IBS Exam 2
If a firm's assets equal $18,000 and its liabilities equal $7,500, then the owners' equity is _____.
$10,500
The Securities Exchange Act of 1934 required that all publicly traded firms with at least _____ file quarterly and annual financial reports with the Securities and Exchange Commission (SEC).
500 shareholders and $10 million in assets
In the context of preferred stock, which of the following is true of payment of dividends?
A corporation cannot pay any dividend to its common stockholders unless it pays the full dividend on its preferred stock.
In the context of the balance sheet, which of the following serves to be the rationale behind the accounting equation?
A firm must finance the purchase of their assets, and the owners and nonowners should contribute toward it.
Which of the following statements is true of a revolving credit agreement?
A revolving credit agreement is a guaranteed line of credit.
Which of the following is a difference between a statement of retained earnings and a stockholders' equity statement?
A statement of retained earnings only shows how net income and dividends affect retained earnings, whereas a stockholders' equity statement also shows changes in stockholders' equity that arise from the issuance of additional shares of stock.
In the context of an independent auditor's report, which of the following is a difference between an unqualified opinion and a qualified opinion?
An unqualified opinion is given if the independent auditor does not find any problems with the way a firm's financial statements were prepared and presented, whereas a qualified opinion is given if the independent auditor identifies minor concerns but believes that on balance the firm's statements are a fair representation of the company's financial position.
Which of the following statements is true in the context of cash budgets?
Cash budgets show projected cash inflows and outflows for each month.
_____ are financial intermediaries that obtain funds by accepting checking and savings deposits from individuals, businesses, and other institutions, and then lending those funds to borrowers.
Depository institutions
The _____ is an index based on the adjusted average price of stocks of 30 major corporations picked by the editors of the Wall Street Journal.
Dow Jones Industrial Average
Which of the following statements is true of exchange-traded funds (ETFs)?
ETFs usually have lower costs and fees than mutual funds.
A major provision of the _____ banned commercial banks from dealing in securities markets, selling insurance, or otherwise competing with nondepository institutions such as insurance companies and investment banks.
Glass-Steagall Act of 1933
The _____ established the Federal Deposit Insurance Corporation, which insured depositors against financial losses when a bank failed.
Glass-Steagall Act of 1933
Identify a true statement about equity financing.
It does not yield the same tax benefits as debt financing.
Which of the following statements is true of return on equity (ROE)?
It indicates earnings per dollar invested by the owners of a company.
Which of the following statements is true of managerial accounting?
It involves presenting customized information on request.
Which of the following statements best describes an S corporation?
It is a form of corporation that avoids double taxation by having its income taxed as if it were a partnership.
Which of the following statements best describes a C corporation?
It is a legal business entity that offers limited liability to all of its owners, who are called stockholders.
Which of the following statements is true of the Financial Accounting Standards Board (FASB)?
It is a private organization responsible for developing accounting rules.
Which of the following statements is true of a capital gain?
It is a type of return on investment for common stockholders.
Which of the following statements is true of the debt-to-assets ratio?
It is a way of measuring the degree of financial leverage.
Which of the following statements is true of mutual funds?
It is easy to withdraw funds from a mutual fund.
Which of the following statements is true of equity financing?
It is more flexible than debt financing.
In the context of the approaches to budget preparation, which of the following statements is true of participatory budgeting?
It is more resource intensive than the top-down approach.
Identify a true statement about commercial paper.
It is only offered by firms with excellent credit ratings.
Which of the following statements is true of earnings per share (EPS)?
It measures the net income per share of common stock outstanding.
Which of the following is true of the Securities Act of 1933?
It required firms issuing new stock in a public offering to file a registration statement with the Securities and Exchange Commission.
Dyno Corp. is a publicly traded firm that has 800 shareholders and $25 million in assets. As per the Securities Exchange Act of 1934, which of the following actions should Dyno Corp. undertake?
It should file quarterly and annual financial reports with the Securities and Exchange Commission.
In the context of buying securities, which of the following statements is true of a buy limit order?
It tells a broker to buy a stock only if its price is at or below a specified value.
Which of the following is a difference between managerial accounting and financial accounting?
