S65 Econ Factors Unit 6, 7, 19, 20 (15%)

A decrease in the value of the monetary unit is just a way of defining A) inflation. B) a decrease in consumer demand. C) a likely decrease in exports. D) deflation.

A) inflation. What causes the value of the money unit (the dollar in the United States) to decrease? Inflation—it takes more dollars to pay for goods and services. This is usually caused by an increase in consumer demand. If the value of the currency declines, exports generally rise because domestically produced goods are less expensive to those using foreign currency.

In order to be in compliance with SEC reporting rules, a company will typically file a Form 10-Q how many times during its fiscal year? A) One time B) Three times C) Four times D) Two times

B) Three times Form 10-Q is used for quarterly financial reporting. However, even though there are four quarters in an accounting year, only three forms are filed. This is because the Form 10-K, the annual report, takes the place of the fourth quarterly report.

To stimulate a sluggish economy using fiscal policy measures, policymakers would A) reduce the money supply. B) reduce income taxes. C) increase the money supply. D) increase income taxes.

B) reduce income taxes. Reducing income taxes is a fiscal policy tool intended to increase overall demand for goods and services. Think about it. If income taxes were reduced, you'd have more money in your pocket to spend. Adjusting the money supply is a monetary policy tool.

The owners' equity portion of a corporation's balance sheet would contain all of the following except A) paid-in capital. B) preferred stock. C) Treasury stock. D) net income.

D) net income. Net income is only found on the income statement. The other three are part of stockholders' equity (net worth). Treasury stock is company stock that has been issued to the public and then reacquired by the issuer (the company). It appears as a negative number, so it reduces the net worth (owners' equity). Note, even though the Treasury stock reduces the owners' equity, the question is asking for the items you would see in the owners' equity section on the balance sheet, and if it exists, it would appear there as a deduction.

Which of the following is a component of U.S. fiscal policy? A) Taxes and budgeting B) Reserve requirements C) Discount rate D) Money supply

A) Taxes and budgeting U.S. fiscal policy is determined by the president and Congress through budgeting and taxation. The other choices are monetary policies employed by the Fed.

When an analyst adds back the current year's depreciation to the net income, she is computing the company's A) cash flow from operations. B) earnings per share. C) cash flow from investments. D) net value of fixed assets.

A) cash flow from operations. Cash flow from operations is computed by adding the year's depreciation deduction to the net income.

With respect to the fiscal policy of the United States, the annual budget request is submitted by the A) president. B) Congress. C) Federal Reserve Board. D) Internal Revenue Service.

A) president. The president of the United States is responsible for submitting the country's annual budget request to Congress for its approval, and Congress ultimately sends the annual budget back to the president for his signature.

A fundamental analyst is reviewing a company's financial statements. When attempting to determine their debt exposure, all of the following would be included except A) outstanding principal balance on long-term debt. B) accounts receivable. C) taxes payable. D) accounts payable.

B) accounts receivable. Accounts receivable are assets; all the other listings represent liabilities of the company.

Which of the following acts requires publicly traded corporations to issue annual reports? A) Securities Exchange Act of 1934 B) Trust Indenture Act of 1939 C) Investment Company Act of 1940 D) Securities Act of 1933

A) Securities Exchange Act of 1934 The Securities Exchange Act of 1934 mandates that public issuers file annual and quarterly reports with the SEC.

A stock analyst viewing a corporation's income statement would not be able to determine the company's A) cash on hand. B) income. C) expenses. D) revenues.

A) cash on hand. The income statement reflects the firm's revenues (sales), expenses, and income. Assets, such as cash, are found on the balance sheet.

As current interest rates go up, the market price of existing corporate bonds bearing lower interest rates will A) stay the same. B) increase. C) decrease. D) change in unpredictable ways.

C) decrease. There is an inverse relationship between interest rates and bond prices. This means that as current interest rates go up, the market price of existing bonds will go down.

If a client has 100 shares of XYZ publicly traded stock and it undergoes a split, afterward the client will have A) a greater role in the daily management of the company. B) a proportionately decreased interest in XYZ company. C) no effective change in the value of the ownership share. D) a proportionately increased interest in XYZ company.

C) no effective change in the value of the ownership share. When a stock splits, the number of shares each stockholder holds increases. However, the value of each share decreases proportionately. The client experiences no effective change in the value of the ownership share.

Net income A) reflects the operating profits of a firm only. B) is paid out in cash to stockholders in addition to any declared dividends. C) represents the amount of money remaining after all expenses, including taxes. D) must be paid out in dividends.

C) represents the amount of money remaining after all expenses, including taxes. Net income is not a cash item that is paid out to stockholders. Dividends, both preferred and common, are generally cash distributions paid out from net income. Net income after taxes can reflect all sources of income in addition to the operating income generated by business activities. Net income also reflects investment income, as well as operating income. Net income may be paid out in the form of dividends; however, most firms retain a portion of net income in order to reinvest the funds in the business.

Which items would change if a company declared a cash dividend? I. Working capital II. Total assets III. Total liabilities IV. Shareholders' equity A) I, III, and IV B) I only C) I, II, III, and IV D) I and IV

A) I, III, and IV The key word is declared. Liabilities increase when a dividend is declared, and total assets decrease when it is paid. A declared dividend (but not yet paid) would increase current liabilities (and would therefore decrease working capital). It would increase total liabilities (this is a pending obligation) and reduce shareholders' equity because retained earnings would be decreased by the dividend. Total assets would not be affected until the dividend is actually paid.

Which of the following statements reflects the monetarist economic position? A) The amount of money in the economy determines the overall price level over time; therefore, the Federal Reserve should control the growth of the amount of money in the economy in a gradual and predictable way. B) The total amount of money in the economy is the result of the level of interest rates. C) The best way to control the money supply is to raise taxes, which will reduce the amount of money in the economy and lower prices. D) The amount of money in the economy is not significant because economic activity reflects the value of real goods and services; therefore, the Federal Reserve should not attempt to manage the money supply.

