ECON 391 Practice Questions

Which type of business organization has all the respective rights and privileges of a legal person?

Corporation

Operating Cash Flow form

=Net income + Depreciation +Changes in working capital

Cash flow to Creditors formula

=beginning total liabilities - ending total liabilities + interest paid

Earnings per Share formula

=profits minus dividends/ #number of shares outstanding

Which of the following accounts are included in working capital management? I. Accounts Payable II. Accounts Receivable III. Fixed Assets IV. Inventory

I, II, and IV only.

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.

I, III, and IV only.

Which one of the following statements is correct?

Income from both sole proprietorships and partnerships is taxed as individual income.

Which one of the following functions should be the responsibility of the controller rather than the treasurer?

Income tax returns.

Depreciation for a tax-paying firm:

Increases expenses and lowers taxes.

Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction:

Was facilitated in the secondary market.

Sally and Alicia currently are general partners in a business located in Atlanta, Georgia. They are content with their current tax situation but are both very uncomfortable with the unlimited liability to which they are each subjected. Which form of business entity should they consider to replace their general partnership assuming they wish to remain the only two owners of their business? Whichever organization they select, they wish to be treated equally.

Limited liability company.

Which one of the following characteristics applies to a limited liability company?

Taxed similar to a partnership.

Which of the following parties are considered stakeholders of a firm? I. Employee II. Long-term creditor III. Government IV. Common stockholder

1 and 3

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?

Agency problem.

A stakeholder is:

Any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.

Why should financial managers strive to maximize the current value per share of the existing stock?

Because they have been hired to represent the interests of the current shareholders.

Nielsen Auto Parts had beginning net fixed assets of $218,470 and ending net fixed assets of $209,411. During the year, assets with a combined book value of $6,943 were sold. Depreciation for the year was $42,822. What is the amount of net capital spending?

Capital Spending= Ending net fixed assets - Beginning net fixed assets Depreciation

Which one of the following terms is defined as the management of a firm's long-term investments?

Capital budgeting.

The decision to issue additional shares of stock is an example of which one of the following?

Capital structure decision.

Which one of the following parties has ultimate control of a corporation?

Shareholders.

The cash flow of a firm that is available for distribution to the firm's creditors and stockholders is called the:

Cash flow from assets.

A business owned by a solitary individual who has unlimited liability for its debt is called a:

Sole proprietorship.

Which one of the following is a capital budgeting decision?

Deciding whether or not to purchase a new machine for the production line.

Corporate bylaws:

Determine how a corporation regulates itself.

Teddy's Pillows has beginning net fixed assets of $462 and ending net fixed assets of $532. Assets valued at $310 were sold during the year. Depreciation was $24. What is the amount of net capital spending?

End + Depr = 532 + 24 = 556 Begin - sold = 462-310 = 152 556 - 152 = 404 purchases Net capital spending = purchases - sales = 404 - 310 = $94

A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:

General partnership

A limited partnership:

Has a greater ability to raise capital than a sole proprietorship.

Which of the following are current assets? I. Cash II. Trademark III. Accounts receivable IV. Notes payable

I and III only.

Net working capital is defined as:

Current assets minus current liabilities.

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.

I and III only.

Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Alfredo will be involved as an active consultant and manager and will also contribute funds. Sam and Alfredo are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt?

Limited partnership.

Which one of the following best states the primary goal of financial management?

Maximize the current value per share.

Which term relates to the cash flow that results from a firm's ongoing, normal business activities?

Operating cash flow.

Which one of the following is a primary market transaction?

Sale of a new share of stock to an individual investor.

Public offerings of debt and equity must be registered with which one of the following?

Securities and Exchange Commission.