Chapter 1 LS Questions
The conflict of interest between an agent and principal is called a(n) ___.
Agency Problem
The owners of a corporation are called ___.
Shareholders
A ___ is someone other than an owner or a creditor who potentially has a claim of the cash flows of a firm.
Stakeholder
___ are frequently used to encourage key managers to maximize the value of the firm's stock.
Stock Options
Which of the following show why a corporation is the most important form of business?
A corporation is a separate legal entity with the ability to acquire and exchange properties. Corporations can sue and be sued. Corporations can enter into contracts.
Which of the following are true of a sole proprietorship?
A proprietorship has a limited life. It is the simplest type of business to form.
The cost incurred due to a conflict of interest between stockholders and management are called ___.
Agency Costs
An organization must prepare ___ and bylaws when forming a corporation.
Articles of Incorporation
Which of the following can be used to encourage managers to act in the best interest of the shareholders?
Better prospects of promotions. Managerial compensation tied to performance. Stock options and bonuses.
The rules used by a corporation to regulate its existence are known as ___.
Bylaws
Which term applies to the mixture of debt and equity maintained by a firm?
Capital Structure
In large firms, financial activity is usually associated with which top officer?
Chief Financial Officer
The Sarbanes-Oxley Act requires corporate officers to do which of the following?
Confirm the validity of the annual financial report Accept responsibility for material errors in the annual report List any deficiencies in internal controls.
What are the two basic classifications under which most potential financial goals fall?
Controlling Risk Earning or increasing profits
The federal government taxes which of the following?
Corporate earnings and shareholder dividends.
Which of the following is included in working capital?
Current (short-term) assets Accounts Payable Accounts Receivable
Some of the cash flow generated by a firm goes back to the financial markets in the form of
Dividends and debt payments
A general partnership has which of the following characteristics?
Each owner has unlimited liability for all firm debts. It is difficult to transfer ownership.
The controller is responsible for which of the following tasks?
Financial Accounting Tax Reporting
In a large corporation, the financial manager is primarily responsible for:
Financing decisions Long-term investment decisions Financial aspects of operations. such as collections of account receivables
Which of the following are considered stakeholders in a company?
Government Suppliers Employees
A good financial decision will do which of the following?
Increase the value of the firm's existing stock. Increase market value of shareholder's equity.
Corporations in other countries are often called:
Joint stock companies Public Limited Companies
In a limited partnership, a limited partner's liability for a business debts is ___.
Limited to their cash contributions to the partnership.
Capital budgeting is concerned with planning and managing a firm's _____.
Long-term Investments
The financial goal or profit maximization is associated with which of the following?
Maintenance Deferment Critical Inventory Reduction Cost-cutting
A treasurer's responsibilities typically include:
Making financial plans Managing capital expenditure decisions Handling cash flows
Since ___ and ownership are separated, a corporation's life is unlimited.
Management
Since ownership in a corporation can be dispersed over a huge number of stockholders, it can be argued that ___ effectively controls the firm.
Management
In a shareholder-manager relationship, who is the agent?
Manager (Shareholders are the principals, managers are the agents)
The goal of a for-profit business is to ___ existing owner's equity.
Maximize
A sole proprietorship is a business owned by ___ person(s).
One
Indirect agency costs are often due to lost ___.
Opportunities
Most equity shares of large firms in the US trade on ___.
Organized auction markets
How is ownership transferred in a corporation?
Ownership is transferred by gifting or selling shares of stock
A business without separate legal authority formed by two or more people is known as a ___.
Partnership
A limited liability company is taxed like a ___ and its owners have ___ liability.
Partnership : Limited
Which of the following are important when considering a partnership?
Personal liability for firm debts. Fund raising limitations Taxation of partnership income
When a corporation raises funds in the financial markets, the transaction occurs on the ___.
Primary market
Which one of these provides a manager an incentive to perform well?
Promotions
Which one of these is important mechanism used by unhappy stockholders to replace current management?
Proxy fight
Because shareholders get paid last after all other obligations are satisfied, they are often called:
Residual Owners
When one owner or creditor sells to another, the transaction takes place in the ___ market.
Secondary
A corporation receives cash from financial markets by selling ___ and ___.
Stocks Bonds
When a corporation is formed, it is granted which of the following rights?
The ability to issue stock. State citizenship for jurisdictional purposes. Legal power to sue.
The liability of a shareholder in a corporation is limited to which of these?
The amount the shareholder invested in the corporation.
Which one of these motivates managers to make good decisions?
Threat of a hostile takeover.
What is the main goal of financial management?
To maximize shareholder wealth
Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?
Tyco Enron WorldCom
Which of the following are among the most important questions to be asked when a business is started?
Where will long-term financing be obtained to pay for investments? What long-term investments should be made? How will everyday financial activities be handled?