A) The amount of money in the economy determines the overall price level over time; therefore, the Federal Reserve should control the growth of the amount of money in the economy in a gradual and predictable way. Monetarists believe that the economy and inflation are best controlled through the management of the money supply rather than through fiscal policy stimulation.

An analyst reviewing a company's financial statements would examine the footnotes to A) discover any pending legal action against the company. B) identify the authors of quoted information. C) compute the net worth. D) determine the average age of the receivables.

A) discover any pending legal action against the company. Footnotes to the financial statements are used to convey off-book information such as pending lawsuits.

You have a 45-year-old client wishing to save for retirement. The client does not have a great deal of investment sophistication and inquires about the risks you have exposed him to by placing the majority of his portfolio in listed common stocks. You would respond that one risk that should not be a concern to this investor is A) liquidity risk. B) business risk. C) inflation risk. D) systematic risk.

A) liquidity risk. A portfolio of listed common stocks will have little to no liquidity risk because listed shares are easily traded. Even though common stock tends to offer protection against inflation, there is no assurance that the portfolio will keep pace with the rising cost of living. Historically, common stock has offered protection against inflation. There are no guarantees, but a portfolio consisting largely of common stock is the most likely to keep pace with the rising cost of living. A portfolio largely consisting of common stock is going to be subject to market risk, the most frequently used example of systematic risk.

Which of the following is the risk that diminishes through portfolio diversification? A) Systematic risk B) Unsystematic risk C) Interest rate risk D) Purchasing power risk

B) Unsystematic risk Unsystematic risk (diversifiable risk) is the risk that is eliminated when the investor builds a well-diversified portfolio. Interest rate risk and purchasing power risk are examples of systematic (nondiversifiable risk).

KPT, Inc., is preparing to report its net income for the past year. An increase in which of the following causes a decrease in the reported net income? I. Tax rate II. Cash dividend III. Interest charged on bank loans A) II only B) I only C) I and III D) I and II

C) I and III Higher taxes mean less net income. Interest charged on loans is an expense item; increasing it lowers operating income. Dividends are paid out of retained earnings and have no effect on the net income the company reports.

Which of the following would have the effect of increasing a company's cash flow? A) Reducing sales B) Increasing inventory C) Issuance of a bond D) Extending credit to good customers

C) Issuance of a bond One of the ways to increase cash flow is through financing. When a company issues a bond, it receives cash but does not have to pay the money back until maturity—a number of years in the future. Extending credit means waiting a longer period to receive the cash from sales. Increasing inventory means spending money for raw material and waiting for it to be sold. The company would want to increase sales to bring in more cash, not decrease them.

When investors tend to increase their investments in debt securities on the short end of the spectrum, it generally leads to A) a flat yield curve. B) an inverted yield curve. C) a positive yield curve. D) short-term yields that exceed long-term yields.

C) a positive yield curve Investors buying short-term debt rather than long-term debt will have the effect of driving the prices of short-term instruments up and, as a result, their yields down. This will produce a normal, or positive, yield. It is when the demand for bonds on the long end of the spectrum exceeds the demand for those in the near term that short-term yields exceed those of long-term yields. This creates an inverted or negative yield curve.

All of the following are considered to be components of cash flow except A) investing activities. B) operating activities. C) banking activities. D) financing activities.

C) banking activities There is no such term as banking activities in the context of cash flow. Cash flow is generated through financing (issuing stock or bonds), investing (profits from investments), and operations of the entity (the most significant of all).

Issuance of which of the following would most likely increase the leverage in a company's capital structure? A) Warrants B) Common stock C) Preferred stock D) Bonds

D) Bonds Leverage is the use of borrowed money. This is reflected in a company's debt-to-equity ratio. Of these choices, the only one that is borrowed money is the bonds.

One of the risks found in equity investing is known as unsystematic risk. The most common way to reduce this risk is? A) Increasing the positive correlation B) Reducing the beta coefficient C) Specialization D) Diversification

D) Diversification Unlike systematic (market) risk, unsystematic or nonsystematic risk can be reduced through diversification. It's the old "don't put all of your eggs in one basket" concept.

A frequently used metric by analysts is the yield, or credit, spread. Common methods of computing this would be comparing which of these? I. Bonds of similar quality and similar maturities II. Bonds of similar quality and different maturities III. Bonds of different quality and different maturities IV. Bonds of different quality and similar maturities A) II and III B) I and IV C) I and III D) II and IV

D) II and IV The term spread always signifies a difference. Therefore, the correct choices have to reflect some kind of difference. One way is when the quality (rating) of the bonds is the same but the length to maturity is different. A very common example of this is the U.S. 2-year Treasury note plotted against the 10-year Treasury note. The other method is to take bonds of different quality (ratings) having the same maturities. An example might be comparing two bonds with a 20-year maturity: one has a AAA rating and the other a BBB rating.

An investor who is in search of greater return has a portfolio overconcentrated in speculative OTC Markets Group and OTC Link stocks. This investor's risk is best reduced through A) hedging with broad-based put options B) arbitrage C) reducing his time horizon D) diversification

D) diversification A portfolio like this is exposed to a high degree of unsystematic (business) risk. The best method of protection is through diversification. Hedging with broad-based options would not work because they don't correlate to this portfolio. A longer time horizon allows the investor to ride out the ups and downs these stocks may have, and arbitrage has no meaning in this context.

John purchased stock of a company in the business of manufacturing yachts. Two years ago his securities had lost most of their value as a result of a congressionally imposed luxury tax on purchases of more than $30,000. John's investment in the yacht-building business suffered a loss due to A) business risk B) volatility C) regulatory risk D) legislative risk

D) legislative risk John's investment in the yacht-building business suffered a loss as a result of legislative risk. In other words, the rules of the game (i.e., tax treatment) changed after John purchased the security as a result of legislative action.

