Finance Exam Prep
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 classified as a tangible fixed asset? a. Cash b. Accounts Receivable c. Patent d. Production Equipment e. Inventory
d
Which one of the following parties has ultimate control of a corporation? a. Board of Directors b. Chief operating office c. Chief Executive Officer d. Shareholders e. Chairman of the board
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 terms is defined as the management of a firm's long-term investments? a. working capital management b. financial allocation c. agency cost analysis d. capital budgeting e. capital structure
d
A business owned by a solitary individual who has unlimited liability for its debt is called a: a. Limited Liability Company b. Corporation c. Limited Partnership d. General Partnership e. Sole Proprietorship
e
A firm has net working capital of $560. Long-term debt is $3,970, total assets are $7,390, and fixed assets are $3,910. What is the amount of the total liabilities? a. $4,130 b. $7,950 c. $2,050 d. $2,920 e. $6,890
e
A stakeholder is: a. a person who owns shares of stock. b. any person who has voting rights based on stock ownership of a corporation. c. a person who initially founded a firm and currently has management control over that firm. d. a creditor to whom a firm currently owes money. e. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.
e
Decisions made by financial managers should primarily focus on increasing which one of the following? a. Total sales b. Size of a firm c. Growth rate of the firm d. Gross profit per unit produced e. Market value per share of outstanding stock
e
Noncash items refer to: a. The ownership of intangible assets such as patents. b. Sales which are made using store credit. c. Accrued expenses. d. Expenses which do not directly affect cash flows. e. Inventory items purchased using credit.
e
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? a. joint stock company b. corporation c. sole proprietorship d. general partnership e. limited partnership
e
The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate. a. mean b. residual c. total d. average e. marginal
e
Which form of business structure is most associated with agency problems? a. sole proprietorship b. limited partnership c. limited liability company d. general partnership e. corporation
e
Which of the following should a financial manager consider when analyzing a capital budgeting project? I. Project start-up costs. II. Timing of all projected cash flows. III. Dependability of future cash flows. IV. Dollar amount of each projected cash flow. a. I and IV only b. I, II, and IV only c. I, II, and III only d. II, III, and IV only e. I, II, III, and IV
e
Which of the following should a financial manager consider when analyzing a capital budgeting project? I. project start up costs II. timing of all projected cash flows III. dependability of future cash flows IV. dollar amount of each projected cash flow a. I and IV only b. I, II, and IV only c. I, II, and III only d. II, III, and IV only e. I, II, III, and IV
e
Which one of the following is a working capital management decision? a. Determining the number of shares of stock to issue to fund an acquisition. b. Determining the amount of long-term debt required to complete a project. c. Determining whether or not a project should be accepted. d. Determining the amount of equipment needed to complete a job. e. Determining whether to pay cash for a purchase or use the credit offered
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 concerning a sole proprietorship is correct? a. The life of a sole proprietorship is potentially unlimited. b. A sole proprietor can generally raise large sums of capital quite easily. c. Transferring ownership of a sole proprietorship is easier than transferring ownership of a corporation. d. A sole proprietorship is taxed the same as a C corporation. e. It is easy to create a sole proprietorship.
e
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. Because this will increase the current dividends per share. c. Doing so increases employee salaries. d. Because managers often receive shares of stock as part of their compensation. e. Because they have been hired to represent the interests of the current shareholders.
e
You are investing $100 today in a savings account at your local bank. Which one of the following terms refers to the value of this investment one year from now? a. Invested principal b. Present value c. Principal amounts d. Discounted value e. Future value
e
A perpetuity is defined as: a. a limited number of equal payments paid in even time increments. b. unending equal payments paid at equal time intervals. c. unending equal payments paid at either equal or unequal time intervals. d. payments of equal amounts that are paid irregularly but indefinitely.
b
A project has a net present value of zero. Given this information: a. the project has no cash flows b. the project's cash inflows equal its cash outflows in current dollar terms. c. the project has a zero percent rate of return. d. the summation of all of the project's cash flows is zero.