Managerial accounting is intended to provide information to internal stakeholders, whereas financial accounting is primarily intended to provide information to external stakeholders.
Which of the following is a difference between market orders and limit orders?
Market orders instruct a broker to buy or sell a security at the current market price, whereas limit orders place restrictions on the prices at which orders are executed.
Which of the following statements is true of sole proprietorships?
Owner receives the entire share of the firms' profits.
Which of the following statements is true about private placements?
Private placements are usually less expensive than public offerings.
In the context of corporate restructuring, which of the following is a common objective of a vertical merger?
Providing tighter integration of production and increased control over the supply of crucial inputs
In the context of corporate restructuring, which of the following is a common objective of a conglomerate merger?
Reducing risk by making a firm less vulnerable to adverse conditions in any single market
Onkel Inc., a large corporation, goes out of business and announces its closure. The company liquidates its assets, and the stockholders of the company become entitled to share in the proceeds in proportion to their ownership. Which of the following common stockholders' rights is reflected in this scenario?
Right to a residual claim on assets
Passed during the early twenty-first century, the _____ increased the Securities and Exchange Commission's authority to regulate financial markets and investigate charges of fraud and unethical behavior.
Sarbanes-Oxley Act
Which of the following is a difference between securities brokers and securities dealers?
Securities brokers execute trades on behalf of others, whereas securities dealers execute trades for their own accounts.
In the context of formation, which of the following is a similarity between limited liability companies (LLCs) and corporations?
Similar to the bylaws of a corporation, organizers of most LLCs draft an operating agreement.
Rosserdam Bank, a commercial bank in Louisiana, which was previously barred from dealing in securities market and selling insurance, began involving itself in such activities in the 90s. Which of the following acts allowed Rosserdam Bank the liberty to perform those activities?
The Gramm-Bliley-Leach Act
Bret likes to invest in smaller U.S. companies because of their active trading and high potential for growth and good long-term returns. Which of the following stock indices should Bret follow?
The Russell 2000
Which of the following is a disadvantage of sole proprietorship?
The company legally ceases to exist if the owner withdraws.
Which of the following statements is true of franchises set up across borders?
The limit of a franchisee's right over a territory is decided through a franchise agreement.
Which of the following statements is true of limited liability companies (LLCs)?
There is no separate tax on the earnings of the companies if they choose to be treated as a partnership.
In the context of financial statements, which of the following statements is true of long-term liabilities?
They are debts that don't come due until more than a year after the date on the balance sheet.
Which of the following statements is true of management accountants?
They assist their superiors in preparing financial statements.
In the context of a limited partnership, which of the following statements is true of general partners?
They have the right to participate fully in managing their partnership.
In the context of external audits of financial statements, which of the following statements is true of CPA firms?
They must be independent of the companies they are auditing.
Which of the following statements is true of savings and loan associations (S&Ls)?
They traditionally accepted only savings account deposits and used them to make mortgage loans.
Which of these statements is true of the Dodd-Frank Act of 2010?
This law created the Financial Stability Oversight Council to identify emerging risks in the financial sector.
In the context of C corporations, which of the following is a difference between preferred stockholders and common stockholders?
Unlike preferred stockholders, common stockholders normally have the right to vote in stockholder meetings.
Which of the following is true of bonds?
When a bond's market price is above its par value, it is selling at a premium.
Sansburn & Sons, an institutional investor, issues a fixed number of shares and invests the money received from selling these shares in a portfolio of assets. The scenario is an example of:
a closed-end fund
Institutional investors do not:
accept deposits
_____ represents what customers who buy on credit owe the firm.
accounts receivable
In a private placement, the issuing firm negotiates the terms of the offer directly with a small number of _____.
accredited investors
The net present value (NPV) of an investment proposal is found by:
adding the present values of all of its estimated future cash flows and subtracting the initial cost of the investment from the sum.
Financial accounting:
addresses the needs of stockholders, creditors, and government regulators.
In the context of corporations, _____ is a corporate restructuring in which one firm buys another.
an acquisition
In the context of an independent auditor's report, _____ indicates that the auditor believes the financial statements are seriously flawed and that they may be misleading and unreliable.
an adverse opinion
Unlike corporations, limited liability companies (LLCs):
are subject to less paperwork.