The uncertainty resulting from the possibility that the value of an investment will be affected by a change in the law is known as A) business risk B) credit risk C) market risk D) legislative risk

D) legislative risk The possibility that the value of an investment will be affected by changes in government laws is known as legislative risk. Market risk is the risk that the value of an investment will decrease because of changes in the market price of the investment. Business risk is the uncertainty about the prospects of the company that issued the security, while credit risk involves the possibility that the issuing company will be unable to repay its debt obligations.

A business reporter claims that we are suffering from inertial inflation. This means A) the business cycle is heading toward a trough. B) the economy is about to enter a deflationary period. C) prices are increasing at a steady rate. D) the current rate of inflation will remain at this level until economic shocks cause it to change.

D) the current rate of inflation will remain at this level until economic shocks cause it to change. Inertial inflation means that there is not expected to be a change in the inflation rate until some kind of economic event shakes things up and causes the rate to move up or down.

Which 2 are most associated with a U. S. Treasury bond? I. Credit risk II. Liquidity risk III. Reinvestment risk IV. Interest rate risk A) III and IV B) I and II C) I and IV D) II and III

A) III and IV We negate credit risk when it comes to U.S. Treasury securities. Liquidity is also not an issue. However, any interest-bearing bond carries interest rate risk, as well as reinvestment risk.

An analyst is reviewing the financial statements of Penta, Ltd. Over the period shown, Penta has sales of $5 million, a net profit of $1.5 million, annual bond interest charges of $500,000, and total assets of $2 million. Penta's net profit margin is A) 30%. B) 35%. C) 25%. D) 20%.

A) 30% Profit margin = net profit ÷ sales = $1.5 million ÷ $5 million = 30%. Profit margin is based on operating costs. Because interest on bonds is a fixed expense, it is not included in the computation. As is often the case, there is more information supplied than needed.

Which of the following is considered the most accurate method of measuring GDP? A) Constant dollars B) As a function of GNP C) Actual dollars D) Eurodollars

A) Constant dollars Constant dollars are mathematically adjusted to remove the effects of inflation, so when economists compare the gross domestic product of one period with that of another, they measure economic activity rather than inflation.

Which of these industries would be considered defensive in the face of a recession? A) Food producer B) Automobile manufacturing C) Real estate construction D) Trucking

A) Food Producer Defensive industries are least affected by normal business cycles. Companies in defensive industries generally produce nondurable consumer goods, such as food, pharmaceuticals, tobacco, and energy. Public consumption of such goods remains fairly steady throughout the business cycle. During recessions and bear markets, stocks in defensive industries generally decline less than stocks in other industries.

Under SEC regulations, publicly traded (reporting) companies are required to file all of the following except A) Form 13F. B) Form 8-K. C) Form 10-Q. D) Form 10-K.

A) Form 13F. Form 13F is used by money managers who manage equity portfolios with at least $100 million in equity securities. The other choices are forms that are filed as appropriate with the SEC by companies whose securities are registered with the SEC.

Federal securities laws require publicly traded companies to disclose certain information on a regular basis. Which of these forms must be submitted quarterly? A) Form 10-K B) Form 10-Q C) Form 8-K D) Form PF

B) Form 10-Q Domestic companies must submit quarterly reports on Form 10-Q (Q for quarterly) and annual reports on Form 10-K. Form 8-K is used to report certain events, and Form PF is for private fund investment advisers.

If a publicly traded corporation was going to sell a wholly owned subsidiary, the information would be made available through the filing of Form A) 10-K. B) 13F. C) 8-K. D) 10-Q.

C) 8-K. Form 8-K is filed with the SEC within four business days of any one of a number of significant actions, including the sale of a significant asset such as a wholly owned subsidiary.

Which of the following equations correctly shows the relationship between the items on a company's balance sheet? A) Assets = liabilities − net worth B) Assets = stockholders' equity − liabilities C) Assets = liabilities + stockholders' equity D) Assets + liabilities = net worth

C) Assets = liabilities + stockholders' equity The stockholders' equity, sometimes referred to as net worth, equals the difference between the company's assets and its liabilities (assets − liabilities = stockholders' equity). This formula is often restated as assets = liabilities + stockholders' equity.

If a business fails because a new technology makes its products obsolete, this is an example of A) interest rate risk B) inflation risk C) unsystematic risk D) systematic risk

C) unsystematic risk Unsystematic (business) risk is the danger inherent in conducting the operations of the business itself. Technology companies are especially sensitive to business risk as a result of competing technologies. Systematic (market risk) refers to risk of the overall market. Inflation risk refers to the loss of buying power as the result of the increase in prices. Interest rate risk is the danger that interest rates will increase, causing a fixed-income security to decline in price.

Under SEC rules, Form 8-K must be filed A) promptly. B) within 15 business days of the event. C) within 4 business days of the event. D) within 10 business days of the event.

C) within 4 business days of the event. Form 8-K is used to report newsworthy events to the SEC. The reporting time limit is four business days.

SSS Corporation's total assets amount to $780,000, of which $260,000 represents current assets. Total liabilities equal $370,000, of which $200,000 is considered long-term or other liabilities. What is SSS Corporation's shareholders' equity? A) $1,150,000 B) $980,000 C) $170,000 D) $410,000

D) $410,000 Total assets minus total liabilities equals shareholders' equity ($780,000 − $370,000 = $410,000).

If a publicly traded corporation was going to sell a wholly owned subsidiary, the information would be made available through the filing of Form A) 13F. B) 10-Q. C) 10-K. D) 8-K.

D) 8-K Form 8-K is filed with the SEC within four business days of any one of a number of significant actions, including the sale of a significant asset such as a wholly owned subsidiary.

