Test 1 Pearson Q's
Gross profit is calculated as:
Total sales - cost of sales
Do corporate decisions that increase the value of the firm's equity benefit society as a whole?
Yes, as long as the increase in the value of the firm's equity does not come at the expense of others
Which of the following organization forms accounts for the most revenue?
"C" corporation
U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?
10K
What is the most important difference between a corporation and all other organization forms?
A corporation is a legal entity separate from its owners.
Which of the following adjustments is NOT correct if you are trying to calculate cash flow from financing activities? A) Add dividends paid B) Add any increase in long term borrowing C) Add any increase in short-term borrowing D) Add proceeds from the sale of stock
A) Add dividends paid
If Moon Corporation has depreciation or amortization expense, which of the following is TRUE? A) Its EBITDA /Interest Coverage ratio will be greater than its EBIT/Interest Coverage ratio. B) Its EBITDA /Interest Coverage ratio will be less than its EBIT/Interest Coverage ratio. C) Its EBITDA /Interest Coverage ratio will be equal to its EBIT/Interest Coverage ratio . D) Not enough information to answer the question.
A) Its EBITDA /Interest Coverage ratio will be greater than its EBIT/Interest Coverage ratio
What are the main advantages and disadvantages of organizing a firm as a corporation?
A. Advantages: Limited liability, liquidity, infinite life. Your answer is correct. B. Disadvantages: Double taxation, separation of ownership and control.
Which organization forms give their owners limited liability?
A. Corporations and limited liability companies give owners limited liability. Your answer is correct. B. Limited partnerships provide limited liability for the limited partners, but not for the general partners.
Explain the difference between an S corporation and a C corporation.
A. S corporations are limited to 100 shareholders and cannot have corporate or foreign stockholders. Your answer is correct. B. C corporations must pay corporate income taxes; S corporations do not pay corporate taxes but must pass through the income to shareholders to whom it is taxable.
You are the CEO of a company and you are considering entering into an agreement to have your company buy another company. You think the price might be too high, but you will be the CEO of the combined, much larger company. You know that when the company gets bigger, your pay and prestige will increase. What is the nature of the agency conflict here and how is it related to ethical considerations?
A. There is an ethical dilemma when the CEO of a firm has incentives that are opposite to those of the shareholders. D. In this case, you (as the CEO) have an incentive to potentially overpay for another company (which would be damaging to your shareholders) because your pay and prestige will improve.
Which of the following is (are) deducted from EBIT to determine net income?
Both Interest expense and Corporate taxes
Which of the following adjustments to net income is NOT correct if you are trying to calculate cash flow from operating activities? A) Add increases in accounts payable B) Add back depreciation C) Add increases in accounts receivable D) Deduct increases in inventory
C) Add increases in accounts receivable
Ensuring that your company has the necessary funds to make investments, pay interest on loans, and pay your employees. This is a(n)
Cash management decision
Which of the following statements regarding the income statement is INCORRECT?
The income statement shows the cash flows and expenses at a given point in time.
Which of the following is/ are an advantage of incorporation? A) Access to capital markets B) Limited liability C) Unlimited life D) ALL OF THE ABOVE
D) ALL OF THE ABOVE
Which of the following statements regarding perpetuities is FALSE? A. To find the value of a perpetuity one cash flow at a time would take forever B. One example of a perpetuity is the British government bond called a consol. C. A perpetuity is a stream of equal cash flows that occurs at regular intervals and lasts forever. D. PV of a perpetuity = r/c
D. PV of a perpetuity = r/c
Throughout the 1990s, interest rates in Japan were lower than interest rates in the United States. As a result, many Japanese investors were tempted to borrow in Japan and invest the proceeds in the United States. Which of the following explains why this strategy does not represent an abritrage opportunity?
Engaging in such transactions may incur a loss if the value of the dollar falls relative to the yen. Because a profit is not guaranteed, this strategy is not an arbitrage opportunity
Determining how to fund your iPhone application investments and what mix of debt and equity your company will have. This is a(n)
Financing decision
Which of the following statements is FALSE? A. Because a corporation is a separate legal entity, when it fails to repay its debts, the debt holders are entitled to seize the assets of the corporation in compensation for the default. B. If the corporation fails to satisfy debt holders' claims, debt holders may lose control of the firm. C. As long as the corporation can satisfy the claims of the debt holders, ownership remains in the hands of the equity holders. D. In bankruptcy, management must negotiate with debt holders for the opportunity to reorganise the firm and stay in business.
If the corporation fails to satisfy debt holders' claims, debt holders may lose control of the firm
Which of the following is (are) deducted from EBIT to determine pretax income?
Interest expense
Determining which type of iPhone application projects will offer your company a positive net present value, and therefore are the types of projects your company should develop. This is a(n)
Investment decision
A limited liability company is essentially:
a limited partnership without a general partner
You overhear your manager saying that she plans to book an Ocean-view room on her upcoming trip to Miami for a meeting. You know that the interior rooms are much less expensive, but that your manager is traveling at the Company's expense. This use of additional funds comes about as a result of
an agency problem
Dustin's Donuts experienced a decrease in the value of the trademark of a company it acquired two years ago. This reduction in value results in:
an impairment charge
Which of the following is not an advantage of a sole proprietorship? a. It offers more flexibility than a partnership or corporation. b. It provides limited liability. c. It is easier and less costly to start than any other kind of business. d. The proprietor has the right to receive all of the profits.
b. It provides limited liability.
An investment is said to be liquid if the investment:
can easily be converted into cash
Accounts payable is a:
current liability
The statement of financial performance is also known as the:
income statement
The firm's revenues and expenses over a period of time are reported on the firm's:
income statement or statement of financial performance.
a sole proprietorship is owned by:
one person
If shareholders are unhappy with a CEO's performance, they are most likely to
sell their shares
the largest stock market in the world by market capitalization is
the New York Stock Exchange
By evaluating cost and benefits using competitive market prices, we can determine whether a decision will make the firm and its investors wealthier. This central concept is called:
the Valuation Principle.
The person charged with running the corporation by instituting the rules and policies set by the board of directors is called:
the chief executive officer
If we use future value rather than present value to decide whether to make an investment:
we will make the same decision using either future value or present value
If you buy shares of Coca-Cola on the secondary market:
you buy the shares from another investor who decided to sell the shares
What does the phrase limited liability mean in a corporate context?
- Owners' liability is limited to the amount they invested in the firm. - Stockholders are not responsible for any encumbrances of the firm; in particular, they cannot be required to pay back any debts incurred by the firm.