In the context of business ownership, the document filed with a state government to establish the existence of a new corporation is referred to as the _____
articles of incorporation
The _____ is computed by dividing accounts receivable by average daily credit sales.
average collection period
Frank is a loan officer who approves loans for small businesses. One factor he looks at carefully when making loan decisions is the amount of outstanding debt a firm already has—an information that he can find in the firm's:
balance sheet
The major responsibilities involved in financial accounting are the preparation of the:
balance sheet, income statement, and statement of cash flows.
Keegee Corp. associates itself with an investment bank to issue some new stock. The bank has agreed to help the company develop a pricing strategy and to help find buyers for the stock. However, the bank has not guaranteed that all of the shares will be sold at the desired price. Keegee's investment bank is using the _____ approach to raise funds.
best efforts
In accordance with corporate bylaws, stockholders elect a _____ and rely on it to oversee the operation of their company and protect their interests.
board of directors
Which of the following statements is a similarity between general partnerships and sole proprietorships?
both allow owners to avoid double taxation
Which of the following is a similarity between corporate stocks and corporate bonds?
both are marketable
Members of the general public cannot directly trade stocks and other securities on the exchanges or the over-the-counter market. Therefore, most individuals seek the help of a(n) _____.
broker
The top managers of Promedium Inc. are creating a master budget for the company. They require a statement of the budget goals from each of its departments to be able to make an appropriate master budget. Karren, the manager of the sales department, overstates her needs in the budget and presents the statement to the top managers. The outcome of Karren's actions is known as _____.
budgetary slack
The _____ is a financial budget and shows how a firm's operations, investing, and financing activities are expected to affect all of the asset, liability, and owners' equity accounts.
budgeted balance sheet
A _____ is a projection showing how a firm's budgeted sales and costs will affect expected net earnings.
budgeted income statement
In the context of budget preparation, the document created in the final stage of an operating budget is referred to as a _____.
budgeted income statement
Comfy Trend Inc., a clothing in the United States, licenses a garment manufacturing firm in Tokyo to operate under its name and trademark. The firm also buys the rights to use Comfy Trend Inc.'s production and business methods. This scenario is an example of a _____.
business format franchise
An advantage of a general partnership is that the:
business is taxed as the personal income of its owners.
In the context of comparative financial statements, comparative balance sheets:
can be used to check if the owners' equity had increased.
A commitment to meeting social responsibilities:
can contribute to a more profitable company
_____ is the process a firm uses to evaluate long-term investment proposals.
capital budgeting
_____ is the mix of equity and debt financing a firm uses to meet its permanent financing needs.
capital structure
In the context of corporations, the _____ and other corporate officers manage the company on a daily basis.
chief executive officer
Hakeem owns shares worth $4,000 dollars in a textile firm. Having a stake in the company, he has the right to vote, the right to receive return on investment in the form of capital gain, and the right to residual claim on assets. Hakeem is a(n):
common stockholder
The Securities and Exchange Commission requires publicly traded corporations to provide _____.
comparative financial statements
Which of the following is a disadvantage of a limited liability company (LLC)?
complexity of formation
A _____ is a form of business ownership in which the business is considered a legal entity that is separate and distinct from its owners
corporation
Gerrilyn works for a business firm that manufactures breakfast cereal. The firm is owned by many individuals who are not personally responsible for any debts or losses incurred by it. Legally, the firm is considered a separate artificial person. In this scenario, Gerrilyn is working for a _____.
corporation
The _____ on a bond expresses the annual interest payment as a percentage of the bond's par value.
coupon rate
A(n) _____ is a restriction lenders impose on borrowers as a condition of providing long-term debt financing.
covenant
The purpose of _____ is to protect creditors by preventing the borrower from pursuing policies that might undermine its ability to repay the loan.
covenants
_____ are not-for-profit organizations owned by their depositors, which strive to pay higher interest rates on member deposits and charge lower interest rates on loans.
credit unions
In the context of financial statements, _____ are debts that come due within a year of the date on the balance sheet.
current liabilities
The _____ is computed by dividing a firm's total liabilities by its total assets.
debt ratio
A _____occurs when a firm transfers total or partial ownership of some of its operations to investors or to another company.
diverstiture
Earnings per share (EPS) is calculated by:
dividing net income of a firm minus preferred dividends by the average number of shares of common stock outstanding.
