Junior Year Business Classes-Principles of Finance
An investor using a securities table can learn about a stock's volatility by checking the stock's
52-Week HI/LO. The highest and lowest prices paid during the past year can be used to learn how volatile a stock is. If the range between the lowest and highest prices is large, then the stock's price has risen or fallen sharply in the past year. Such a stock would be considered volatile. The stock's dividend, volume, and closing price are much less reliable indicators of a stock's volatility.
A business's liabilities total $87,420. Its assets amount to $105,390. What is the value of the owner's equity?
$17,970. The accounting equation is usually expressed as "Assets = Liabilities + Owner's Equity." Another way to express the same equation is "Owner's Equity = Assets - Liabilities." So, to determine the owner's equity, subtract the business's liabilities from its assets ($105,390 - $87,420 = $17,970).
Interpret the following stock table to determine the most that was paid for March7912 stock in the past year? 52-Week STOCK YLD VOL NET HI LO (SYM) DIV % PE 100s CLOSE CHG 44.00 34.28 MAR7 1.5 6.8 17 781 40.05 1.7
$44.00. According to the securities table, the highest selling price during the past 52-week period was $44.00. The stock's lowest selling price during that time period was $34.28. The amount at which the stock was selling at the close of the previous day's trading was $40.05. The figure of 17 was the stock's price-to-earning ratio that is determined by dividing the last closing price by the earnings per share (EPS) for the year. The EPS figure is not shown in the securities table.
How much money do you need to deposit into a savings account today to have $500 in two years? The interest rate for the savings account is three percent.
$471.30. The present value of money is equal to the future value of the money divided by the interest factor, which is equal to the sum of the interest rate and one, raised to the nth power (n is equal to the number of years). To find the present value of $500 two years in the future, first convert the interest rate to a decimal and add one to it (0.03 + 1 = 1.03). Then, raise that sum to the second power, which is the same as multiplying that number by itself (1.03 X 1.03 = 1.0609). Finally, divide the amount of money in the future by the interest factor that you just calculated ($500 / 1.0609 = $471.30). To have $500 in two years, you need to deposit $471.30 into a savings account at three percent interest today.
According to a company's most recent statement of cash flows, its cash flow from operations for the most recent year was $1,375,400. The net cash used by investing was an outlay of $690,000. The net cash spent on financing was $140,300. What was the company's free cash flow?
$545,100. A company's free cash flow represents the funds available for internal growth and expansion. It also indicates how well the company is managing its money. A positive free cash flow is usually a sign that the company is practicing responsible money management, which can result in increased shareholder yield. A negative free cash flow, however, indicates that the company needs to look for more and/other sources of funding. To calculate the free cash flow, we first need to determine the company's capital expenditures by adding together the net cash used by investing and the net cash used by financing ($690,000 + $140,300 = $830,300). Finally, subtract the total capital expenditures from the cash flow from operations ($1,375,400 - $830,300 = $545,100). So, the company brought in $545,100 more than it spent.
A business's revenue is $77,300, its expenses are $54,644, its liabilities equal $37,910, and its owner's equity is $5,759. Use the expanded accounting equation to determine the business's assets.
$66,325. The expanded accounting equation is Assets = Liabilities + Owner's Equity + Revenue - Expenses" and is derived from the basic accounting equation "Assets = Liabilities + Owner's Equity." The accounting equation is the basis for double-entry bookkeeping. It can be used to show that debits equal credits for each financial transaction. To determine the business's assets, add the liabilities, owner's equity, and revenue together minus the business's expenses ($37,910 + $5,759 + $77,300 - $54,644 = $66,325).
The benefit of fundamental analysis is that
After choosing a stock, an investor needs to do only periodic reviews. The benefit of fundamental analysis is that after choosing a stock, an investor needs to do only periodic reviews, looking for significant changes. Tracking daily price fluctuations and making short-term buy and sell decisions are not necessary. To conduct fundamental analysis, an investor does indeed need to look closely at the company itself.
At a stock exchange, specialists have responsibility for
All of the trades made on a particular stock. The role of specialists is to maintain a fair and orderly market for the security they trade. They are not responsible for keeping a stock's price high or low, nor do they trade solely on the behalf of institutional investors.
