1

For a tax-paying firm, an increase in _____ will cause the cash flow from assets to increase. A. Depreciation. B. Net capital spending. C. Change in net working capital. D. Taxes. E. Production costs.

A

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? A. Income statement. B. Balance sheet. C. Statement of cash flows. D. Tax reconciliation statement. E. Market value report.

A

Which of the following are advantages of the corporate form of business ownership? I. Limited liability for firm debt. II. Double taxation. III. Ability to raise capital. IV. Unlimited firm life.

C

Which one of the following accounts is the most liquid? A. Inventory. B. Building. C. Accounts Receivable. D. Equipment. E. Land.

C

Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment? A. Amortized loan. B. Modified loan. C. Balloon loan. D. Pure discount loan. E. Interest-only loan.

E

A positive cash flow to stockholders indicates which one of the following with certainty? A. The dividends paid exceeded the net new equity raised. B. The amount of the sale of common stock exceeded the amount of dividends paid. C. No dividends were distributed, but new shares of stock were sold. D. Both the cash flow to assets and the cash flow to creditors must be negative. E. Both the cash flow to assets and the cash flow to creditors must be positive.

A

Amortized loans must have which one of these characteristics? A. Either equal or unequal principal payments over the life of the loan. B. One lump-sum principal payment. C. Increasing payments over the life of the loan. D. Equal interest payments over the life of the loan. E. Declining periodic payments.

A

Depreciation for a tax-paying firm: A. Increases expenses and lowers taxes. B. Increases the net fixed assets as shown on the balance sheet. C. Reduces both the net fixed assets and the costs of a firm. D. Is a noncash expense that increases the net income. E. Decreases net fixed assets, net income, and operating cash flows.

A

The articles of incorporation: I. Describe the purpose of the firm. II. Are amended periodically. III. Set forth the number of shares of stock that can be issued. IV. Detail the method that will be used to elect corporate directors. A. I and III only. B. I and IV only. C. II and III only. D. II and IV only. E. I, III, and IV only.

A

The higher the degree of financial leverage employed by a firm is, the: A. Higher is the probability that the firm will encounter financial distress. B. Lower is the amount of debt incurred. C. Less debt a firm has per dollar of total assets. D. Higher is the number of outstanding shares of stock. E. Lower is the balance in accounts payable.

A

Which of the following are results related to the enactment of the Sarbanes-Oxley Act of 2002? I. Increased foreign stock exchange listings of U.S. stocks. II. Decreased compliance costs. III. Increased privatization of public corporations. IV. Increased public disclosure by all corporations. A. I and III only. B. II and IV only. C. I, II, and III only. D. II, III, and IV only. E. I, III, and IV only.

A

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at year 5 and an annual percentage rate of 10 percent? A. Annual. B. Semiannual. C. Monthly. D. Daily. E. Continuous.

A

An amortized loan: A. Requires the principal amount to be repaid in even increments over the life of the loan. B. May have equal or increasing amounts applied to the principal from each loan payment. C. Requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term. D. Requires that all payments be equal in amount and include both principal and interest. E. Repays both the principal and the interest in one lump sum at the end of the loan term.

B

Christina invested $3,000 five years ago and earns 2 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following? A. Simplifying. B. Compounding. C. Aggregation. D. Accumulation. E. Discounting.

B

Net capital spending: A. Is equal to ending net fixed assets minus beginning net fixed assets. B. Is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense. C. Reflects the net changes in total assets over a stated period of time. D. Is equivalent to the cash flow from assets minus the operating cash flow minus the change in net working capital. E. Is equal to the net change in the current accounts.

B

The book value of a firm is: A. Equivalent to the firm's market value provided that the firm has some fixed assets. B. Based on historical cost. C. Generally greater than the market value when fixed assets are included. D. More of a financial than an accounting valuation. E. Adjusted to the market value whenever the market value exceeds the stated book value.

B

Which of the following are current assets? I. Cash II. Trademark III. Accounts receivable IV. Notes payable A. II and III only. B. I and III only. C. I, II, and IV only. D. I, II, and IV only. E. II, III, and IV only.

B

Which one of the following functions should be the responsibility of the controller rather than the treasurer? A. Daily cash deposit. B. Income tax returns. C. Equipment purchase analysis. D. Customer credit approval. E. Payment to a vendor.

B

Which one of the following is a capital budgeting decision? A. Determining how many shares of stock to issue. B. Deciding whether or not to purchase a new machine for the production line. C. Deciding how to refinance a debt issue that is maturing. D. Determining how much inventory to keep on hand. E. Determining how much money should be kept in the checking account.

B

Which one of the following is classified as a tangible fixed asset? A. Accounts receivable. B. Production equipment. C. Cash. D. Patent. E. Inventory.