Earnings per share (EPS) is computed by:
dividing the net income available to common stockholders by the number of shares of common stock outstanding.
The price-to-earnings ratio is calculated by:
dividing the stock's price per share by its earnings per share.
Firms that use factors:
do not receive the full amount their customers owe.
Which of the following is an advantage of sole proprietorships?
ease of formation
From the franchisee's perspective, which of the following is an advantage offered by franchising?
easy access to funding
When a firm provides its employees with a good work environment, _____.
employee turnover is likely to be lower
_____ refers to funds provided by the owners of a company.
equity financing
The accountants at Gamone Phones, a cell phone manufacturing company, discover that the firm has performed poorly over the last two quarters, leading to negative financial implications. Instead of stating the actual figures, the managers decide to wrongly present the firm's debts and overstate its earnings. The aspect of financial accounting that should be emphasized to avoid such incidents of accounting fraud is:
ethics in accounting
_____ are shares traded on securities markets that represent the legal right of ownership over part of a basket of individual stock certificates or other securities.
exchange-traded funds
An individual who decides to establish a sole proprietorship must realize that he or she would be:
facing unlimited personal liability for the company's debts
A(n) _____ is a company that provides short-term financing to firms by purchasing their accounts receivables at a discount.
factor
The legal and ethical obligation of financial managers to make decisions consistent with the financial interests of their firm's owners is called their _____.
fiduciary duty
_____ is the functional area of business that is responsible for finding the best sources of funds and the best ways to use them.
finance
In the United States, the Securities and Exchange Commission (SEC) has delegated the responsibility for developing accounting standards to a private organization called the _____.
financial accounting standards board
In the context of financial statements, the specific accounts listed in the stockholders' equity section of a balance sheet depend on the:
form of business ownership
A _____ is a licensing arrangement under which one party allows another party to use its name, trademark, patents, copyrights, business methods, and other property in exchange for monetary payments and other considerations.
franchise
In the context of the various forms of operating a business, instant brand-name recognition is a benefit ensured by a:
franchise
Max and Lucio start a retail store. They take turns to manage the store, and they share the profits equally. Max and Lucio understand that they are personally liable for any debts or losses that the store may incur in the future. This type of business venture exemplifies a _____.
general partnership
A(n) _____ is one that relies heavily on debt.
highly leveraged firm
In the context of interpreting financial statements, using comparative statements to identify changes in key account values over time is called _____.
horizontal analysis
Nusreen, a financial manager in a company, compares the operating budgets from the past three years to identify trends in the cost of materials purchased and to learn whether the company's net expenses have increased or decreased over the time span. Nusreen is using _____ to compare the financial statements.
horizontal analysis
In the context of corporate restructuring, a _____ is defined as a combination of firms in the same industry.
horizontal merger
Daynon Inc. buys Leeston Corp., a firm that makes shipbuilding components, despite the opposition from Leeston's board of directors and its top management. This acquisition exemplifies a _____.
hostile takeover
Lecona, a start-up company, failed to acquire any major funding from potential investors. Therefore, the owners of the company set up their office in an unoccupied apartment owned by one of them. In this scenario, the company most likely incurred a(n) _____.
implicit cost
The opportunity cost that arises when a firm uses owner-supplied resources is known as a(n) _____.
implicit cost
_____ are costs that are the result of a firm's general operations and are not tied to any specific cost object.
indirect costs
_____ are organizations that pool contributions from investors, clients, or depositors and use these funds to buy stocks and other securities.
institutional investors
_____ work within their organizations to detect problems such as waste, mismanagement, embezzlement, and employee theft.
internal auditors
The _____ considers a C corporation to be a separate legal entity and taxes its earnings accordingly.
internal revenue system
_____ are stocks of finished goods, work-in-process, parts, and materials that firms hold as a part of doing business.
inventories
The _____ is computed by dividing a firm's cost of goods sold by average inventory levels.
inventory turnover ratio
Buy-and-hold investors put their faith in the ability of the overall market to continue the long-run upward trend it has exhibited throughout its history. One way that many buy-and-hold investors do this is by:
investing in index mutual funds and exchange-traded funds.