Business managers use accounting information to help them to
Allocate their funds. Managers use the accounting information that tells them the amount of funds available in order to develop operating budgets. These budgets specify how much money may be spent for such expenses as rent, salaries, insurance, etc. Insurance premiums are the monies paid to cover a contractual agreement in which one party will pay for specified losses incurred by the other party. Excise taxes are determined by government. They apply to certain items, such as gasoline, and are paid by the buyer. Labor union dues are paid by the union members.
After a business designates categories of expenses in its budget, it
Allocates a dollar amount. After a business designates categories of expense in its budget, it allocates a dollar amount. When developing a budget, a business organizes its budget information by creating categories for items such as rent, insurance, and utilities. Once the categories are designated, management allocates a dollar amount to each one. After designating expense categories, businesses do not necessarily apply a formula, appoint an accountant, or attach a time limit to each category.
Which of the following probably is the most important piece of information that a cash flow statement provides:
Amount of money expected. How much money will flow into and out of a business is probably the most important piece of information that a cash flow statement provides. Businesses need to know whether they will have enough cash coming in to meet monthly obligations. For example, if businesses discover that they will not collect enough money, they can do such things as plan a sale to generate more income or tighten their credit policies. Predicting the cost of maintenance is only a small part of estimating expenses in a cash flow statement. Businesses decide when their tax year will begin. Many businesses use industry statistics when developing their cash flow statements.
The two major sections on a balance sheet are
Assets and liabilities. Assets and liabilities are the two major sections that must "balance" on a balance sheet. Cash flow, income, and expenses are important items on financial statements, but they are not the major sections on a balance sheet.
Which of the following are the categories that businesses use to summarize information on their balance sheets:
Assets, liabilities, and equity. A balance sheet is a financial statement that captures the financial condition of the business at that particular moment. The business summarizes its financial condition by categorizing data into three groups—assets, liabilities, and equity. An asset is anything that the business owns or that can be converted into cash. Assets include cash, equipment, and sales income. Liabilities are the business's debts. As a liability, a credit balance is money that a business owes to its suppliers or lenders. Equity is the net worth of the business after subtracting all liabilities from all assets. A budget is an estimate of income and expenses for a certain period of time. A budget is not a category of information that is listed on a balance sheet.
A business owner applying for a bank loan would probably ask the accounting department to provide records that show the value of the company's total
Assets. All the items that a business owns that have value are its assets. Businesses applying for loans usually have their accounting department compute the total value of their assets to present to the lending institution as verification of their ability to repay the loan. Cash, inventory, and equipment are types of business assets whose value would be listed on a balance sheet.
In what way can the general state of the economy affect a stock's price?
By increasing supply or demand. The general state of the economy affects a stock's price when there is a change in supply or demand. For example, any increase in the supply or demand of a product means that product prices—and sales—will change accordingly. The company's income statement, then, will reflect the sales revenue and the corresponding profits received. With more earnings, companies are likely to see their stock prices rise. Making investment information available to the general public is not an aspect (nor a function) of the general state of the economy. Bringing together a balanced portfolio and filtering out poor investments could be the tasks of an individual investor or a financial advisor.
Robyn bought $100 worth of stock in a company, and now it's worth $150. This is an illustration of
Capital appreciation. Robyn's story is an illustration of capital appreciation. Capital appreciation is an increase in the price of the stock you own. Robyn's stock is now worth more than what she paid for it. A stock exchange is a place (physical or virtual) where stocks are traded by brokers who represent buyers and sellers. A stock split is the division of a corporation's existing stock into multiple shares. Dividends are sums of money paid to investors as earnings on their investments.
Which of the following offers municipal bonds:
Cities. A bond is a lending investment in which individuals lend money to an entity to earn a set rate of interest for a specified timeframe. Municipal bonds are issued by a local municipality, such as a state, province, principality, city, or county. Countries, businesses, and shareholders (owners of a corporation) do not issue municipal bonds.
What type of money is recorded in the cash receipts column of a cash flow statement?
Collected. Only collected money is recorded under cash receipts. For example, if a business expects to make $5,000 from cash sales and $2,000 from credit sales, it records only the $5,000 in the cash receipts column. The $2,000 in credit sales is referred to as accounts receivable and should not be recorded until it is actually collected; otherwise, the business will appear to have more money on hand than it actually does. Expenses are listed in the cash payments column rather than in the cash receipts column.
Which type of stock comes with voting rights?
