Finance Exam

Which of the following are true of a sole proprietorship?

-A proprietorship has a limited life -It is one of the simplest types of businesses to form

Rank the ease (from easiest to hardest) of turning the following assets into cash.

-Cash Equivalents -Accounts Receivable -Inventory -Plant and Equipment

Which of the following show why a corporation is the most important form of business?

-Corporations can enter into contracts -Corporations can sue and be sued -A corporation is a separate legal entity with the ability to acquire and exchange property

Which of the following are examples of non-cash items on an income statement?

-Deferred taxes -Depreciation

Which of the following statements are true about fixed assets?

-Fixed assets can be tangible or intangible -Fixed assets have a long-term assets and can be either tangible or intangible

Which of these questions can be answered by reviewing a firm's balance sheet?

-How much debt is used to finance the firm? -What is the total amount of assets the firm owns?

A good financial decision will do which of the following?

-Increase market value of shareholders' equity -Increase the value of the firm's existing stock

Which of the following are examples of current assets?

-Inventory -Cash

A general partnership has which of the following characteristics?

-It is difficult to transfer ownership -Each owner has unlimited liability for all firm debts

Which of the following are tangible fixed assets?

-Land -Plant

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 are included in a firm's capital structure?

-Long-term debt -Equity

Which of the following, according to the textbook, are possible financial goals for a company?

-Minimize costs -Maximize profits -Survival

Which of the following are period costs?

-Selling costs -General Expenses -Administrative expenses

Which of the following are true about shareholders' equity?

-Shareholders' equity is the difference between the value of a firm's assets -Shareholders' equity is a residual claim on a firm's assets

A corporation received cash from financial markets by selling _____________ and _____________.

-Stocks -Bonds

Which of the following are considered non-owner stakeholders in a company?

-Suppliers -Government -Employees

Which of the following are important when considering a partnership?

-Taxation of partnership income -Personal liability for firm's debts -Fund raising limitations

Which of the following are found on an income statement?

-The operations section -The non-operating section

Which of the following are included in a firm's inventory according to GAAP?

-Work in progress -Raw materials -Finished goods

Liabilities usually involve which of these?

-require a cash payout within a stated period of time -obligations of the firm

Which of the following are disadvantages of a sole proprietorship?

-unlimited liability -difficulty in raising cash -limited life of the enterprise

Which one of the following statements is correct concerning ratio analysis?

A single ratio is often computed differently by different individuals.

A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts?

Accounts receivable

If you hire a real estate company to sell your house, you are most apt to encounter which of the following?

Agency problem

In March, Al purchased 10 video games for his store's inventory. In April, he sold five games on credit card and received the payment in May. The income should be reported in the month of

April

An organization must prepare ______________ and bylaws when forming a corporation.

Articles of incorporation

The lowest Moody's bond rating that is considered to be an investment-grade rating is

Baa.

In large firms, financial activity is usually associated with which top officer?

Chief financial officer

Which one of these parties cannot be a stakeholder of a firm?

Firm's creditors

What does GAAP stand for?

Generally Accepted Accounting Principles

Which one of these is handled differently in calculating cash flows for accounting versus financial purposes?

Interest expense

Enterprise value is computed as

Market capitalization + Market value of interest-bearing debt - Cash

A current liability is defined as debt that must be repaid within which period?

One year

Which ratio computes the amount of net income generated by each $1 of sales?

Profit margin

Which of the following is a variable cost in the short run?

Raw materials used in production

Which of the following are generally included in a bond indenture?

Security description and basic terms

Which of the following statements concerning a sole proprietorship is correct?

The life of the firm is limited to the life span of the owner.

Which corporate officer is responsible for managing the firm's cash?

Treasurer

Dividends are a cash flow from

a firm to the financial markets.

A balance sheet reflects a firm's ____________ value on a particular date.

accounting

The relationship between stockholders and management can best be described as an ______________ relationship.

agency

When making financial decisions related to assets, you should

always consider market values.

Fixed Assets

are those that will last a long time.