b
According to the statement of cash flows, an increase in inventory will _____ the cash flow from _____ activities. a. increase, investment b. decrease, operating c. increase, financing d. increase, operating e. decrease, financing
b
Al invested $7,200 in an account that pays 4 percent simple interest. How much money will he have at the end of five years? a. $8,299 b. $8,640 c. $8,056 d. $8,678 e. $8,710
b
Cullen invested $5,000 five years ago and earns 6 percent annual interest. By leaving his interest earnings in her account, he increases the amount of interest he earns each year. His investment is best described as benefitting from: a. simplifying b. compounding c. aggregating d. discounting
b
Hayley won a lottery and will receive $1,000 each year for the next 30 years. The current value of these winnings is called the: a. Single Amount b. Present Value c. Future value d. Compound interest
b
Kurt won a lottery and will receive $1,000 a year for the next 50 years. The value of his winnings today discounted at his discount rate is called which one of the following? a. Compounded value b. Present value c. Simple amount d. Future value e. Single amount
b
Madelyn is calculating the present value of a bonus she will receive next year. The process she is using is called: a. Growth analysis b. Discounting c. Accumulating d. Compounding
b
Public offerings of debt and equity must be registered with which one of the following? a. Market Dealers Exchange b. Securities Exchange Commission c. NYSE Registration Office d. New York Board of Governors e. Federal Reserve
b
Sophia and Mallory are the same age. At age 25, Sophia invests $6,000 at 7 percent, compounded annually. At age 30, Mallory invests $6,000 at 7 percent, compounded annually. All else constant, when they both reach age 60: a. Sophia will have less money when she retires than Mallory. b. Sophia will have more money than Mallory. c. Mallory will earn more interest on interest than Sophia. d. Mallory will earn more compound interest than Sophia.
b
The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles? a. Underlying Value Principle b. Stand Alone Principle c. Equivalent Cost Principle d. Salvage Principal
b
The length of time a firm must wait to recoup the money it has invested in a project is called the: a. internal return period. b. payback period. c. profitability period. d. discounted cash period.
b
The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following? a. Erosion Cost b. Opportunity Cost c. Variable Cost d. Incremental Cost
b
The sources and uses of cash over a stated period of time are reflected on the: a. Tax Reconciliation Statement b. Statement of Cash Flows c. Balance Sheet d. Income Statement e. Statement of Operating Position
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, III, and IV only e. II, III, and IV only
b
Which of the following represent cash outflows from a corporation? I. Issuance of securities. II. Payment of dividends. III. New loan proceeds. IV. Payment of government taxes. a. II, III, and IV only b. II and IV only c. I and III only d. I and IV only e. I, II, and IV only
b
Which of the following represent cash outflows from a corporation? I. issuance of securities II. payment of dividends III. new loan proceeds IV. payment of government taxes a. I and III only b. II and IV only c. I and IV only d. I, II, and IV only e. II, III, and IV only
b
Which one of the following best describes the primary advantage of being a limited partner instead of a general partner? a. Active participation in the firm's activities. b. Maximum loss limited to the capital invested. c. Tax-free income. d. No potential financial loss. e. Greater control over the business affairs of the partnership.
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 an example of a sunk cost? a. $2,000 in lost sales because an item was out of stock b. $2,000 paid last year to rent equipment c. $2,000 reduction in Product A revenue if a firm commences selling Product B d. $2,000 project that must be forfeited if another project is accepted
b
Which one of the following statements concerning a sole proprietorship is correct? a. Transferring ownership of a sole proprietorship is easier than transferring ownership of a corporation. b. It is easy to create a sole proprietorship. c. A sole proprietorship is taxed the same as a C corporation. d. The life of a sole proprietorship is potentially unlimited. e. A sole proprietor can generally raise large sums of capital quite easily.
b
Which type of business organization has all the respective rights and privileges of a legal person? a. sole proprietorship b. corporation c. limited liability company d. limited partnership e. general partnership
b
You invested $6,500 in an account that pays 6 percent simple interest. How much more could you have earned over a 10-year period if the interest had compounded annually? a. $930.11 b. $1,240.51 c. $1,049.22 d. $1,182.19 e. $1,201.15
b
A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a: a. corporation. b. sole proprietorship. c. general partnership. d. limited partnership. e. limited liability company.