Common. Common stock is a basic share of ownership in a company that comes with voting rights. Preferred stock is also a basic share of ownership in a company, but it comes with extra privileges and no voting rights. A small-cap stock belongs to a company that is valued at under $1 billion. An income stock is a stock that pays higher-than-average dividends.
Before you invest, you should
Conduct thorough research. Before you invest, you should conduct thorough research. The stock market can seem like a big, bad place, and investing is a tricky business. But that doesn't mean you shouldn't do it—it just means you need to do your homework before jumping in and investing. Every successful investor realizes the importance of thorough research. You shouldn't put your money into any investment without getting all the facts. Some of the facts you'll need to learn come from researching the investment, and some of the facts come from taking a close look at yourself. You don't need to graduate from college, be 25, or own a car before investing—the sooner you get started, the better.
If you are nearing retirement, which investing approach will you use?
Conservative. If you are nearing retirement, you want to preserve the money you've accumulated and make sure it's safe. Therefore, you need to invest conservatively, rather than aggressively or moderately. A tax-minimizing approach to investing is an approach you should use throughout your entire life, not just when nearing retirement.
The overall purpose of accounting is to
Control the finances of the business. An accounting system provides a business with accurate financial information with which it can maintain control of its finances. Keeping track of sales, compiling expenses, and creating reports are all activities of the accounting system that help a business to control its finances.
Which of the following is one of the components of a business's cash payments:
Cost of goods sold. Cash payments are the specific sources of money flowing out of a business. Cash payments include cost of goods sold, variable expenses, and fixed expenses. Cost of goods sold is the amount of money a business pays for the products it will sell and often is a sizeable expense. Previous month's balance is the amount of cash a business has left at the end of the previous month. Total credit sales equal the amount of purchases that customers make on credit and will pay later. Interest from loans is income, often from credit sales.
Sammy received one share of stock in Nike, Inc. as a gift. He wondered how much of the company's profit went to his single share, so he divided net income by the number of outstanding shares of common stock. This common ratio is called
Earnings per share. Dividing net income by the number of outstanding shares of common stock results in a financial ratio called earnings per share. It is not gross profit margin, which is calculated by dividing gross profit by sales; return on equity, which is calculated by dividing net income by book value; nor price-earnings, which is calculated by dividing stock price by earnings per share.
Which of the following is an example of current liabilities that a business should include in its balance sheet:
Employees' salaries. Liabilities are debts that a business owes. Liabilities are classified as current, which means that the debts will be paid off during the year, or long-term, which means that they will be paid off over a period of time. Employees' salaries are current liabilities because the business is expected to pay its employees for their work on a regular basis throughout the year. Mortgage loans are long-term liabilities because businesses usually make mortgage payments for several years. Accounts receivable are assets because they are all the monies owed to the business by its customers. Owner's equity is the amount an owner has invested in the business plus or minus profits and losses.
Which of the following is a method that businesses use to predict variable costs:
Estimate sales volume. A business that is able to make a fairly accurate estimate of what its sales volume will be can predict its variable costs. Businesses use their past sales figures as a guide in estimating future sales. The volume of future sales gives a business a fairly clear picture of the amount of expenditures that will be needed to handle that volume. Businesses do not analyze inventory records, review income data, or forecast profit margin in order to predict variable costs.
When you are told to "consider the cost" before selling an investment, you are being advised to
Estimate the effect of commissions and taxes on your purchase. When investors are told to "consider the cost" before selling investments, they are being advised to estimate the effect of commissions and taxes on their purchases. They are not being advised to review the costs they've incurred so far, to calculate the costs of prior transactions, or to negotiate for any better deals.
For assessing a security's fundamentals, which of the following is a true statement:
Even investment experts disagree about the most important ratios to consider in fundamental analysis. For assessing securities' fundamentals, select the ratios you are familiar with—keeping in mind that the experts do not agree on which ratios are the most important. Although Warren Buffet is indeed a well-respected investment expert, you can conduct a valid fundamental analysis without consulting him. Fundamental analysis is not used to predict stock prices. And, fundamental analysis is simple enough for most investors (even beginners) to conduct successfully.
The Milton Ladder Corporation, which is publicly traded, is in the process of acquiring the Bradley Chute Company. What type of document is Milton Ladder required to file within 15 days of the acquisition?