The Conference Board releases information about the economy on a monthly basis. Included are a number of different indicators. Economic indicators can be leading, lagging, or coincidental, which indicates the timing of their changes relative to how the economy as a whole changes. Which of the following is a lagging economic indicator? A) Building permits (housing starts) B) Nonagricultural employment C) Manufacturers' new orders for consumer goods D) Average prime rate

D) Average Prime Rate Both the S&P 500 and housing permits are leading economic indicators, as is the measure of hours worked because it reflects changes in the average workweek during the current period. The average prime rate is a lagging indicator because, in an economic downturn, the longer rates stay low, the quicker the recovery should be.

All of the following are tools that may be employed by the Federal Reserve in an effort to control the economy except A) the reserve requirements. B) the discount rate. C) open market operations buying and selling Treasury securities. D) the prime rate.

D) the prime rate. The prime rate is set by money center commercial banks. All of the others are under the control of the Fed.

On October 15, 2008, the Dow Jones Industrial Average lost 733 points, the largest single point drop in its history. After the markets closed on Tuesday, October 14th, ABC Manufacturing Company released its 3rd quarter operating results with earnings that surpassed all estimates. However, by the close of the market on October 15th, the price of the stock was down 15 points. This is an example of A) systematic risk B) business risk C) beta D) opportunity cost

A) systematic risk Systematic risk (market risk) is the danger that a specific stock's price will be driven by factors largely independent of its issuer such as a severe market plunge​. Business risk is unique to each business entity. Beta is a measure of a stock's volatility relative to the overall market. Opportunity cost refers to the return given up in order to invest in another instrument or project.

Those investors wishing to examine a document that would probably give them the most information about a corporation's current and planned operations would seek out A) the annual report. B) the balance sheet. C) the investor's brochure. D) Form 10-K.

A) the annual report. The annual report to shareholders contains not only a complete financial report of the prior year's operations but also a statement from key personnel dealing with the company's future plans. Form 10-K does not include discussion of future business plans—it is a report of what happened over the previous fiscal year.

Among the advantages of being the holder of secured bond is that if the issuer files for bankruptcy, you A) will receive your principal plus all unpaid interest B) are paid ahead of holders of unsecured debt, as well as equity securities C) are paid ahead of everyone, except past-due wages to employees D) are sure to recover 100% of your investment

B) are paid ahead of holders of unsecured debt, as well as equity securities Secured bondholders are on the top of the list of creditors. The first priority for unsecured claims is that of employees and taxes.​ Even with a secured claim, there is no assurance that you will receive all your money back (think of the "short sales" on homes not long ago where the bank accepted less than the mortgage amount because the value of the home had fallen so far).

Components of a company's net worth would include all of these except A) fixed assets. B) operating income. C) inventory. D) goodwill.

B) operating income. Net worth is all of the company's assets minus its liabilities as found on the balance sheet. Operating income is found on the income statement and is neither an asset nor a liability.

If the value of the U.S. dollar were to increase with respect to other currencies, it would do which of these? I. Make U.S. exports, like heavy equipment, more competitive in foreign markets II. Make U.S. exports, like heavy equipment, less competitive in foreign markets Make foreign imports into the United States, such as cars, less competitive in U.S. markets Make foreign imports into the United States, such as cars, more competitive in U.S. markets A) II and III B) I and IV C) II and IV D) I and III

C) II and IV When the value of the U.S. dollar rises in relation to other currencies, exported products become more expensive in those foreign markets and are less competitive. On the other hand, imported products become less expensive in U.S. markets and are more competitive.

Prior to the opening of the securities markets, KAPCO Chemical Corporation reports quarterly earnings per share of $1.50, exceeding analysts' estimates by more than 10%. By the end of the trading session, KAPCO's stock price has fallen by 5%. This would be an example of A) regulatory risk B) opportunity cost C) market risk D) financial risk

C) market risk Market risk is the uncertainty that a stock's price will move in a manner unrelated to the company's fundamentals. A prime example of this is when earnings go one way and the stock price goes the other. What we are not told in the question is the performance of the stock market. It is likely that the overall market has declined over this period. Financial risk is, as the name indicates, related to financing circumstances. The most common financial risk is when excess leverage has been employed. Another financial risk is lack of cash flow, but nothing in this question indicates that situation.

If the U.S. dollar has fallen relative to foreign currencies, which of the following statements are true? I. U.S. exports are likely to rise. II. U.S. exports are likely to fall. III. Foreign currencies buy fewer U.S. dollars. IV. Foreign currencies buy more U.S. dollars. A) II and III B) I and III C) II and IV D) I and IV

D) I and IV When the U.S. dollar loses value compared to a foreign currency, the same amount of the foreign currency now buys more dollars. As a result, U.S. goods are cheaper in terms of that foreign currency, which means that the foreign country and its residents tend to buy more U.S. products and U.S. exports rise.

The issuance of a long-term debt instrument, such as a bond, by a company would have an immediate effect on which of the following balance sheet items? I. Total assets II. Total liabilities III. Working capital IV. Shareholders' equity A) I, III, and IV B) I, II, and IV C) II, III, and IV D) I, II, and III

D) I, II, and III The cash received from the sale of the bonds is a current asset of the company and, as such, would increase assets and working capital on the balance sheet. The bonds are debt of the company and would increase the liabilities of the company. Shareholders' equity is only affected by gains, losses, new invested capital, and the declaration of cash distributions (dividends) to shareholders.

Which items change when a company pays a cash dividend? I. Working capital II. Total assets III. Total liabilities IV. Shareholders' equity A) II, III, and IV B) I, II, and III C) I and IV D) II and III

D) II and III From an accounting standpoint, once a corporation declares a cash dividend, it becomes a current liability on the company's balance sheet. When that dividend is paid, cash—a current asset—is decreased by the amount of the dividend. Payment of the dividend removes it from the balance sheet as a current liability. Therefore, there is no change to the company's working capital (current assets minus current liabilities) because they are both reduced by the same amount. The total assets (of which cash is one) and the total liabilities (of which the dividend payable is one) both decrease. Because assets and liabilities are changed by an identical amount, there is no change to shareholders' equity (net worth).

