Learn Smart 1-3

Which of the following is NOT a component of cash flow from assets? Multiple choice question. Operating cash flow Capital spending Financing expenses Change in net working capital

Financing expenses

What is the formula for computing the internal growth rate (IGR)?

(ROA x b)/(1 - ROA x b)

How is the price-earnings (PE) ratio computed?

Market price per share/Earnings per share

The payout ratio equals cash dividends divided by net income.

dividend

True or false: If there is a conflict between market and accounting data, accounting data should be given precedence.

false

True or false: It is important to investigate trends in financial ratios to identify the reason for the trend.

true

Return on assets (ROA) is a measure of _____.

profitability

Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley? Multiple select question. Enron WorldCom Tyco Disney

Enron WorldCom Tyco

Which one of the following is the correct equation for computing return on assets (ROA)?

Net income/Total assets

Which of the following is the correct equation for return on equity?

Net income/Total equity

Which of the following are components of cash flow from assets?

Operating cash flow Capital spending Change in net working capital

Which of the following is NOT one of the basic areas of finance? Personal Finance International finance Financial institutions Corporate finance Investments

Personal Finance

Which of the following is the correct representation of the total debt ratio?

(Total assets - Total equity)/(Total assets

Which of the following items are used to compute the current ratio?

Accounts payable Cash

The more debt a firm has, the greater its: Multiple choice question. retained earnings degree of financial leverage book value degree of operating leverage

degree of financial leverage

Net capital spending is equal to the change in net fixed assets plus: Multiple choice question. dividends notes payable depreciation retained earnings

depreciation

Which of the following is the balance sheet equation? Multiple choice question. Stockholders' equity equals assets plus liabilities Assets equal liabilities plus stockholders' equity. Liabilities equal assets plus stockholders' equity. Assets equal stockholders' equity minus liabilities.

Assets equal liabilities plus stockholders' equity.

The price-earnings ratio is ____ , Correct Unavailable per share divided by ____ , per share.

Blank 1: price Blank 2: earnings

The DuPont identity shows that ____ times total asset turnover times equity multiplier equals ROE.

Blank 1: profit Blank 2: margin or margins

In finance, the value of a firm depends on its ability to generate ______. Multiple choice question. cash flows net working capital net income earnings per share

Cash Flows

In large firms, financial activity is usually associated with which top officer? Multiple choice question. Vice president of production Chief financial officer Vice president for marketing Chief management consultant

Chief financial officer

According to the textbook, which of the following is not one of the three main questions to be addressed if you wanted to start your own business? Multiple choice question. How will everyday financial activities be handled? What long-term investments should be made? How many employees will I need? Where will long-term financing be obtained to pay for investments?

How many employees will I need?

Is profit maximization the primary objective of a business? Multiple choice question. No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value. Yes; the entire point of running a business is to make as much money as possible for everyone involved. It depends; sometimes profit maximization is the most important objective, and sometimes it isn't.

No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value.

Which of the following are defining features of the primary market? Multiple select question. Proceeds from the sale of securities goes to the issuing firm It is the market where initial public offerings are made It is the market where shareholders and bondholders buy and sell to each other It only involves seasoned equity offerings

Proceeds from the sale of securities goes to the issuing firm It is the market where initial public offerings are made

Which of these topics is not of especial interest to a financial manager? Multiple choice question. Capital structure Working capital management Product development Capital budgeting

Product development

Corporations in other countries are often called: (Select all that apply.) Multiple select question. Autonomous entities Re-calibrated partnerships Public limited companies Limited liability companies Joint stock companies

Public limited companies Limited liability companies Joint stock companies

The profit margin is equal to net income divided by ______.

Sales

Which of the following represents the receivables turnover ratio?

Sales/Accounts receivable

________ financial statements enable one to compare firms that differ in size

Standardized

_______ ______ can be used to encourage managers to maximize the value of the stock.

Stock options

True or false: In a large corporation, stockholders and managers are usually separate groups. True false question. True False

True

A balance sheet reflects a firm's: Multiple choice question. accounting value on a specific date economic value over a specified time period income at a specific time earnings per share over an unspecified time

accounting value on a specific date

Net earnings refers to income earned ______. Multiple choice question. prior to taxes after interest and taxes before interest and taxes net of operating and administrative costs

after interest and taxes

In the long-run, costs may be considered as ________.

all variable

The short run is ______. Multiple choice question. defined as one month defined as six months defined as more than one year an imprecise period of time

an imprecise period of time

An organization must prepare ______ and bylaws when forming a corporation. Multiple choice question. articles of incorporation a legal will a partnership agreement an indenture agreement

articles of incorporation

Liquidity refers to the ease of changing _____. Multiple choice question. assets to cash cash in to other assets cash to liabilities liabilities to assets

assets to cash

A company's ______ tax rate is its tax bill divided by its total taxable income, and its ______ tax rate is the tax rate it pays on the next dollar of income.