c
A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a: a. generally partner. b. sole proprietor. c. limited partner. d. corporate shareholder. e. zero partner.
c
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. Accumulation b. Simplifying c. Compounding d. Discounting e. Aggregation
c
Eunchae invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning? a. Free interest b. Complex Interest c. Simple Interest d. Interest on Interest
c
Pro forma financial statements can best be described as financial statements: a. expressed in a foreign currency. b. that express the assets as a percentage of total assets, and the costs as a percentage of sales. c. that state projected values for future time periods. d. expressed in real dollars, given a stated base year.
c
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 a. I and II only b. III and IV only c. I, III, and IV only d. II, III, and IV only e. I, II, III, and IV
c
Which of the following are advantages of the payback method of project analysis? a. Considers time value of money; liquidity bias b. Liquidity bias; subjective cutoff point c. Liquidity bias; ease of use d. Ignores time value of money; ease of use
c
Which of the following is (are) included in the market value of a firm but is (are) excluded from the firm's book value? I. Value of management skills. II. Value of a copyright. III. Value of the firm's reputation. IV. Value of employee's experience. a. III and IV only b. I, II, and III only c. I, III, and IV only d. I only e. II only
c
Which one of the following best describes the concept of erosion? a. Expenses that have already been incurred and cannot be recovered b. change in net working capital related to implementing a new project c. The cash flows of a new project that come at the expense of a firm's existing cash flows d. The alternative that is forfeited when a fixed asset is utilized by a project
c
Which one of the following business types is best suited to raising large amounts of capital? a. sole proprietorship b. limited liability company c. corporation d. general partnership e. limited partnership
c
Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? a. Income Statement b. Statement of Cash Flows c. Balance Sheet d. Creditor's Statement e. Dividend Statement
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 is correct? a. The majority of firms in the U.S. are structured as corporations. b. Corporate profits are taxable income to the shareholders when earned. c. Corporations can raise large amounts of capital generally easier than partnerships can. d. Stockholders face no potential losses related to their corporate investment. e. Corporate shareholders elect the corporate president.
c
Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers? a. articles of incorporation b. corporate breakdown c. agency problem d. bylaws e. legal liability
c
Which one of these sets forth the common set of standards and procedures by which audited financial statements are prepared? a. The Matching Principle. b. The Cash Flow Identity. c. Generally Accepted Accounting Principles. d. Financial Accounting Reporting Principles. e. Standard Accounting Value Guidelines.
c
Why is payback often used as the sole method of analyzing a proposed small project? a. Payback considers the time value of money. b. All relevant cash flows are included in the payback analysis. c. The benefits of payback analysis usually outweigh the costs of the analysis. d. Payback is focused on the long-term impact of a project.
c
Winston Industries had sales of $843,800 and costs of $609,900. The firm paid $38,200 in interest and $18,000 in dividends. It also increased retained earnings by $62,138 for the year. The depreciation was $76,400. What is the average tax rate? a. 38.17% b. 33.33% c. 32.83% d. 48.87% e. 43.39%
c
Depreciation Expense increases net income True or False
False
Which one of the following functions should be the responsibility of the controller rather than the treasurer? a. Payments to a vendor b. Daily Cash Deposits c. Equipment purchase analysis d. Income Tax Returns e. Customer credit approval
d
A business created as a distinct legal entity and treated as a legal "person" is called a: a. corporation. b. sole proprietorship. c. general partnership. d. limited partnership. e. unlimited liability company.
a
A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a: a. Limited Partner b. Sole Proprietor c. General Partner d. Zero Partner e. Corporate Shareholder
a
A general partner: a. Is personally responsible for all the partnership debts. b. Receives a salary in lieu of a portion of the profits. c. Has no say over a firm's daily operations. d. Faces double taxation whereas a limited partner does not. e. Has a maximum loss equal to his or her equity investment.
a
According to the statement of cash flows, an increase in interest expense will _____ the cash flow from _____ activities. a. decrease, operating b. increase, operating c. increase, investment d. increase, financing e. decrease, financing
a
An ordinary annuity is best defined as: a. equal payments paid at the end of regular intervals over a stated time period. b. equal payments paid at the beginning of regular intervals for a limited time period. c. equal payments that occur at set intervals for an unlimited period of time. d. increasing payments paid forever.