An economic condition where the rate of price increases reaches a stable equilibrium and stays there until a shock to the system occurs—at which time, the rate of inflation changes—is known as A) stagflation. B) price controls. C) inertial inflation. D) stagnation.

C) intertial inflation This is a definition of inertial inflation. Just like it sometimes takes a shock to get people moving (lack of inertia), it can require a shock to move the economy. It is unlikely that any of the other terms shown here will appear as a correct answer on your exam.

A commentator on a cable news show mentions that the capital structure of the Lowveh Corporation is highly leveraged. This means that the company A) has very little default risk. B) is in arrears on its cumulative preferred stock dividends. C) has significant long-term debt. D) has issued employee stock options.

C) has significant long-term debt. When describing a corporation's capital structure, leverage refers to the amount of long-term debt capital. Highly leveraged means the debt capital is generally more than 50% of the total capital and increases rather than decreases the default risk. Employee stock options and preferred stock dividends have nothing to do with leverage.

If, during a given year, a company has net income of $1 million and pays out dividends of $800,000, its retained earnings will A) increase by $1 million. B) decrease by $1 million. C) increase by $200,000. D) decrease by $200,000.

C) increase by $200,000. Retained earnings represent the net income a company has retained and not paid out in dividends. If a company has net income of $1 million and pays out only $800,000 in dividends, its retained earnings will increase by $200,000.

Which items would change if a company declared a cash dividend? I. Working capital II. Total assets III. Total liabilities IV. Shareholders' equity A) I, III, and IV B) I, II, III, and IV C) I only D) I and IV

A) I, III, and IV The key word is declared. Liabilities increase when a dividend is declared, and total assets decrease when it is paid. A declared dividend (but not yet paid) would increase current liabilities (and would therefore decrease working capital). It would increase total liabilities (this is a pending obligation) and reduce shareholders' equity because retained earnings would be decreased by the dividend. Total assets would not be affected until the dividend is actually paid.

All of the following appear on a corporation's balance sheet as fixed assets except A) inventory. B) real estate. C) furniture. D) computer equipment.

A) Inventory Inventory is considered a current asset, not a fixed asset, because the company expects to convert its inventory into cash within a short period. The other choices are fixed assets, and the company does not expect to turn them into cash (sell them) during the normal business cycle.

Which of the following would not be considered a defensive security? A) Steel company stock B) Food chain stock C) Utility company stock D) Tobacco stock

A) Steel company stock Steel is cyclical and is not considered defensive; defensive stocks are generally less affected by the business cycle.

A fixed-income investor notices that the short, intermediate, and long ends of the yield curve reflect a similar return. This would be typical of A) a flat yield curve. B) a normal yield curve. C) a positive yield curve. D) an inverted yield curve.

A) a flat yield curve. If you were to plot this curve, what would it look like? It would be a flat line because, regardless of the maturities, all of the yields are the same. In an inverted (or negative) yield curve, the short end of the curve has higher yields than the long end. A normal (or positive) yield curve slopes upward, with lower yields at the short end and higher yields at the long end.

The issuer-specific component of the variability in a stock's total return that is unrelated to overall market variability is known as A) unsystematic risk. B) fundamental risk. C) systematic risk. D) nondiversifiable risk.

A) unsystematic risk. Unsystematic risk is unique to a single security, business, industry, or country and may be reduced by diversification. Systematic risk is related to the overall market or economy and is not diversifiable.

An investor has bonds maturing in three weeks on the first day of the upcoming month. Since his purchase of the bonds five years ago, interest rates have fallen. To which one these risks are these bonds most likely to be subject? A) Default risk B) Reinvestment risk C) Interest rate risk D) Purchasing power risk

B) Reinvestment risk Reinvestment risk is the risk associated with reinvesting interest and/or principal payments when interest rates have fallen. On the upcoming maturity date, the investor will receive the par value of the bonds plus the final interest payment. When looking to reinvest the proceeds, it will be at current market interest rates which, as the question states, are lower than what the bonds had been paying.

An expansionary fiscal policy would usually result in A) a government decreasing government spending to slow down economic activity. B) a government increasing government spending to stimulate economic activity. C) a government increasing taxes in the economy. D) a government operating a balanced budget.

B) a government increasing government spending to stimulate economic activity. An expansionary fiscal policy is one that is deliberately implemented to boost demand. Increased spending would be an expansionary policy.

An investor using yield curve analysis would expect to view bonds of A) varying quality of similar maturities. B) a single issuer over varying maturities. C) varying quality over a number of maturities. D) similar quality over varying maturities.

B) a single issuer over varying maturities. The most common yield curves are drawn using U.S. Treasury securities. The curve is plotted using maturities ranging from the short-term T-bills to the long bonds. There are other curves drawn with bonds from other sectors, such as corporate bonds, to show the yield spread, but that is going beyond the scope of this question.

A client's portfolio consists of holdings in long-term U.S. Treasury bonds and Treasury notes. Of least concern to this investor would be A) purchasing power risk B) credit risk C) market risk D) interest rate risk

B) credit risk Securities issued by the U.S. Treasury are, at least for exam purposes, free of default or credit risk, but, as with all fixed-income securities, are subject to interest rate risk and inflation or purchasing power risk. Any marketable security is subject to market risk.

Debts that will come due more than one year after the date on the balance sheet are known as A) deferred charges. B) fixed (or long-term) liabilities. C) current liabilities. D) accounts payable.

B) fixed (or long-term) liabilities. Debts that will come due more than one year after the date on the balance sheet are known as fixed (or long-term) liabilities. Current liabilities are debts that may come due within one year from the date on the balance sheet.

An example of systematic rather than unsystematic risk is A) political risk. B) purchasing power risk. C) financial risk. D) tenure risk.