average; marginal

The Sarbanes-Oxley Act is intended to strengthen protection against: Multiple choice question. companies going out of business destroying shareholder wealth with bad decisions corporate accounting fraud and financial malpractice using overseas tax havens

corporate accounting fraud and financial malpractice

Public limited companies and joint stock companies are other names for __________. Multiple choice question. partnerships companies proprietorships corporations

corporations

The current ratio computes the relationship between ____

current assets and current liabilities

A bad financial decision is defined as a decision that ______ shareholder wealth. Multiple choice question. maximizes increases decreases

decreases

Cash flow to stockholders equals ____.

dividends paid minus net new equity raised

When a firm smooths earnings to please investors, it is called ________.

earnings management

If a company has inventory, the quick ratio will always be greater than the current ratio.

false

The information needed to compute the profit margin can be found on the ____.

income statement

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.

increase

Cash flow to creditors equals:

interest paid minus net new borrowing

If a company has inventory, the quick ratio will always be ______ the current ratio.

less than - Since the quick ratio excludes inventory, it will always be less than the current ratio.

The price-earnings (PE) ratio is a ____ ratio.

market value

The last item (or "bottom line") on the income statement is typically the _________. Multiple choice question. operating cash flow operating income net income gross income

net income

The cash flow that results from the firm's day-to-day activities of producing and selling is called:

operating cash flow

Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm. Multiple choice question. overstate; inflate change; don't change lie; fudge overstate; understate

overstate; understate

A business without separate legal authority formed by two or more people is known as a _____. Multiple choice question. conglomerate corporation partnership sole proprietorship

partnership

A positive operating cash flow indicates that the firm is generating enough cash to:

pay everyday cash outflows.

Net capital spending is equal to ending net fixed assets minus beginning net fixed assets ___

plus depreciation

In a common-size income statement, each item is expressed as a percentage of total

sales, revenue, or sale

When one owner or creditor sells to another, the transaction takes place in the _________ market Multiple choice question. secondary rudimentary primary underwriting

secondary

The owners of a corporation are called ______. Multiple choice question. shareholders government agents bondholders partners

shareholders

The times interest earned ratio is a measure of long-term

solvency

A(n) ______ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm. Multiple choice question. bondholder stakeholder shareholder autocrat

stakeholder

Assets can be categorized as (select all that are appropriate) Multiple select question. fixed and variable assets tangible and intangible assets current and fixed assets short-term and long-term equity

tangible and intangible assets current and fixed assets

Operating cash flow (Select all that apply.)

tells us whether or not a firm's cash inflows from its operations are sufficient to cover its everyday cash outflows is a sign of trouble if negative over a long period of time

The market value of an item is: Multiple choice question. the amount you paid it its appraised value the cash value you'd get if you sold it the amount recorded in the balance sheet it

the cash value you'd get if you sold it

A partnership must have at least _______ owners. Multiple choice question. ten three two four

two

A sole proprietor has ______ personal liability for all business debts and obligations. unlimited limited no little

unlimited

What three subjects is the financial manager concerned with? Multiple select question. working capital management capital budgeting designing new products capital structure

working capital management capital budgeting capital structure

True or false: Operating cash flow does not include depreciation or interest.

True

The relationship between stockholders and management can best be described as a(n) ______ relationship. Multiple choice question. agency irrelevant contradictory mentoring

agency

The conflict of interest between an agent and a principal is called a(n) Multiple choice question. agency problem. moral agency. agency relationship. moral hazard problem.

agency problem.

Financial leverage refers to a firm's _________. Multiple choice question. net working capital organizational structure use of debt in its capital structure

use of debt in its capital structure

Given an internal growth rate of 3 percent, a firm can _____.

grow by 3 percent or less without any additional external financing

Time-trend analysis is an example of

management by exception

Based on the DuPont Identity, an increase in sales, all else held equal, __________ ROE.

may not change may increase or decrease

True or false: There is a solid and prescriptive method to select which ratios to use in financial statement analysis.

False

Whenever ___________ information is available, it should be used instead of accounting data.

Medium

Which of the following create problems with financial statement analysis?

The firm or its competitors are global companies. The firm and its competitors operate under different regulatory environments. The firm or its competitors are conglomerates

Non-cash items do not affect: Multiple choice question. earnings per share cash flow net income retained earnings

cash flow

Which of the following are reasons that the corporation is the most important form of business? (Select all that apply) Multiple select question. Corporations can vote in general elections Corporations can enter contracts. Corporations can sue and be sued. Corporations are separate legal entities

Corporations can enter contracts. Corporations can sue and be sued. Corporations are separate legal entities.

How is the inventory turnover ratio computed?

Cost of goods sold/Inventory

Financial ratios are computed using only balance sheet information.

False

In a common-size income statement, each item is expressed as a percentage of total sales.