Form 8-K. Publicly-traded companies are required to provide information about their finances to the Securities and Exchange Commission (SEC) every quarter. For the first three quarters of the fiscal year, publicly-traded companies file 10-Q reports that focus on the company's financial situation for that period of time. At the end of the fourth quarter of each fiscal year, each company is required to file a Form 10-K, which is similar to an annual report. It includes detailed information about the company, its competitors, risks it faces, legal proceedings that the company is involved in, and audited financial statements. In addition to these standard, routine documents, a company is also required to file a Form 8-K, also known as a current report if a significant, non-recurring event occurs before a 10-Q or 10-K is due. Events might include changes in key management, introduction of a new product, legal actions, or the acquisition of another company. Form 4 tells you when insiders are buying or selling the company's stock.
Return on equity (ROE) measures management's ability to make a profit
From the money that shareholders have invested. Return on equity (ROE) looks at management's ability to make a profit with the money that shareholders have invested. It does not consider management's ability to make a profit from the money generated by sales, by more efficient operations, or by owning shares of other firms.
What system does the SEC require companies to use when preparing financial statements?
GAAP. The SEC requires financial statements to be prepared using generally accepted accounting principles (GAAP). FASB, MD&A, and EDGAR are not acronyms for a reporting system. FASB stands for Financial Accounting Standards Board; MD&A stands for Management Discussion and Analysis; and EDGAR stands for Electronic Data Gathering and Retrieval (a portion of the SEC web site).
Which of the following is often considered one of the safest types of investments:
Government bonds. These bonds are issued by various levels of government, from the local to the national level. Government bonds are considered one of the safest types of investments because they are backed by the government. Although government bonds do not pay high interest rates, they are safe and a good investment for individuals who cannot afford to risk losing their investment. Penny stocks are very inexpensive, but their value can go up or down quickly. Commodities and precious metals are considered high risk investments because of the fluctuations in price and value.
Which of the following is considered a reliable bond:
Government. Since governments usually do not have trouble paying back what they owe, government bonds are considered reliable. Not all corporations have the same repayment reliability. Callable and puttable bonds are bonds that are repaid before the maturity date.
The PEG ratio is unique because it incorporates price, earnings, and
Growth of EPS. The PEG ratio goes one step further than price-earnings and incorporates stock price, earnings, and growth of EPS. It does not incorporate gross profit, growth of sales, or growth of price-earnings.
Which of the following is essential for making wise investment decisions:
Knowledge. Knowledge is essential for making wise investment decisions. You don't need an expert to tell you which stocks to pick—because you are the one with your best interests at heart. Age and wealth are not required for wise investing. To be a wise investor, you can be young or old, and wealthy or not. Intelligence is helpful if you use it to gain and use knowledge.
In order for a business to generate a profit, its operating costs must be __________ the gross margin.
Less than. Operating costs are expenditures necessary to keep the business running. Gross margin is the monetary difference between net sales and cost of goods sold. Operating costs are subtracted from gross margin to determine net profit. Consequently, operating costs must be less than the gross margin in order for the business to realize a profit.
Sales growth indicates a company's
Level of quality. Sales growth indicates a company's level of quality. A steady growth in sales indicates a high-quality company. A company with the same rate of growth, but with sales that zigzag from year to year, is less predictable and of lower quality. Sales growth does not indicate past stock price or future growth potential. "Degree of diligence" is not a term used to describe sales growth or anything it indicates.
Which of the following represents a mistake frequently made when conducting a cost/benefit analysis:
Limiting options to examine. When businesses need to make decisions, they need to consider all feasible options to ensure that the best decision can be made. Other mistakes that businesses make when conducting cost/benefit analyses include failing to consider the "do nothing option," including factors other than cash costs and benefits, and failing to consider the time value of money when estimating costs.
A class of financial ratios that measures the ability of a company to turn assets into cash and to pay its bills is called
Liquidity ratios. Liquidity ratios measure the ability of a company to turn assets into cash to pay its bills. Asset management ratios, or efficiency ratios, measure how efficiently a company manages its assets. Debt ratios, also called safety or financial leverage ratios, compare what a company owns to what it owes. Profitability ratios measure the ability of a company to make a profit.
What factor might a financial advisor consider when helping clients select investments?