B) purchasing power risk. Unsystematic risk, also known as diversifiable risk, affects only a particular company, country, or sector and its securities. Purchasing power risk is an example of systematic risk that affects the certainty of returns associated with any investment—most particularly, fixed income. Political and financial risk would be considered unsystematic and there is no formal classification known as tenure risk, although some mutual funds whose advisers have a short tenure, might be considered to have that kind of risk. If that were to be considered, it would still be an unsystematic risk.

An analyst wishing to check on the most recent financial performance of an SEC-registered issuer would probably examine the A) Schedule 13D. B) Form 8-K. C) Form 10-Q. D) Form 10-K.

C) Form 10-Q Financial reporting is done on Forms 10-K and 10-Q: the former annually and the latter quarterly. Therefore, unless it is shortly after the end of the company's fiscal year, the most recent information is going to be on Form 10-Q. For test-taking purposes, note that the question uses the term probably. With three Form 10-Qs filed each year and only one Form 10-K filed yearly, the probability is higher that Form 10-Q will be the most recent one available. The moral of this story is that you don't look for exceptions unless that is what the question is aiming for.

All the pundits are predicting bad times ahead—not only a recession but a period where prices actually fall (deflation). If they are right, the best place for your client would probably be A) common stock. B) real estate. C) U.S. Treasury securities. D) gold.

C) U.S. Treasury securities. It is times like this that the flight to safety has investors commit their funds to U.S. government securities. Gold (and other commodities) tends to increase in price during inflationary, not deflationary, periods. Both real estate and equities tend to rise when things are good, not during recessions.

If an economist were to describe defensive issues, he would probably not include companies that produce A) clothing. B) tobacco products. C) building materials. D) food products.

C) building materials. Defensive issues are issues that are defensive against a downturn in the economy. Building materials are usually susceptible to downturns when the economy is bad.

An analyst wishing to view a good consolidated indicator of a business's cash inflow and outflow would most likely ask to look at A) the current ratio. B) the consolidated income statement. C) the statement of cash flows. D) the working capital.

C) the statement of cash flows. Cash flow is the money (cash) that flows into and out of a business. It consolidates the flow of money from operating activities, investing activities, and financing activities. Working capital and current ratio are indicators of current liquidity and in the income statement reflect only income and expenses. Items such as the cash received from the issuance of securities (stocks or bonds) or a loan from a bank do not appear.

Due to changes in customer preferences, a manufacturing company has decided to discontinue the operations of one of its subsidiaries. An explanation of this decision would most likely be found in the company's A) tax return. B) income statement. C) balance sheet. D) footnotes to the financial statements.

D) footnotes to the financial statements. Footnotes are used to explain extraordinary items such as the sale of a subsidiary.

A corporate executive decides that it is in the company's best interest to purchase a yacht. Over the years, the company has built up substantial retained earnings and will use accumulated funds to make the purchase. An analyst interested in how this purchase will affect the company's debt-to-asset ratio would examine A) the statement of cash flows. B) the seaworthiness of the ship. C) the income statement. D) the balance sheet.

D) the balance sheet. Where do we find a company's assets, liabilities, and retained earnings? On the balance sheet.

A recession is defined as a drop in GDP for A) six consecutive quarters. B) four consecutive quarters. C) three consecutive quarters. D) two consecutive quarters.

D) two consecutive quarters. A recession is a drop in GDP for two consecutive quarters.

Which of these is a definition of inflation? A) An increase in purchasing power B) A decrease in the value of the monetary unit C) A decrease in consumer demand D) An increase in the value of the dollar

B) A decrease in the value of the monetary unit We tend to think solely in terms of our dollar, but inflation can occur worldwide and leads to a decrease in the purchasing power (or value) of the monetary unit in use in any particular jurisdiction. Inflation is commonly caused by increased consumer demand, not a decrease.

Increases in which of the following indicators are regarded as predictors of the level of business activity? A) Corporate profits B) Building permits C) Personal incomes D) Levels of inventories

B) Building Permits Increases in building permits are indicative of increased future business activity and therefore are considered a leading economic indicator. Increases in personal income reflect current, not future, activity and are therefore considered a coincident indicator. Increases in inventories indicate that goods are not being sold in anticipated quantities, so they function as a disincentive to manufacturing. Buildup in inventories is a lagging economic indicator. Corporate profits are not included in the Conference Board's list of economic indicators.

The Conference Board releases information about the economy on a periodic basis. Included are a number of different indicators. These indicators can be used to predict how the economy as a whole might change. Which of the following would be considered a leading indicator? A) CPI for services B) Stock prices as measured by a broad index such as the S&P 500 C) Industrial production D) Gross domestic product

B) Stock prices as measured by a broad index such as the S&P 500 The stock market, which anticipates economy activity, is a leading economic indicator. Industrial production is a coincident, or current, economic indicator. The CPI for services is a lagging indicator. GDP is not included in the Conference Board's list of economic indicators.

An analyst uses a stock selection method that involves analyzing a specific corporation, followed by evaluating where it fits in its industry and then viewing the overall economy. The term that best describes this method is A) top-down. B) bottom-up. C) efficient frontier. D) capital asset pricing model.

B) bottom-up. The bottom-up method of stock selection goes from micro to macro—that is, identifying the specific company and then working up through the overall economy. It is the opposite of top-down.

When the value of the U.S. dollar decreases, A) foreign manufacturers will likely export more to the United States. B) domestic manufacturers will likely increase their exports. C) domestic manufacturers will likely increase their imports. D) domestic manufactures will likely not be affected.

B) domestic manufacturers will likely increase their exports. When the U.S. dollar decreases against other currencies, foreign goods become more expensive. On the other hand, domestically produced goods are cheaper for those buying with foreign currencies, so we can expect the exporting of goods made in the United States to increase.