False

True or False: "Profit maximization" is the goal for the management of a corporation in short-run only. True false question. True False

False

True or false: Current assets plus current liabilities equals net working capital. True false question. True False

False

The DuPont identity is a popular expression breaking ROA into three parts.

False - The DuPont identity is a popular expression breaking ROE into three parts.

True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.

False - were reduced by 21%

Which of these questions can be answered by reviewing a firm's balance sheet? Multiple select question. How much of the firm's net income was paid out in dividends? How much debt is used to finance the firm? What is the total amount of assets the firm owns? How much net income has the firm earned this period?

How much debt is used to finance the firm? What is the total amount of assets the firm owns?

Which of the following are true of a sole proprietorship? (Selct all that apply.) It is one of the simplest types of businesses to form. A proprietorship has a limited life. The owner has limited liability for business debts. A sole proprietor can issue stock to raise capital.

It is one of the simplest types of businesses to form. A proprietorship has a limited life.

When a corporation is formed, it is granted which of the following rights? (Select all that apply.) Multiple select question. Corporate life of up to 100 years Legal powers to sue The ability to issue stock Citizenship for casting vote in presidential election of the country

Legal powers to sue The ability to issue stock

shareholder's liability is limited to which of these? Multiple choice question. The amount the shareholder invested in the corporation The corporation's outstanding long-term debt The corporation's current liabilities The percentage of corporate debt that equals the shareholder's ownership percentage

The amount the shareholder invested in the corporation

Which of the following best explains why financial managers use a common-size income statement?

The common-size income statement can show which costs are rising or falling as a percentage of sales.

Which of the following is (are) true of financial ratios? Multiple select question.

They are used for comparison purposes. They are developed from a firm's financial information.

What is the main goal of financial management? Multiple choice question. To maximize expenses To maximize current share value To make sure that the managers hold the majority of the shares in the company To raise as much capital as possible

To maximize current share value

According to Figure 1.2, where does cash generated by a corporation typically go? Multiple select question. To pay corporate taxes Paid to shareholders and creditors Reinvested in the firm To buy financial assets

To pay corporate taxes Paid to shareholders and creditors Reinvested in the firm

Which one of the following best explains why financial managers use a common-size balance sheet?

To track changes in a firm's capital structure

How is the average income tax rate computed? Multiple choice question. Total taxes paid over the last five years / 5 Total taxable income / Marginal tax rate Total tax bill / Total taxable income Last dollar of income earned / Amount of tax paid on that dollar of income

Total tax bill / Total taxable income

If you hire a real estate company to sell your house, you are most apt to encounter which one of the following? Multiple choice question. Securities Exchange Act of 1934 violation Capital structure problem Securities Act of 1933 violation Agency problem

Agency problem

Business finance is broadly concerned with which of the following (select all that apply)? Multiple select question. How to manage day-to-day finances of the firm How to finance long-term investments Which long-term investment to make How to set up the audit committee

How to manage day-to-day finances of the firm How to finance long-term investments Which long-term investment to make

In a shareholder-manager relationship, who is the agent? Multiple choice question. Both shareholders and managers Managers Shareholders Neither shareholders nor managers

Managers

The price at which willing buyers and sellers would trade is called ______ value. Multiple choice question. accounting carrying book market

Market

Which of the following are considered non-owner stakeholders in a company? Multiple select question. Stockholder Suppliers Employees Government

Suppliers Employees Government

Which of the following positions generally report to the chief financial officer (CFO)? Chief executive officer (CEO) Director of marketing Treasurer Controller

Treasurer Controller

The common-size income statement can show which costs are rising or falling as a percentage of sales.

True

According to GAAP, when is income reported? Multiple choice question. When it is first anticipated Whenever the firm decides to report it When it is earned or accrued When cash payment is received

When it is earned or accrued

According to GAAP, when is revenue recognized on an income statement? Multiple select question. When the earnings process is virtually completed Only when cash has been received for the sale When the value of an exchange of goods or services is known or reliably determined After the related expenses are paid in full

When the earnings process is virtually completed When the value of an exchange of goods or services is known or reliably determined

Liquidity has two dimensions which are the ability to: Multiple choice question. quickly convert assets into cash regardless of loss in value quickly convert assets into cash without significant loss in value convert assets into cash so that value is maximized

quickly convert assets into cash without significant loss in value

Managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of: Multiple choice question. stock options monthly bonuses high salaries

stock options

A corporation receives cash from financial markets by selling ______ and ______. Multiple select question. land stocks finished goods bonds

stocks bonds

Cash flow refers to _____.

the difference between the number of dollars that came in and the number that went out

The goal of the financial management is to increase the value of _____. Multiple choice question. future profits their total compensation package. the existing shares of stock current earnings

the existing shares of stock

A common-size balance sheet expresses accounts as a percentage of ______. Multiple choice question. total liabilities

total assets