Liquidity. Liquidity refers to the ease with which you can convert your investment dollars back into cash. When helping clients select investments, financial advisors should consider the clients' need for liquidity. Some clients may need to be able to get back cash quickly, while others have the ability to buy investments that they cannot turn into cash for a long time. Financial advisors usually do not consider depreciation, commission, or prestige when helping clients select investments.
Melinda wants to invest in a bond, but her main concern is how soon she'll be able to access the money she's invested. Melinda needs to look at the
Liquidity. Since liquid investments are ones in which the investor has immediate access to the invested funds, Melinda needs to look at the liquidity of her potential bond investment. The bid price is what others are willing to pay for the bond. The yield is what the bond may bring you over the time period at a certain price. The bond rating is the ranking that shows how likely it is that an issuer will repay the bond.
Commission fees associated with mutual funds are known as
Loads. Commission fees associated with mutual funds are known as loads. NAV, or net asset value, is the way to determine the price of a mutual fund's shares. ETFs are exchange-traded funds, "cousins" of mutual funds that trade like individual stocks. A fund's expense ratio is the percentage of assets used to pay for expense
Pre-tax profit margin is a good measure of management's performance because
Managers have control of all of the expenses up to the point of taxes. Pre-tax profit margin is a good measure of management's performance because managers can control the cost of goods sold, operating expenses, and interest—all of the expenses before taxes are paid. Although pre-tax profit margin is calculated by dividing pre-tax profit by sales, and although its percentage can be interpreted in a particular way, calculation and interpretation are not reasons pre-tax profit margin is a good measure of management's performance. The definition of a growth company is one whose sales and EPS grow at a rate greater than that of the market.
A stock exchange functions in a way that is most similar to a(n)
Marketplace. A stock exchange is similar to a marketplace, where buyers and sellers agree on a price for a certain good. Stock exchanges are not like department stores, where the seller sets the price, nor are they like outlet malls, where goods are priced by the seller and offered at a discount. Stock exchanges are not like online retailers either, where price is set by the seller.
Which of the following web sites is most likely to contain accurate, trustworthy securities information:
Morningstar. Morningstar is an independent company that provides up-to-date, reliable information and analyses of a variety of securities, including stocks, bonds, and mutual funds. Although Wikipedia contains a wealth of information, it is less likely to be accurate or trustworthy because the content is primarily provided by anonymous Internet users. StandardLine does not provide financial information. Facebook Finance is a fictitious web site.
While Chase was reviewing his stock performance, he saw that his commodities investment dropped .002 points from Monday's close to Tuesday's close. This drop is called the
Net change. Newspapers, business publications, and web sites publish a securities or stock table, which is a format used to list stock quotes. The table helps investors monitor the performance of their stocks. The net change is a column in the table that indicates the difference between a stock's closing price and the previous day's price, which may increase or decrease (drop). True value, net worth, and true yield are not terms that describe the difference between a stock's closing price and the previous day's price.
The bottom line on a business's income statement indicates
Net income. The net income, or bottom line, is a business's final profit. It is the money remaining after operating expenses are subtracted from gross profit. Net income is the amount of money a business is able to keep after paying all expenses. Total costs are all of a business's expenses. Gross revenue is all the money earned by a business before expenses are subtracted. Net worth is the total value of the business.
It's a good idea for an investor to watch the numbers on a stock table
Over a period of time. Watching numbers over a period of time is a good idea because investors can get a sense of what is normal for a stock price. Looking at the numbers once a year, on a given day, or when dividends are paid does not give you enough time to obtain this kind of information.
A company is trying to determine if it should expand and is conducting a cost/benefit analysis. Which of the following factors are possible costs that the business should consider:
Payroll, insurance, and training. By conducting a cost/benefit analysis, a business can determine if conditions indicate that it is beneficial for the company to expand. The primary benefit is the possibility of the business generating more revenue (profit, income) over time. Costs include additional expenses related to payroll, insurance, inventory, taxes, rent, employee training, and the need to meet government regulations. Revenue, profit, and income indicate money coming into the business rather than costs.
Which of the following elements are needed to determine the future value of money that is placed in a savings account for one year:
Principal amount and interest rate. When people keep their money in a financial institution (e.g., bank), they earn interest on the amount (principal) that they put into the account. The interest is paid to the customer's account by the financial institution. Over time, the customer earns money on the principal by accumulating interest, which increases the future value of the savings account. To calculate the future value of the savings account, it is necessary to know the principal amount, the interest rate, and the length of time that the principal is in the account. Quarterly wages, late fees, annual income, and insurance rates are not elements that will help a person calculate the future value of money in a savings account.