An investor has a majority of his portfolio in an ETF that mirrors the S&P 500. If the investor decided to liquidate that position and reinvest the proceeds into a single NYSE-listed common stock, it would most likely lead to an increase to the investor's A) liquidity risk B) interest rate risk C) business risk D) purchasing power risk

C) business risk Business risk is a nonsystematic (unsystematic) risk—one that diversification can mitigate. That is a benefit of owning an index like the S&P 500. However, when an investor is invested largely in a single security, if that company fails, so does the entire portfolio. LO 19.b

Inflation causes people living on a fixed income to have A) unlimited resources. B) reduced systematic risk. C) declining purchasing power. D) fewer financial problems.

C) declining purchasing power. Inflation means rising prices for goods and services. Someone on a fixed income in a time of rising prices have reduced purchasing power. This is known as purchasing power or inflation risk. It generally helps to remember the acronym PRIME representing the five tested systematic risks: Purchasing power; Reinvestment; Interest rate; Market; Exchange rate.

The risk to bondholders that bonds may lose value during periods of increasing inflation is known as A) reinvestment risk B) marketability risk C) interest rate risk D) credit risk

C) interest rate risk Interest rate risk is the risk that as interest rates rise, bond prices fall. Periods of inflation are accompanied by rising interest rates. Another risk in this scenario, but not an answer choice, is purchasing power risk; each semiannual interest payment has less purchasing power due to inflation, and, of course, the purchasing power of the principal at maturity will be far less as well.

The business cycle has expanded, peaked, and contracted. The current economic activity could best be described as a trough. Which of the following would most likely be found in the trough? I. A high rate of inflation II. A low rate of inflation III. A high rate of unemployment IV. A low rate of unemployment A) I and III B) II and IV C) I and IV D) II and III

D) II and III A trough is the latter stage of a recession. Unemployment is higher than normal, and with a lesser demand for goods and services, the inflation rate is low.

Which items change when a company pays a cash dividend? I. Working capital II. Total assets III. Total liabilities IV. Shareholders' equity A) II, III, and IV B) I and IV C) I, II, and III D) II and III

D) II and III From an accounting standpoint, once a corporation declares a cash dividend, it becomes a current liability on the company's balance sheet. When that dividend is paid, cash—a current asset—is decreased by the amount of the dividend. Payment of the dividend removes it from the balance sheet as a current liability. Therefore, there is no change to the company's working capital (current assets minus current liabilities) because they are both reduced by the same amount. The total assets (of which cash is one) and the total liabilities (of which the dividend payable is one) both decrease. Because assets and liabilities are changed by an identical amount, there is no change to shareholders' equity (net worth).

Due to changes in market rates, a corporation is able to purchase some of its outstanding 20-year bonds at a discount. Which of the following is correct? I. Working capital is increased. II. Working capital is reduced. III. Net worth is increased. IV. Net worth is reduced. A) II and IV B) II and III C) I and IV D) I and III

B) II and III Even though the bonds are purchased for less than par value, working capital is reduced because the company is using a current asset—cash—to pay off a long-term liability. However, the fact that it is reducing its debt for less than the amount shown on the books will result in an increase to net worth.

All of the following corporate actions would have the effect of increasing the firm's net worth except A) issuing convertible preferred stock. B) purchasing some of the corporation's outstanding bonds at a discount. C) issuing convertible debentures. D) issuing common stock.

C) issuing convertible debentures Issuing a debt security, such as a debenture, will bring in cash (an asset) but will be offset by an equal amount: the debt. Therefore, the net worth will remain the same. Issuing any equity security, preferred or common, increases the owners' equity (net worth). Being able to pay off a debt at a discount means that the current asset (cash) went down less than the long-term liability (the bond), resulting in an increase to net worth.

An investor regularly reads financial blogs on the internet, and they are filled with articles suggesting that the economy is headed for a slump. Some are even saying that there will be price deflation. If these projections are accurate, the best place for the investor to place funds would probably be A) common stock. B) U.S. Treasury bonds. C) gold. D) commercial real estate.

B) US Treasury Bonds When the economy is headed downward, safety is the imperative, and nothing is as safe (at least for exam purposes) as U.S. Treasuries. Gold and most other commodities are a hedge against inflation, not deflation. In down times, real estate—both residential and commercial—usually underperforms.

On October 15, 2008, the Dow Jones Industrial Average lost 733 points, the largest single point drop in its history. After the markets closed on Tuesday, October 14th, ABC Manufacturing Company released its 3rd quarter operating results with earnings that surpassed all estimates. However, by the close of the market on October 15th, the price of the stock was down 15 points. This is an example of A) beta B) systematic risk C) business risk D) opportunity cost

B) systematic risk Systematic risk (market risk) is the danger that a specific stock's price will be driven by factors largely independent of its issuer such as a severe market plunge​. Business risk is unique to each business entity. Beta is a measure of a stock's volatility relative to the overall market. Opportunity cost refers to the return given up in order to invest in another instrument or project.

The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is A) reported as a separate line item on the balance sheet. B) the net change in the cash position of the firm for the reporting period. C) reported as cash income on the income statement. D) an integral part of the footnotes to the balance sheet required by generally accepted accounting principles.

B) the net change in the cash position of the firm for the reporting period. The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is the net change in the cash position of the firm for the reporting period. The sum total, or the net change in cash, is not reported on either the balance sheet or the income statement. It is the sum total of the entries on the statement of cash flows, which is a separate financial statement.

The research department of an investment advisory firm forecasts that the current business cycle should reach its peak within the next two months. Under such circumstances, which of the following portfolio adjustments would be most suitable for the firm's customers who actively invest in common stocks? A) Aggressive growth stocks B) Defensive stocks C) Corporate bonds D) Cyclical stocks

B) Defensive stocks The concept of sector rotation involves moving assets from those sectors that are close to their peak and into those sectors that will benefit from the next move in the business cycle. Defensive stocks—such as food, pharmaceuticals, and public utilities—would most likely be suitable for investors who believe the cycle is near its peak. Defensive stocks are least likely to be affected by a reversal in the business cycle.