Which of the following statements is true of commercial paper?
it is normally unsecured
A key advantage of a C corporation is:
its ability to raise large amounts of financial capital.
Stockholders typically want to view a firm's accounting information to:
know if management has generated a strong-enough return on investment.
Richard wants to buy additional stock in Rancor Mobil, but the price of the stock has fluctuated in recent days. He wants to make sure he does not pay too much. His analysis suggests that $80 per share is the highest price he should pay. Richard is likely to place a _____ with his broker.
limit order
Irina, Ron, and Benz want to start the business of designing the interiors of offices. All of them want to actively manage the company and do not want to be personally responsible for the debts and obligations of the company. Moreover, they do not want to hold regular board meetings. The three are most likely to form a _____.
limited liability company
Silva and Ron start a taxi service together. Ron only invests money in the venture and does not actively participate in managing the business. Silva, on the other hand, manages the venture entirely. According to the agreement between Silva and Ron, Silva is personally responsible for the debts and losses while Ron takes responsibility of the debts only up to a certain amount. The agreement also mentions that Ron cannot participate in the management of the business. In this scenario, Ron and Silva have formed a _____.
limited partnership
A _____ is a financial arrangement in which a bank agrees to provide a firm with funds up to some specified limit, as long as the borrower's financial situation does not deteriorate, and the bank has sufficient funds.
line of credit
_____ are securities dealers that commit to continuously offering to buy and sell specific NASDAQ-listed stocks.
market makers
The _____ of a firm organizes the operating and financial budgets into a unified whole, representing the firm's overall plan of action for a specified time period.
master budget
Historically, the most widely accepted goal of financial management has been to:
maximize the value of a firm to its owners.
One of the drawbacks of sole proprietorships is that the owners:
may find it difficult to attract and maintain talented employees.
A _____ refers to a corporate restructuring that occurs when two formerly independent business entities combine to form a new organization.
merger
Understanding of the timing of cash flows within the planning period is important because:
most firms experience uneven inflows and outflows of cash over the course of a year.
In the context of franchising, a Franchise Disclosure Document (FDD):
must be provided to the franchisee at least 14 calendar days before the franchise agreement is signed.
The _____ is a situation where the behavior of an incompetent or an irresponsible franchisee adversely affects not only the franchise as a whole but also the success of other franchisees.
negative halo effect
Companies that are not publicly traded:
obtain external audits at their own discretion.
_____ are budgets that identify projected sales and production goals and the various costs the firm will incur to meet these goals.
operating budgets
In the context of managerial accounting, _____ are usually easy to measure because they involve actual expenditures of money or other resources.
out of pocket costs
Power Toolz Inc. is a small, publicly traded corporation with only 370 stockholders and total assets of $8.9 million. It does not have its shares listed on an organized exchange. Investors who want to buy stock in this company would probably purchase the stock in the _____.
over-the-counter-market
The vast majority of limited liability companies (LLCs) elect to be taxed as:
partnerships
Mr. Rob O'Leary owns 17.6 percent of the existing shares of stock in Dyna Corp. The corporation is presently issuing new stock. Before the stock is offered to other investors, Mr. O'Leary buys 17.6 percent of the new shares to maintain his share of ownership in the company. By doing so, Mr. O'Leary is exercising his _____.
preemptive right
Generally accepted accounting principles (GAAP) are a set of accounting standards that is used in the:
preparation of financial statements
A positive net present value (NPV) means that the:
present value of the expected cash flows from a project is greater than the cost of the project.
