assets:

minus the predicted change in retained earnings.

Discretionary financing sources are __________.

notes payable and stock issues

A forecasting method that expresses assets, expenses and liabilities as a fraction of revenues is known as the;

percent of sales method.

In the event the firm is liquidated, and any funds remain after paying all credit obligations, stockholders will be the first to receive payment.

preferred

Retained earnings are the sum of:

previous years' of earnings less dividends

The income statement is also known as

profit and loss statement

One of the limitations of the percent of sales forecasting method is that for it to provide reasonable estimates the firm's asset requirements and financing sources must be:

relatively constant

The process of packaging mortgages into a portfolio and then selling financial securities collateralized by that portfolio is called;

securitization

Firms that engage in unethical or socially irresponsible activity can suffer loss of reputational capital and also __________ when the news becomes public.

see stock prices decline

Agency theory studies the relationships that occur when managers are hired to act as agents for the:

shareholders

A cash budget is useful for:

short-term financial planning

Financial managers __________ when making decisions because it can have a direct impact on shareholder wealth.

should always engage in ethical behavior

A larger number of days in receivables indicates the firm is to collect and the receivables are likely to be of quality.

slower; lesser

When accounts payable automatically increases as sales increase this is a source of:

spontaneous financing

When DFN is positive it means that:

the firm must raise additional funds.

Capital structure refers to

the mix of the firm's long-term sources of financing

The most important input in the financial planning process is:

the sales forecast.

The ratio that tells managers how efficiently a firm is using its assets to generate sales is the;

total asset turnover

A disadvantage of a partnership is:

unlimited liability

Financial managers use ratio analysis to;

identify performance deficiencies

Which of these is a source of discretionary financing?

increase in notes payable

The relevant cash flows of a project are best described as

incremental cash flows

Firm XYZ has $400,000 invested in inventories. Assuming forecast sales growth of 8%, how much new inventory will the firm need to fund?

$32,000

In addition to annual financial statements all publicly traded firms are required to file an annual report with the Securities Exchange Commission (SEC) known as a;

10-k

__________ are a major source of unsecured short-term financing for business firms.

Accounts payable

Which of these industries would you expect to have the highest debt ratios?

Auto finance

Which ratio indicates how much profit the firm is generating for the owners?

Return on Equity

One of the primary tasks of the financial manager is to manage short-term cash needs, which is known as:

Working Capital Management

Firm XYZ holds 71 days in receivables. Should management be concerned about this ratio given the firm's credit terms require that all credit accounts be paid in full within 60 days?

Yes, the firm's collections are not as fast as they should be.

An itemized forecast of the firm's expected revenues and expenses for some future period is known as:

a budget

The sales forecast might be impacted by:

a new advertising campaign

One of the most fundamental principles in the field of finance is that money has __________ value.

a time

When a firm uses basis accounting, profits are recorded when earned whether the profits have been received.

accrual

We only want to consider incremental earnings in the capital budgeting process. Incremental earnings are the:

additional sales and costs associated with the project.

the costs that result from attempting to align the goals of managers and owners are known as

agency costs

If the managers of a company are not the owners of the company, they are considered:

agents

A forecast increase in total assets will result in in DFN, holding all else constant.

an increase

Spontaneous financing can be generated from:

an increase in accounts payable

The process of evaluating longterm investment opportunities for the firm, and then determingin which ones the firm should invest in is known as

capital budgeting

A __________ can serve as a monitoring tool for the operations of the firm.

cash budget

A detailed plan of future cash flows in called a:

cash budget

A balance sheet where the assets and liabilities are expressed as a percentage of the firm's total assets is known as a;

common-sized balance sheet

A price/book ratio less than one indicates that investors are;

concerned about the firm's prospects.

Net working capital equals:

current assets - current liabilities

One of the limitations of ratio analysis is that it can be difficult to;

determine the appropriate industry for comparisons purposes.

Some assets, such as a computer system, will generate benefits over much larger ranges of output and result in lower fixed costs per unit. This cost savings is known as:

economies of scale

Capital budgeting is the process of

evaluating a firm's choices

The fraction of funds needed that will not be funded through retained earnings is known as:

external financing needs.

The primary reason to engage in financial forecasting is to estimate:

future financing needs