B

Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value? A. Real estate investment. B. Good reputation of the company. C. Equipment owned by the firm. D. Money due from a customer. E. An item held by the firm for future sale.

B

Which one of the following is true according to generally accepted accounting principles? A. Depreciation is recorded based on the market value principle. B. Income is recorded based on the realization principle. C. Costs are recorded based on the realization principle. D. Depreciation is recorded based on the recognition principle. E. Costs of goods sold are recorded based on the matching principle.

B

Which one of the following statements is correct concerning a corporation with taxable income of $125,000? A. Net income minus dividends paid will equal the ending retained earnings for the year. B. An increase in depreciation will increase the operating cash flow. C. Net income divided by the number of shares outstanding will equal the dividends per share. D. Interest paid will be included in both net income and operating cash flow. E. An increase in the tax rate will increase both net income and operating cash flow.

B

Which one of the following statements related to liquidity is correct? A. Liquid assets tend to earn a high rate of return. B. Liquid assets are valuable to a firm. C. Liquid assets are defined as assets that can be sold quickly regardless of the price obtained. D. Inventory is more liquid than accounts receivable because inventory is tangible. E. Any asset that can be sold is considered liquid.

B

Which one of the following statements related to loan interest rates is correct? A. The annual percentage rate considers the compounding of interest. B. When comparing loans you should compare the effective annual rates. C. Lenders are most apt to quote the effective annual rate. D. Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate. E. The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate.

B

You need $25,000 today and have decided to take out a loan at 7 percent for five years. Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis. A. Interest-only loan. B. Amortized loan with equal principal payments. C. Amortized loan with equal loan payments. D. Discount loan. E. Balloon loan where 50 percent of the principal is repaid as a balloon payment.

B

Your credit card charges you 1.5 percent interest per month. This rate when multiplied by 12 is called the: A. Effective annual rate. B. Annual percentage rate. C. Periodic interest rate. D. Compound interest rate. E. Period interest rate.

B

Your grandmother has promised to give you $10,000 when you graduate from college. She is expecting you to graduate three years from now. What happens to the present value of this gift if you speed up your graduation by one year and graduate two years from now? A. Remains constant. B. Increases. C. Decreases. D. Becomes negative. E. Cannot be determined from the information provided.

B

17. Which one of the following statements concerning interest rates is correct? A. Savers would prefer annual compounding over monthly compounding given the same annual percentage rate. B. The effective annual rate decreases as the number of compounding periods per year increases. C. The effective annual rate equals the annual percentage rate when interest is compounded annually. D. Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. E. For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

C

A firm which opts to "go dark" in response to the Sarbanes-Oxley Act: A. Must continue to provide audited financial statements to the public. B. Must continue to provide a detailed list of internal control deficiencies on an annual basis. C. Can provide less information to its shareholders than it did prior to "going dark.". D. Can continue publicly trading its stock but only on the exchange on which it was previously listed. E. Ceases to exist.

C

An ordinary annuity is best defined by which one of the following? A. Increasing payments paid for a definitive period of time. B. Increasing payments paid forever. C. Equal payments paid at the end of regular intervals over a stated time period. D. Equal payments paid at the beginning of regular intervals for a limited time period. E. Equal payments that occur at set intervals for an unlimited period of time.

C

As of 2015, which one of the following statements concerning corporate income taxes is correct? A. The largest corporations have an average tax rate of 39 percent. B. The lowest marginal rate is 25 percent. C. A firm's tax is computed on an incremental basis. D. A firm's marginal tax rate will generally be lower than its average tax rate once the firm's income exceeds $50,000. E. When analyzing a new project, the average tax rate should be used.

C

How is the principal amount of an interest-only loan repaid? A. The principal is forgiven over the loan period; thus it does not have to be repaid. B. The principal is repaid in decreasing increments and included in each loan payment. C. The principal is repaid in one lump sum at the end of the loan period. D. The principal is repaid in equal annual payments. E. The principal is repaid in increasing increments through regular monthly payments.

C

Which of the following parties are considered stakeholders of a firm? I. Employee II. Long-term creditor III. Government IV. Common stockholder A. I only. B. IV only. C. I and III only. D. II and IV only. E. II, III, and IV only.

C

Which one of the following is an unintended result of the Sarbanes-Oxley Act? A. More detailed and accurate financial reporting. B. Increased management awareness of internal controls. C. Corporations delisting from major exchanges. D. Increased responsibility for corporate officers. E. Identification of internal control weaknesses.

