FIN 780 exam 1 chapter 1 concept review
What are the two questions to be asked in ascertaining how effective managers will be in advocating for stockholders' best interests?
-Can managers be replaced if they do not pursue stockholder goals? -How closely are management goals aligned with stockholder goals?
Which of the following show why a corporation is the most important form of business?
-Corporations can sue and be sued. -A corporation is a separate legal entity with the ability to acquire and exchange property. -Corporations can enter into contracts.
A general partnership has which of the following characteristics?
-Each owner has unlimited liability for all firm debts -It is difficult to transfer ownership
Which of the following are considered non-owner stakeholders in a company?
-Government -Employees -Suppliers
A good financial decision will do which of the following?
-Increase the value of the firm's existing stock -Increase market value of shareholders' equity
When a corporation is formed, it is granted which of the following rights?
-Legal powers to sue -provincial citizenship for jurisdictional purposes -The ability to issue stock
Which of the following can be used to encourage managers to act in the best interests of shareholders?
-Monitoring through reports -The threat of termination -Stock options and bonuses -Managerial compensation tied to performance
Which of the following is true concerning government regulation?
-Regulation can help reduce conflicts of interest between managers and shareholders. -Regulation can help ensure firms disclose relevant information to investors. -Regulation can be costly to a firm.
Which of the following statements are true about shareholders' equity?
-Shareholders' equity is the difference between the value of a firm's assets and its debt. -Shareholders' equity is a residual claim on a firm's
Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?
-WorldCom -Tyco -Enron
Regulation is meant to:
-reduce conflicts of interest -improve corporate governance
What must an organization prepare to start a corporation?
-set of bylaws -articles of incorporation
Why would it not make sense for a firm to set financial goals like "maximize profits" or "minimize costs"?
A sole focus on items like this may lead to ignoring what is in the stockholders' long-term best interests.
Which of the following is an example of a current liability?
Accounts payable
Which of the following are examples of current assets?
Cash and Inventory
In large firms, financial activity is usually associated with which top officer?
Cheif financial officer
What determines when a sale is recorded for accounting purposes?
Generally accepted accounting principles
In a shareholder-manager relationship, who is the agent?
Managers
How is ownership transferred in a corporation?
Ownership is transferred by gifting or selling shares of stock.
What happens when a firm creates value?
Shareholder wealth increases.
When would individuals prefer to receive cash flows?
Sooner rather than later
______ are frequently used to encourage key managers to maximize the value of the firm's stock.
Stock options
A shareholder's liability is limited to which of these?
The amount the shareholder invested in the corporation
What is the primary purpose of awarding stock options to managers?
To give managers the incentive to pursue shareholders' goals, such as, increasing shareholder value
What is the fundamental goal of the Sarbanes-Oxley Act of 2002?
To protect investors from corporate abuse
Shareholders' equity is the difference between which of the following?
Total assets and total debt
True or False: The goal of financial management is to maximize the current value (per share) of the existing stock.
True
A manager who does a good job in pursuing stockholder goals will be able to get ______ in the job market than one who is ineffective.
a higher salary
The costs incurred due to a conflict of interest between stockholders and management are called ______ costs.
agency
The relationship between stockholders and management can best be described as a(n) ______ relationship.
agency
The owners of a firm wish to make a risky investment with upside, as the value of the stock may go up. Management wants to avoid this investment, as there is significant risk, and jobs may be lost as a result. This is an example of an
agency costs
An organization must prepare ______ and bylaws when forming a corporation.
articles of incorporation
Some of the cash flow sent from the financial markets to the firm in the form of stock purchases is then used to invest in:
assets
The left side of a balance sheet shows a firm's current and fixed ______.
assets
A firm's balance sheet shows a snapshot of the firm's finances ______.
at a single point in time
The rules used by a corporation to regulate its existence are known as _________.
bylaws
the_____ is the most important form of business, as it is a distinct legal entity.
corporation
The corporation comprises shareholders, directors, and:
corporation officers
A bad financial decision is defined as a decision that ______ owners' equity.
decreases
Some of the cash flow generated by a firm goes back to the financial markets in the form of ______.
dividends and debt payments.
In a limited partnership, the limited partners _________.
do not participate in managing the day-to-day business
True or false: Ownership of a corporation is difficult to transfer.
false
True or false: Shareholders are the ONLY stakeholder in a firm as they are the owners
false
True or false: Shareholders are the ONLY stakeholder in a firm as they are the owners.
false
Identify which assets last a long time and include items such as equipment, land, machinery or buildings.
fixed
On a balance sheet, patents and trademarks are classified as ______.
fixed assets
The 1934 Securities Exchange Act deals with the important issue of ______ trading.
insider
A corporation is a distinct ______ entity and as such can have a name and take advantage of the legal powers of natural persons.
legal
Shareholders' liability is ______ to the amount invested in ownership shares.
limited
In a limited partnership, a limited partner's liability for business debts is ______.
limited to their cash contribution to the partnership
A ______ liability does not have to be paid within one year.
long-term
Corporate bonds are generally classified as ______.
long-term debt
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
When a large group owns stock in a company, stockholders individually have very little power to control the direction of the firm. This means that _______ effectively controls the firm.
management
When a large group owns stock in a company, stockholders individually have very little power to control the direction of the firm. This means that _________ effectively controls the firm.
management
Assuming interest rates are positive, one dollar received today is worth ______ one dollar received next year.
more than
The 1934 Securities Exchange Act restricts anyone who has access to ______ information from trading on that information.
non-public
A sole proprietorship is a business owned by ______ person(s).
one
A current liability is defined as debt that must be repaid within which period of time?
one year
A business formed by two or more people and has no separate legal authority is known as a _____.
partnership
Which one of these provides a manager an incentive to perform well?
promotions
As the amount and timing of cash flows are not known with certainty, this means that investors carry a certain amount of _____, which firms should be aware of.
risk
Most investors have an aversion to ______.
risk
The owners of a corporation are called ______.
shareholders
Bylaws are meant to regulate:
shareholders, directors, and officers
A current asset has a(n) ______ life.
short
The primary responsibility of financial managers is to increase the value of _____.
the existing shares of stock
Which of the following positions generally report to the chief financial officer (CFO)?
treasurer and controller
True or false: A general partnership may be formed by oral agreement.
true
True or false: Accounting profit does not adequately account for cash flow.
true
A partnership must have at least _______ owners.
two
The life of a corporation ______.
unlimited
The purpose of the firm is to create ______ for the owner
value