Liquidity refers to the ease of changing

assets to cash

Your ___________ tax rate measures the total taxes you pay dividend by your total taxable income.

average

Book value is

based on historical cost.

The short run is a period when there are ___________ costs.

both fixed and variable costs

The rules by which corporations govern themselves are called

bylaws.

The statement of cash flow explains changes in

cash and equivalents

A current assets is best defined as

cash and other assets owned by the firm that should convert to cash within the next year.

Current Assets

comprises those that have short lives.

The officer responsible for corporate tax reporting is the

controller

Net working capital equals

current assets minus current liabilities

Net working capital is best defined as

current assets minus current liabilities.

The quick ratio is calculated as

current assets minus inventory, divided by current liabilities.

According to the Fisher effect, a decrease in the rate of inflation will

decrease the nominal rate, but not affect the real rate.

The ________________ premium is that portion of a nominal interest rate or bond yield that represents compensation for the possibility of nonpayment by the bond issuer.

default risk

The income statement

determines the aftertax income of a firm.

Some of the cash flow generated by a firm goes back to the financial markets in the form of

dividends and debt payments.

Non-cash items refer to

expenses charged against revenues that do not directly affect cash flows.

On a common-size income statement, depreciation will be

expressed as a percentage of sales.

Bond prices are quoted as a percentage of the

face value.

On a balance sheet, patents and trademarks are classified as

fixed assets

Fixed costs are costs that will not change in the short run due to

fixed commitments over a stated period of time

Debt securities

increase a firm's cost of doing business.

When a firm pays out fewer dividends, it ___________ the accounting value of its retained earnings.

increases

Interest rate risk _______________________________________ as the time to maturity increases.

increases at a decreasing rate

EBITDA is the abbreviation for earnings before

interest, taxes, depreciation, and amortization.

Short-term finance

is concerned with managing net working capital.

The carrying value or book value of assets

is determined under GAAP and is based on the cost of the assets.

A limited liability company's owners have ___________ liability.

limited

A(n) _________ asset is one that can be quickly converted into cash without significant loss in value.

liquid

Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are often referred to as

liquidity measures.

Capital budgeting is concerned with making and managing expenditures on

long-term assets.

An upward sloping yield indicates

long-term rates are higher than medium-term rates.

When you are making a financial decision, the most relevant tax rate is the ___________ rate.

marginal

Your ____________ tax rate is the percentage of the next taxable dollar of income you earn that is payable as a tax.

marginal

The price at which willing buyers and sellers would trade is called __________ value.

market

The accounting equation shows that stockholders' equity equals assets ________ liabilities.

minus

The percentage change in the amount of money you have as the result of an investment is called the _____________ rate of return.

nominal

The yield to maturity on a bond is the rate

of return currently required by the market.

A sole proprietorship is a business owned by ____ person.

one

Bond ratings

only assess the possibility of default.

A bond with both a face value and a market value of $1,000 is called a ______________ bond.

par value

A business formed by two or more people and has no separate legal authority is known as a

partnership.

A stakeholder is best described as

person or entity, other than a stockholder or creditor, who potentially has a claim on a firm's cash.

Long-term debt securities that are issued but not offered to the general public are referred to as

privately placed.

A deferred call provision is designed to

prohibit the calling of a bond prior to a certain date.

The parts of an indenture that protect the interests of the lender by limited certain actions that a company might take during the term of the loan are called

protective covenants.

How is income defined?

revenue minus expenses

A total asset turnover measures of .84 means that a firm has $0.84 in

sales for every $1 in total assets.

Bonds backed by assets with long-term payments are referred to as

securitized bonds.

The owners of a corporation are called

shareholders

Agency costs refer to

the costs of any conflicts of interest between stockholders and management.

The issuance of new equity shares is a cash flow from

the financial markets to a firm.

The Securities Act of 1933 focuses on

the issuance of new securities.

A common-size balance sheet will express accounts receivable as a percentage of

total assets.

The officer responsible for managing the firm's cash flows is the

treasurer.

Ratios that measures how efficiently a firm uses its assets to generate sales are known as _______________ ratios.

utilization