C

Which one of the following statements concerning a sole proprietorship is correct? A. A sole proprietorship is designed to protect the personal assets of the owner. B. The profits of a sole proprietorship are subject to double taxation. C. The owner of a sole proprietorship is personally responsible for all of the company's debts. D. There are very few sole proprietorships remaining in the U.S. today. E. A sole proprietorship is structured the same as a limited liability company.

C

Which one of the following statements concerning net working capital is correct? A. The lower the value of net working capital is, the greater is the ability of a firm to meet its current obligations. B. An increase in net working capital must also increase current assets. C. Net working capital increases when inventory is sold for cash at a profit. D. Firms with equal amounts of net working capital are also equally liquid. E. Net working capital is a part of the operating cash flow.

C

Which one of the following statements related to an income statement is correct? Assume accrual accounting is used. A. The addition to retained earnings is equal to net income plus dividends paid. B. Credit sales are recorded on the income statement when the cash from the sale is collected. C. The labor costs for producing a product are expensed when the product is sold. D. Interest is a non-cash expense. E. Depreciation increases the marginal tax rate.

C

Which one of the following statements related to the cash flow to creditors is correct? A. If the cash flow to creditors is positive, then the firm must have borrowed more money than it repaid. B. If the cash flow to creditors is negative, then the firm must have a negative cash flow from assets. C. A positive cash flow to creditors represents a net cash outflow from the firm. D. A positive cash flow to creditors means that a firm has increased its long-term debt. E. If the cash flow to creditors is zero, then a firm has no long-term debt.

C

Which one of the following terms is defined as a loan wherein the regular payments, including both interest and principal amounts, are insufficient to retire the entire loan amount, which then must be repaid in one lump sum? A. Amortized loan. B. Continuing loan. C. Balloon loan. D. Pure discount loan. E. Interest-only loan.

C

Which one of the following will increase the cash flow from assets, all else equal? A. Decrease in cash flow to stockholders. B. Decrease in operating cash flow. C. Decrease in the change in net working capital. D. Decrease in cash flow to creditors. E. Increase in net capital spending.

C

Why should financial managers strive to maximize the current value per share of the existing stock? A. Doing so guarantees the company will grow in size at the maximum possible rate. B. Doing so increases employee salaries. C. Because they have been hired to represent the interests of the current shareholders. D. Because this will increase the current dividends per share. E. Because managers often receive shares of stock as part of their compensation.

C

You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. A. Both options are of equal value since they both provide $12,000 of income. B. Option A has the higher future value at the end of year three. C. Option B has a higher present value at time zero. D. Option B is a perpetuity. E. Option A is an annuity.

C

A limited partnership: A. Has an unlimited life. B. Can opt to be taxed as a corporation. C. Terminates at the death of any limited partner. D. Has a greater ability to raise capital than a sole proprietorship. E. Consists solely of limited partners.

D

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan. A. Amortized. B. Continuous. C. Balloon. D. Pure discount. E. Interest-only.

D

An increase in the depreciation expense will do which of the following for a firm with taxable income of $80,000? I. Increase net income. II. Decrease net income. III. Increase the cash flow from assets. IV. Decrease the cash flow from assets. A. I only. B. II only. C. I and III only. D. II and III only. E. II and IV only.

D

Financial managers should primarily focus on the interests of: A. Stakeholders. B. The vice president of finance. C. Their immediate supervisor. D. Shareholders. E. The board of directors.

D

Noncash items refer to: A. Accrued expenses. B. Inventory items purchased using credit. C. The ownership of intangible assets such as patents. D. Expenses which do not directly affect cash flows. E. Sales which are made using store credit.

D

The cash flow of a firm that is available for distribution to the firm's creditors and stockholders is called the: A. Operating cash flow. B. Net capital spending. C. Net working capital. D. Cash flow from assets. E. Cash flow to stockholders.

D

The entire repayment of which one of the following loans is computed simply by computing one single future value? A. Interest-only loan. B. Balloon loan. C. Amortized loan. D. Pure discount loan. E. Bullet loan.

D

What is the relationship between present value and future value interest factors? A. The present value and future value factors are equal to each other. B. The present value factor is the exponent of the future value factor. C. The future value factor is the exponent of the present value factor. D. The factors are reciprocals of each other. E. There is no relationship between these two factors.

D

Which of the following are expenses for accounting purposes but are not operating cash flows for financial purposes? I. Interest expense. II. Taxes. III. Cost of goods sold. IV. Depreciation. A. IV only. B. II and IV only. C. I and III only. D. I and IV only. E. I, II, and IV only.

D

Which of these will increase the present value of an amount to be received sometime in the future? A. Increase in the time until the amount is received. B. Increase in the discount rate. C. Decrease in the future value. D. Decrease in the interest rate. E. Decrease in both the future value and the number of time periods.

