Finance Chapters 1-3 Exam 1
Long-term liabilities represent obligations of the firm lasting over _____.
1 year
True or false: Current assets plus current liabilities equals net working capital.
False
True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.
False
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
In a shareholder-manager relationship, who is the agent?
Managers
According to GAAP, when is revenue recognized on an income statement?
When the earnings process is virtually completed When the value of an exchange of goods or services is known or reliably determined
Business finance is broadly concerned with which of the following (select all that apply)?
Which long-term investment to make How to finance long-term investments How to manage day-to-day finances of the firm
The relationship between stockholders and management can best be described as a(n) ______ relationship.
agency
The conflict of interest between an agent and a principal is called a(n)
agency problem.
In the long-run, costs may be considered as ________.
all variable
The short run is ______.
an imprecise period of time
An organization must prepare ______ and bylaws when forming a corporation.
articles of incorporation
A corporation receives cash from financial markets by selling ______ and ______.
bonds stocks
What three subjects is the financial manager concerned with?
capital budgeting working capital management capital structure
Non-cash items do not affect:
cash flow
The purpose of a(n) ______ is to measure performance over a set period of time.
income statement
Period costs are the costs that are allocated to a specific ______.
interval of time
Businesses are motivated to organize as corporations because stockholders in a corporation have _______ liability for corporate debts.
limited
The price at which willing buyers and sellers would trade is called ______ value.
market
The owners of a corporation are called ______.
shareholders
A(n) ______ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm.
stakeholder
Managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of:
stock options
The market value of an item is:
the cash value you'd get if you sold it
Cash flow refers to _____.
the difference between the number of dollars that came in and the number that went out
A partnership must have at least _______ owners.
two
______ budgeting is the process of planning and managing a firm's long-term assets.
Capital
When a firm smooths earnings to please investors, it is called ________.
earnings management
Depreciation is the accountant's estimate of the cost of ______ used in the production process matched with the benefits produced from owning it.
equipment fixed assets
Marginal tax rates are the most important tax rates because:
financial decisions are usually based on new cash flows incremental cash flows are taxed at marginal tax rates
Costs that do not change in the short run arise because of ______.
fixed commitments
A partnership in which partners share in gains or losses, and carry unlimited liability for all partnership debts, is called a:
general partnership
A sole proprietorship is a business that _______.
is owned by one person
A corporation is a distinct ______ entity and as such can have a name and take advantage of the legal powers of natural persons.
legal
Capital budgeting is concerned with making and managing expenditures on _____.
long-term assets
For financial decision-making purposes, the most important tax rate is the ______ tax rate.
marginal
The ______ tax rate is the tax rate paid on the next dollar of income.
marginal
Current assets (plus/minus) current liabilities equals NWC (net working capital)
minus
The balance sheet identity shows that stockholders' equity equals assets ______ liabilities.
minus
What is the purpose of the income statement?
to measure performance over a set period of time
Current assets are defined as assets that can be turned into cash within ______ months.
twelve
A sole proprietor has ______ personal liability for all business debts and obligations.
unlimited
Financial leverage refers to a firm's _________.
use of debt in its capital structure
Public limited companies and joint stock companies are other names for __________.
corporations
"Increasing shareholder wealth" means increasing the _________.
current common stock value
A bad financial decision is defined as a decision that ______ shareholder wealth.
decreases
The more debt a firm has, the greater its:
degree of financial leverage
U.S. corporations pay tax at a rate of _ percent. (Enter number only.)
21
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
Which one of these is considered to be the most liquid? Land Equipment and machines Inventory Accounts receivable
Accounts receivable
If you hire a real estate company to sell your house, you are most apt to encounter which one of the following?
Agency problem
The four basic areas of finance include investments, financial institutions, international finance, and _ finance.
corporate
The Sarbanes-Oxley Act is intended to strengthen protection against:
corporate accounting fraud and financial malpractice
Product costs are usually shown on the income statement under the heading of _________________ .
cost of goods sold
Assets can be categorized as (select all that are appropriate)
current and fixed assets tangible and intangible assets
According to GAAP, when is income reported?
When it is earned or accrued
Shareholders are the principals and managers are the agents in a shareholder-manager relationship
True
True or false: In a large corporation, stockholders and managers are usually separate groups.
True
True or false: Operating cash flow does not include depreciation or interest.
True
Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?
Tyco WorldCom Enron
______ changes as the output of the firm changes.
Variable cost
Three main questions to address if you want to start your own business
What long-term investments should be made? How many employees will I need? How will everyday financial activities be handled?
How is ownership of a corporation represented?
Shares of stock
_______ ______ can be used to encourage managers to maximize the value of the stock.
Stock options
When a corporation is formed, it is granted which of the following rights?
The ability to issue stock Legal powers to sue
A shareholder's liability is limited to which of these?
The amount the shareholder invested in the corporation
How is the average income tax rate computed?
Total tax bill/Total taxable income
Which of the following positions generally report to the chief financial officer (CFO)?
Treasurer Controller
A corporation borrows money in its own name.
True
Long-term liabilities are not due in the current year (from the date of the balance sheet).
True
Which of the following are components of cash flow from assets?
Change in net working capital Operating cash flow Capital spending
In large firms, financial activity is usually associated with which top officer?
Chief financial officer
Which of the following are reasons that the corporation is the most important form of business?
Corporations can enter contracts. Corporations can enter contracts. Corporations are separate legal entities.
Which of these topics is not of especial interest to a financial manager?
Debt
Which of the following is an example of a non-cash item on an income statement? Retained earnings Costs Depreciation Dividends
Depreciation
A general partnership has which of the following characteristics?
Each owner has unlimited liability for all firm debts. All the partners share in gains or losses of the partnership.
Which of the following are considered non-owner stakeholders in a company?
Employees Suppliers Government
Which of the following are classified as fixed assets on the balance sheet?
Equipment Buildings Trademark
True or False: "Profit maximization" is the goal for the management of a corporation in short-run only.
False
Which of the following is NOT a component of cash flow from assets?
Financing expenses
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?
How many employees will I need?
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?
Corporations in other countries are often called:
Limited liability company Public limited companies Joint stock companies
Is profit maximization the primary objective of a business?
No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value.
How is ownership transferred in a corporation?
Ownership is transferred by gifting or selling shares of stock.
Which of the following is NOT one of the basic areas of finance?
Personal finance
Which of the following are defining features of the primary market?
Proceeds from the sale of securities goes to the issuing firm It is the market where initial public offerings are made
According to Figure 1.2, where does cash generated by a corporation typically go?
Reinvested in the firm Paid to shareholders and creditors To pay corporate taxes
A balance sheet reflects a firm's:
accounting value on a specific date
Net earnings refers to income earned ______.
after interest and taxes
Liquidity refers to the ease of changing _____.
assets to cash
In finance, the value of a firm depends on its ability to generate ______.
cash flows
The last item (or "bottom line") on the income statement is typically the _________.
net income
Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm.
overstate; understate
A business without separate legal authority formed by two or more people is known as a _____.
partnership
Liquidity has two dimensions which are the ability to:
quickly convert assets into cash without significant loss in value
When one owner or creditor sells to another, the transaction takes place in the _________ market
secondary
On a balance sheet, total assets must always equal total liabilities plus:
shareholders' equity
Physical assets are termed ______________ assets.
tangible
The goal of the financial management is to increase the value of _____.
the existing shares of stock