When assessing a stock using fundamental analysis, an investor should consider
Qualitative and quantitative factors. Fundamental analysis is based on discovering a company's intrinsic value as reflected in qualitative and quantitative factors. It is not based on short-term price influences, annual stock-price charts, or quantitative factors alone (such as ratios).
When you study a company's business model, product mix, competition, and brand, you are studying
Qualitative measures. A company's business model, product mix, competition, and brand are examples of qualitative measures, which are subjective. Quantitative measures are objective and based on numbers. These characteristics describe a company, not an industry. They are not objective, but subjective.
When selecting an investment, a chart is most helpful in comparing
Quantitative factors. Charts help investors compare a company's quantitative information, such as sales growth and PE. Typically, charts do not help investors compare qualitative factors, such as how the management team is performing, what effect competition has on potential sales, or which growth strategies different businesses use.
Investors take a risk for the potential of receiving which of the following:
Return. Investors are willing to take a risk for the potential of return (reward or benefit they might receive). The return is what the investment can potentially earn for the investor. Prizes are awarded to players in sweepstakes contests. Bonuses are added to employees' paychecks. And, recognition is positive attention for extraordinary achievements. Prizes, bonuses, and recognition do not provide the motivation for investing.
Which of the following is an example of variable operating expenses:
Sales commissions. A sales commission is a percentage of the total sale amount paid to the individual who makes the sale. Sales commissions are an example of variable operating expenses because they increase or decrease in relation to increases or decreases in sales volume. Fire insurance, management salaries, and property taxes are examples of fixed operating expenses.
Which of the following would be the most effective method to segregate the duties of employees who handle financial transactions:
Sheryl and Will both sign each check, Georgie records the payments in the books, and Karin reconciles the bank statements. Segregation of duties is a method of internal control that prevents any one person from having complete control over all aspects of all financial transactions. It usually involves multiple individuals who each are responsible for a different aspect of the accounting process. Segregation of duties is typically an effective way to reduce errors and fraud because one person's work can be used to check the work of one or more other employees. Focusing on different aspects of accounting on different days, such as Annie does, is not segregation of duties. It is usually not plausible to require a senior manager to preauthorize all expenditures that a firm makes. While involving two individuals in the accounting process is better than one, involving four individuals would be even more effective in preventing fraud and other issues.
If you are investing for a goal that you hope to reach within three years, you are investing for a
Short-term time horizon. A short-term time horizon means you are investing for a goal you want to reach in less than five years; if you are investing for a three-year goal, you are on a short-term time horizon. An intermediate-term time horizon is 5 to 15 years, and a long-term time horizon is longer than 15 years. Risk-tolerant time horizon is not a term that is used in investing.
Businesses use budgets to estimate how they will
Spend their money. A budget estimates how a business will earn and spend its money. Businesses use budgets to estimate how they will spend the money they earn as income. Businesses have expenses, and budgets help businesses plan how to allocate income in order to pay those expenses. Businesses do not use budgets to calculate their assets, file their taxes, or depreciate their assets.
What information is found in the Report of Management on the Financial Statements section of an annual report?
Statement of responsibility for the integrity and objectivity of the financial statements. Company officers are held accountable for the integrity of financial statements. This indicates that if the financial statements are not true, that management will be held liable for the problem. This section also describes the internal controls that are in place within the company to ensure that the numbers are as accurate as possible. The names and titles of top management officers and members of the board of directors often appear on the back cover of the annual report. Graphs, charts, and/or tables that compare finances for the past two to five years are found in the Financial Highlights section. Business activities that management believes make up the year's highlights are provided in the Annual Highlights section.
To get a general idea of the direction of the stock market today, check a
Stock market index. To get a general idea of the direction of the stock market today, check a stock market index. A stock market index is a measure of average stock prices that gives a general indication of the market. Examples of stock market indices include the Dow Jones Industrial Average, the S&P 500, the NYSE Composite Index, and the NASDAQ Composite Index. A secondary market is a place where investors can trade securities that have been issued by a corporation. A stock exchange is a place (physical or virtual) where stocks are traded by brokers who represent buyers and sellers. A blue-chip company is a large, established company known for its quality and its reputation for paying dividends.