D

Which one of the following is NOT included in cash flow from assets? A. Accounts payable. B. Inventory. C. Sales. D. Interest expense. E. Cash account.

D

Which one of the following is a capital structure decision? A. Determining which one of two projects to accept. B. Determining how to allocate investment funds to multiple projects. C. Determining the amount of funds needed to finance customer purchases of a new product. D. Determining how much debt should be assumed to fund a project. E. Determining how much inventory will be needed to support a project.

D

Which one of the following is an agency cost? A. Accepting an investment opportunity that will add value to the firm. B. Increasing the quarterly dividend. C. Investing in a new project that creates firm value. D. Hiring outside accountants to audit the company's financial statements. E. Closing a division of the firm that is operating at a loss.

D

Which one of the following must be true if a firm had a negative cash flow from assets? A. The firm borrowed money. B. The firm acquired new fixed assets. C. The firm had a net loss for the period. D. The firm utilized outside funding. E. Newly issued shares of stock were sold.

D

Which one of the following statements concerning net working capital is correct? A. Net working capital increases when inventory is purchased with cash. B. Net working capital excludes inventory. C. Total assets must increase if net working capital increases. D. Net working capital may be a negative value. E. Net working capital is the amount of cash a firm currently has available for spending.

D

Which one of the following statements concerning stock exchanges is correct? A. NASDAQ is a broker market. B. The NYSE is a dealer market. C. The exchange with the strictest listing requirements is NASDAQ. D. Some large companies are listed on NASDAQ. E. Most debt securities are traded on the NYSE.

D

Which one of the following statements is generally correct? A. Private placements must be registered with the SEC. B. All secondary markets are auction markets. C. Dealer markets have a physical trading floor. D. Auction markets match buy and sell orders. E. Dealers arrange trades but never own the securities traded.

D

Which one of the following variables is the exponent in the present value formula? A. Present value B. Future value C. Interest rate D. Number of time periods E. There is no exponent in the present value formula.

D

Corporate dividends are: A. Tax-free income because they represent a repayment of the cost to purchase corporate shares. B. Not taxed as shareholders pay taxes on corporate income when it is earned. C. Tax-free since the corporation pays tax on that income when it is earned. D. Taxed at both the corporate and the personal level when the dividends are paid. E. Taxable as personal income when received by shareholders even though that income was taxed at the corporate level.

E

Shareholders' equity: A. Is referred to as a firm's financial leverage. B. Is equal to total assets plus total liabilities. C. Decreases whenever new shares of stock are issued. D. Includes patents, preferred stock, and common stock. E. Represents the residual value of a firm.

E

The cash flow related to interest payments less any net new borrowing is called the: A. Operating cash flow. B. Capital spending cash flow. C. Net working capital. D. Cash flow from assets. E. Cash flow to creditors.

E

Which one of the following parties has ultimate control of a corporation? A. Chairman of the board. B. Board of directors. C. Chief executive officer. D. Chief operating office. E. Shareholders.

E

Which one of the following statements correctly defines a time value of money relationship? A. Time and future values are inversely related, all else held constant. B. Interest rates and time are positively related, all else held constant. C. An increase in a positive discount rate increases the present value. D. An increase in time increases the future value given a zero rate of interest. E. Time and present value are inversely related, all else held constant.

E

Which one of the following statements related to taxes is correct? A. The marginal tax rate must be equal to or lower than the average tax rate for a firm. B. The tax for a firm is computed by multiplying the firm's current marginal tax rate times the taxable income. C. Additional income is taxed at a firm's average tax rate. D. Given the tax structure in 2014, the highest average corporate tax rate is 34 percent. E. The marginal tax rate for a firm can be either higher than or the same as the average tax rate.

E

Which one of the following will decrease the value of a firm's net working capital? A. Using cash to pay a supplier. B. Depreciating an asset. C. Collecting an accounts receivable. D. Purchasing inventory on credit. E. Selling inventory at a loss.

E

Which one of these statements related to growing annuities and perpetuities is correct? A. You can compute the present value of a growing annuity but not a growing perpetuity. B. In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate. C. The future value of an annuity will decrease if the growth rate is increased. D. An increase in the rate of growth will decrease the present value of an annuity. E. The present value of a growing perpetuity will decrease if the discount rate is increased.

E

You are considering two projects with the following cash flows: Project X Project Y Year 1 $8,500 $7,000 Year 2 8,000 7,500 Year 3 7,500 8,000 Year 4 7,000 8,500 Which one of the following statements is true concerning these two projects given a positive discount rate? A. Both projects have the same future value at the end of Year 4. B. Both projects have the same value at Time 0. C. Both projects are ordinary annuities. D. Project Y has a higher present value than Project X. E. Project X has both a higher present and a higher future value than Project Y.

E