In the context of basic financial planning tools, the budgeted income statement and budgeted balance sheet are referred to as _____.
pro forma financial statements
_____ provide a framework for analyzing the impact of a firm's plans on the financing needs of the company.
pro forma financial statements
Return-on-equity (ROE) and earnings per share (EPS) are both classified as _____.
profitability ratios
When a firm negotiates a loan with a bank, it signs a(n) _____, which specifies the length of the loan, the rate of interest the firm must pay, and other terms and conditions of the loan.
promissory note
Mark, an accountant, is given the task to lead an external auditing project for a multinational company. In his spare time, Mark also acts as a consultant for Mayfair Hut Inc., a local company. In this scenario, Mark is a:
public accountant
Investors who employ the buy and hold investment approach:
purchase a diversified portfolio of securities and keep them for a long period of time.
Lance signs a contract with Gerove Corp. to perform an external audit for the company. In his audit, he finds certain minor issues in the firm's financial statements but is of the view that the statements are, nevertheless, an accurate representation of the firm's financial status. In this scenario, Lance is most likely to issue a(n) _____ opinion.
qualified
Which of the following is a drawback of franchising?
restrictions on sale
_____ are the part of a firm's net income it reinvests.
retained earnings
_____ is calculated by dividing net income (profit) by owners' equity.
return on equity
Increases in a firm's assets that result from the sale of goods, provision of services, or other activities intended to earn income are referred to as _____.
revenue
The _____ suggests that sources and uses of funds that offer the potential for high rates of return tend to be riskier than sources and uses of funds that offer lower returns.
risk-return tradeoff
In the United States, the ultimate legal authority to set and enforce accounting standards lies with the _____.
securities and exchange commission
_____ are financial intermediaries that participate directly in securities markets, buying and selling stocks and bonds for their own account.
securities dealers
A(n) _____ is an organized venue for stockbrokers and securities dealers to trade listed stocks and other securities for their clients.
securities exchange
In the context of budget preparation, the cash budget is a financial budget document that identifies:
short-term fluctuations in cash flow
In the context of statement of cash flows, cash flows from investing activities:
show the amount of cash received from the sale of fixed assets.
Which of the following is a major issue that confronts financial managers as they seek to maximize the market price of stock?
social responsibility
Thiago has spent a long time working in various commercial establishments owned by some of his close relatives. He now wishes to establish his own business, a sporting goods retail store. Thiago plans to manage the store single-handedly. In the context of the various business ownership options, Thiago's store will be an example of a:
sole proprietorship
As a shareholder of Syder Corporation, Carl wants to know whether the company had earned a profit over the last financial year. He begins by looking into the net income of the company to know if it has sufficient amount of money to pay off the workers and suppliers and also the amount of money remaining with the owners. In this scenario, Carl is looking at Syder Corporation's _____.
statement of cash flows
_____ refers to the claims owners have against their firm's assets.
stockholders' equity
In the context of the sources of funds for a business, a _____ calls for a regular schedule of fixed payments sufficient to ensure that the principal and interest are repaid by the end of the tenure for which the money has been borrowed.
term loan
_____ is one of the most important sources of short-term financing for many firms and arises when suppliers ship materials, parts, or goods to a firm without requiring payment at the time of delivery.
trade credit
_____ is sometimes called spontaneous financing because it is granted when a company places its orders without requiring any additional paperwork or special arrangements.
trade credit
_____ are short-term IOUs issued by the U.S. government that typically mature in 4, 13, or 26 weeks.
treasury bills
_____ is an arrangement under which an investment banker agrees to purchase all shares of a public offering at an agreed-upon price.
underwritings
Which of the following is a disadvantage of general partnerships?
unlimited liability
Mr. Whyte analyzes the stock market for companies to invest in. He realizes that DDrive, an online car rental service operating in his city, has stocks that are currently underrated in the market. He decides to invest in this company as he believes that its market price will increase over time, yielding him a good amount of capital gain. By investing in this company, Mr. Whyte uses the _____ strategy.
value investing
Which of the following approaches for investing in securities requires intensive research to identify discrepancies between a company's true worth and its current market price?
value investing
In the context of managerial accounting, _____ are costs that change directly with the level of production.
variable costs
In the context of corporate restructuring, a _____ refers to a combination of firms that are at different stages in the production of a good or service.
vertical merger
_____ is found by dividing the dividend per share by the previous day's price per share.
yield