Why is it important for a business to budget a certain amount of money to savings?
To avoid financial crisis. It is important for a business to budget a certain amount of money to savings to avoid financial crisis. With a budget that includes a plan for savings, there is a better chance of being able to pay expenses even when planned sales goals are not met. The money budgeted to savings can be used to pay expenses and help avoid a financial crisis. Businesses do not budget money to savings in order to pay stockholders, to prevent government control, or to satisfy customers.
Which of the following is the most likely reason why a manager would review financial information for her/his industry and compare his/her business's operating results with industry averages:
To determine if the business is performing above or below average. Managers often compare their businesses' operating results with industry averages to determine if their businesses are doing better than, worse than, or about the same as other firms in the same industry. The business's percentage increase in net sales, next year's budget, and the return on common stockholders' equity can be determined without industry financial information and averages.
What is one of the main purposes of a business's sales budget?
To estimate income. The sales budget sets the financial pace for a business by estimating what amount of expenses and income can be expected from the sale of the business's goods and services. Sales budgets are extremely important because they estimate the major source of income, which helps a business determine if it will be profitable. Businesses take into consideration future trends, the state of the economy, and the level of competition when developing sales budgets.
Which of the following is a way that businesses can use financial information:
To identify trends. Through financial-information analysis, businesses can recognize what products are selling well and in what colors, styles, models, and sizes. Over time, this helps businesses spot trends in customer buying habits so that the businesses provide more of the products customers are buying and less of those that are not selling well. Selling strategies are largely determined by the nature of the product being sold rather than by financial information. Focus groups are used to collect customer reactions to and opinions about product features or company image. Businesses function in economic systems rather than creating them.
Which of the following is a reason why businesses usually maintain records of their operating expenses:
To plan for the future. Businesses maintain records of their operating expenses over a period of time in order to plan for the future. Businesses use these records to determine if they will earn sufficient profit to pay all their expenses. They also base their future plans for growth and development on how their expenses compare with earnings. Businesses do not maintain records of their operating expenses in order to develop sales goals, organize activities, or promote personnel.
Teresa is a new employee who received training in handling sales and returns for the business. Her supervisor referred to both types of activities as
Transactions. A transaction is a business activity such as a sale, a purchase, or a return. These transactions must be recorded accurately as part of the accounting information. Credit is the arrangement by which businesses or individuals can purchase now and pay later. An exchange is the trading of one thing for another. A function is a group of activities that are similar in purpose.
When Alana prepares a report so that all of the financial data is clearly disclosed, she is ensuring that the information is
Transparent. When financial information is fully disclosed and is presented in a clear, understandable way, it is transparent. Transparent information is not buried in a document or presented in a way that deliberately confuses the reader. Relevant information consists of data that are helpful to users of the information. Timely information is current or up-to-date. Flexible data are often used in or applicable to different situations. Alana's report may or may not contain flexible, relevant, or timely information.
Which of the following is a cyclical stock:
US Concrete (RMIX). A concrete company such as US Concrete would operate mainly during the warm/dry season when construction companies (and individuals) would request concrete to lay foundations, sidewalks, etc. Stock prices for hospitals, water utilities, and firms manufacturing personal household goods are not likely to be cyclical, since the goods and services offered are needed year-round.
The price of raw materials used in manufacturing a product was double what had been projected for the year. Which of the following could the business determine by analyzing its financial information:
Variances. Businesses analyze their financial information to determine the differences between what they had forecast and what actually happened. By doing this, they can account for those differences and improve future forecasts. In this scenario, equipment costs were not a factor. The business could not determine from its financial information whether the supply of raw materials decreased or demand increased. Forecasts are estimates based on information known at the time the forecast was made and will not be exactly what actually happens. In this scenario, therefore, the variances would not be considered forecasting errors.
Stocks whose prices rise higher than, or fall lower than, the market as a whole are referred to as
Volatile. Stocks whose prices rise higher than, or fall lower than, the market as a whole are referred to as volatile. Volatility compares how much "rollercoaster" action a stock demonstrates in relation to the stock market. Stocks may appear to be influential or successful, whether or not they are volatile. Efficient is not a term used to describe stocks.