a
Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true? a. Barb will earn more interest the second year than Andy. b. Andy will earn compound interest. c. Andy will earn more interest in year three than Barb will. d. Barb will earn more interest the first year than Andy will. e. After five years, Andy and Barb will both have earned the same amount of interest.
a
Assume you are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now? a. Future Value b. Present Value c. Principal Amount d. Discounted Amount
a
Depreciation for a tax-paying firm: a. Increases expenses and lowers taxes. b. Decreases net fixed assets, net income, and operating cash flows. c. Reduces both the net fixed assets and the costs of a firm. d. Increases the net fixed assets as shown on the balance sheet. e. Is a noncash expense that increases the net income.
a
Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios. a. Profitability b. Turnover c. Asset management d. Short-term solvency e. Long-term solvency
a
Renee invested $2,000 six years ago at 4.5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $2,000 investment. Which type of interest is she earning? a. Simple interest b. Complex interest c. Compound interest d. Free interest e. Interest on interest
a
The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's: a. incremental cash flow b. internal cash flow c. external cash flow d. erosion
a
The interest rate that is most commonly quoted by a lender is referred to as the: a. Annual percentage rate b. Compound rate c. Effective Annual Rate d. Simple Rate
a
Which one of the following actions will increase the present value of an amount to be received sometime in the future? a. Increase in the discount rate b. Decrease in the future value c. Decrease in the interest rate d. Decrease in both the future value and the number of time periods
a
Which one of the following is defined as a firm's short-term assets and its short-term liabilities? a. working capital b. debt c. investment capital d. net capital e. capital structure
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 repor
a
Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? a. Net present value b. Discounted payback c. Internal rate of return d. Payback
a
Which one of the following types of costs was incurred in the past and cannot be recouped? a. Sunk b. Variable c. Incremental d. Total
a
An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values. a. Increase in the cash ratio b. Decrease in the cash coverage ratio c. Increase in the current ratio d. Decrease in the quick ratio e. Increase in the net working capital to total assets ratio
d
Andrew just calculated the present value of a $15,000 bonus he will receive next year. The interest rate he used in his calculation is referred to as the: a. effective rate b. compound rate c. simple rate d. discount rate
d
Corporate bylaws: a. Define the name by which the firm will operate. b. Cannot be amended once adopted. c. Must be amended should a firm decide to increase the number of shares authorized. d. Determine how a corporation regulates itself. e. Describe the intended life and purpose of the organization.
d
Decisions made by financial managers should primarily focus on increasing which one of the following? a. size of the firm b. growth rate of the firm c. gross profit per unit produced d. market value per share of outstanding stock e. total sales
d
Jared invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as: a. free interest b. bonus income c. simple interest d. interest on interest
d
Net working capital is defined as: a. Total assets minus total liabilities. b. Fixed assets minus long-term liabilities. c. Current liabilities minus shareholders' equity. d. Current assets minus current liabilities. e. Total liabilities minus shareholders' equity.
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 _____ tax rate is equal to total taxes divided by total taxable income. a. deductible b. residual c. total d. average e. marginal
d
The growth of both sole proprietorships and partnerships is frequently limited by their: a. Double Taxation b. Limited liability c. Bylaws d. Inability to raise cash e. Organizational articles
d
The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? a. Sunk b. Total c. Variable d. Incremental
d
Which of the following accounts are included in working capital management? I. Accounts Payable II. Accounts Receivable III. Fixed Assets IV. Inventory a. I and II only b. I and III only c. II, and IV only d. I, II, and IV only e. II, III, and IV
d
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. a. II, III, and IV only b. I, II, III and IV c. III and IV only d. I, III, and IV only e. I and II only
d
Which of the following are included in current liabilities? I. Note payable to a supplier in 13 months. II. Amount due from a customer last week. III. Account payable to a supplier that is due next week. IV. Loan payable to the bank in 10 months. a. I and III only b. I, II, and III only c. I, III, and IV only d. III and IV only e. I, II, III, and IV
d
Which one of the following accounts is the most liquid? a. Equipment b. Inventory c. Building d. Accounts Receivable e. Land
d