Which of the statements below best describes why a normal yield curve is positively sloped? A) Short-term bonds generally fluctuate in price more than long-term bonds. B) Investors logically demand higher returns from government securities than they do from corporate securities. C) Investors demand higher interest when lending their money for longer periods. D) Stocks generally have lower yields than bonds, although their total returns may be higher.

C) Investors demand higher interest when lending their money for longer periods. When the yield curve is positively sloped (and thus normal), long-term bonds carry higher interest rates than short-term bonds of the same quality.

Which of the following would constitute political risk that might affect a security? A) A bad decision by the company's CEO B) A strike by the union representing the company's employees C) New tariffs are levied against the company's major product D) New environment regulations

C) New tariffs are levied against the company's major product ​Political risk involves political activities, and of the choices given, the only one that is the result of actions by a political body is the decision to raise tariffs. A strike has nothing to do with politics (theoretically), and environmental regulations create regulatory risk.

One of the best sources of financial information is found in the reports required to be filed with the SEC by publicly traded companies. The easiest way to access this information is by A) using EDGAR. B) making an appointment to meet with the company's CFO. C) writing a letter to the company. D) visiting the SEC's offices.

A) using EDGAR EDGAR stands for Electronic Data Gathering, Analysis, and Retrieval. It is the easiest (and surely the fastest) way to obtain all of the financial information filed by reporting companies. It is available at SEC.gov.

Proponents of the concept of inflation inertia believe that A) prices will rise rapidly and then begin to contract. B) prices will remain the same for a protracted period of time. C) the rate of inflation will parallel the Consumer Price Index. D) prices will rise slowly and then begin to increase at a faster rate.

D) prices will rise slowly and then begin to increase at a faster rate. The concept of inflation inertia is that prices will rise slowly during an initial period of inflation and then begin to pick up steam as a result of some economic shock.

Some prominent stock market pundits are predicting that the economy will slide into a recession in the near future. Furthermore, they are expecting moderate deflation during the same period. If this were to happen, your clients would probably enjoy the greatest overall return from investing in A) real estate. B) U.S. Treasury bonds. C) common stock. D) commodities.

B) U.S. Treasury bonds. The combination of recession and deflation leads us to a security with the highest safety. The other three choices tend to rise with inflation and, therefore, are often thought of as inflation hedges. However, deflation is the opposite; you'd want to be in fixed investments because their purchasing power will increase.

If, during a given year, a company has net income of $1 million and pays out dividends of $800,000, its retained earnings will A) increase by $1 million. B) increase by $200,000. C) decrease by $200,000. D) decrease by $1 million.

B) increase by $200,000. Retained earnings represent the net income a company has retained and not paid out in dividends. If a company has net income of $1 million and pays out only $800,000 in dividends, its retained earnings will increase by $200,000.

Individuals are faced with choices every day. Sometimes the choices we make result in a favorable outcome while some choices don't. When it comes to investing, an investor who, when presented with several investment options, selects one that ultimately provides the poorest returns has encountered which risk? A) Liquidity risk B) Opportunity cost C) Market risk D) Business risk

B) Opportunity cost Opportunity cost is the risk that making the wrong choice will provide lower returns. Investors can choose a risk-free investment (91-day T-bill) or some new tech stock promising enormous returns. If that tech stock turns out to be a bust, the investor will have lost the opportunity of a sure-thing (the return on the T-bill). The question doesn't give us enough information about the investment choices to know whether any of these other risks were pertinent.

When a company recognizes a sale only when payment is made, it is using which form of accounting? A) Accrual B) Audited C) Cash D) Double entry

C) Cash Cash and accrual are the two major forms of accounting. In the cash method, sales and expenses are recognized when the money changes hands. With accrual accounting, the date of the transaction is used.

When a member of the board of directors of a publicly traded company resigns due to a disagreement over an operational matter, A) Form 10-K must be filed with the SEC within four business days of the event. B) Form 8-K must be filed with the SEC within four business days of the event. C) the administrator must be notified no later than the close of the business day following the event. D) FINRA must be notified promptly.

B) Form 8-K must be filed with the SEC within four business days of the event. Form 8-K is used to report significant events of importance to investors. Examples would be the resignation of a member of the board because of an operational dispute, liquidation of a significant asset, filing for bankruptcy, or a change in management control. When any of these occur, Form 8-K must be filed with the SEC no later than four business days after the event. Form 10-K is the company's annual filing, and that is due—depending on the size of the company—60 to 90 days after the end of the fiscal year.

Over time, a country's trade deficit will lead to a decline in the value of its currency because A) domestic goods will become too expensive for foreigners to buy. B) the country's imports will exceed exports, creating selling pressure on its currency. C) the money supply will decrease. D) the country's exports will exceed its imports.

B) the country's imports will exceed exports, creating selling pressure on its currency. When a country's imports exceed its exports, a trade deficit will occur. This causes selling pressure on the country's currency, therefore lowering its exchange rate against other currencies. When a country's currency declines in price relative to other currencies, exports tend to increase over time because they become less expensive in terms of foreign currency, thus reversing the trade deficit.

A common measurement used to evaluate attitudes regarding future economic conditions is the difference in yields between U.S. Treasury bonds and corporate bonds. This is known as A) a business cycle. B) a yield curve. C) the Consumer Price Index. D) a yield spread.

D) a yield spread Many analysts compare the difference between yields on bonds with the same maturity but different quality (rating) to get a sense of the market sentiment. A common example of that is comparing the difference between the yield on a U.S. Treasury bond and a highly rated corporate bond. When investor sentiment is positive, the extra safety of the Treasury security is not considered as valuable, so the spread is narrow. When there is "gloom and doom" ahead, investors flock to the safety of the Treasury, causing the spread to widen. This spread is found by comparing the yield curves, but that doesn't answer the specific question, which is dealing with the difference, and a difference in this industry is called a spread.