Before you invest for the long-term, determine which of the following:
What you want to accomplish. Before you invest for the long-term, determine what you want to accomplish and how much risk you are willing to face. Then, consider the risk/return tradeoff, so you can decide if the investment suits your goals and your risk tolerance. What others are doing, what your advisor recommends, and what your investment will do in the short-term are not relevant to long-term investing.
When investors' expectations (of a stock's performance) and the company's earnings are perfectly matched, the PEG ratio is
When investors' expectations (of a stock's performance) and the company's earnings are perfectly matched, the PEG ratio is 1. When investor expectations are high, given projected earnings growth, the PEG is greater than 1. A PEG less than 1 is ideal, indicating that the market does not yet reflect the company's growth potential.
According to a company's most recent income statement, its sales last quarter totaled $489,300, and its cost of goods sold was $241,000. What was the company's gross profit margin for the quarter?
51%. To determine the company's gross profit margin, we first need to calculate its gross profit for the quarter. To find the gross profit, subtract the cost of goods sold from the total sales ($489,300 - $241,000 = $248,300). Then, divide the gross profit by the total sales to determine the company's gross profit margin ($248,300 / $489,300 = 0.51 or 51%). That means that for every one dollar in sales, the company is going to have $0.51 left after paying for the cost of goods sold. Investors often calculate a company's gross profit margin to determine how efficient the firm is in producing its products. If a company has a gross profit margin that is higher than the industry average, the firm is more efficient in producing its products than most competitors.
The Sarbanes-Oxley Act of 2002 is legislation that was passed in response to numerous
Accounting scandals. The Sarbanes-Oxley Act of 2002 is federal legislation that was passed in response to numerous major corporate and accounting scandals. These scandals include Enron and WorldCom which resulted in a loss of public trust in current accounting and reporting procedures. The law established new and improved accounting procedures for public companies and accounting firms. The Sarbanes-Oxley Act was not passed in response to recent investment options, tax settlements, or collection activities.
In order for an accounting system to be useful to the business, the accounting information it contains must be
Accurate and up-to-date. Accounting records show the financial health of a business. If its accounting records are inaccurate or out of date, a business cannot be sure what its financial situation is. Posting is transferring accounting information from a daily journal to the appropriate ledger, and it can be done by bookkeepers or clerical staff. The chief executive officer of a business would not have time to approve all the accounting information the system contains. A business may use either the cash accounting method or the accrual method. In the cash accounting method, income and expenditures are recorded at the time the money changes hands. In the accrual method, transactions are recorded at the time they occur even if no money changes hands.
Financial managers who are legally responsible for their clients' investments must demonstrate fiduciary responsibility, which involves
Acting in the best interests of their clients. In the financial industry, a fiduciary is a financial professional who has been given legal authority to make financial transactions on behalf of an individual or business—the owner of the financial product (e.g., stock). Because the fiduciary has been given legal authority to act on behalf of a client, s/he must act in the best interest of the client. Fiduciary responsibility involves making wise financial decisions and obtaining financial products that will help the client achieve his/her financial goals. A fiduciary does not focus on selling products that generate the highest commissions or make risky investments without the client's knowledge. A responsible, ethical fiduciary is transparent and trustworthy and continuously communicates with her/his clients rather than communicating with them only once a year.
One reason businesses conduct a cost/benefit analysis is to evaluate
Alternatives. Businesses often conduct a cost/benefit analysis when making economic decisions. One reason to do this is to evaluate the various alternatives before making a decision. For example, a business that is planning to expand would consider the cost of building a new location, renting an existing facility, sharing space with another business, etc. These are alternatives. The business analyzes the cost of each alternative and the benefit to decide which alternative is the best choice. Businesses do not conduct a cost/benefit analysis to evaluate procedures, resources, or specialties.
Mutual funds that contain both stocks and bonds are known as
Balanced funds. Mutual funds that contain both stocks and bonds are known as balanced funds. Exchange-traded funds are "cousins" of mutual funds that trade like individual stocks. Money market funds invest in a variety of different securities that provide relatively higher rates of return over the short-term. Index funds are a unique type of stock mutual fund that copy the performance of a particular stock market index, such as the Standard and Poor's 500 (S&P 500) or the Nasdaq 100.
When Janine wants to know what others are willing to pay for a bond she owns, she looks at the
Bid price. The bid price is what others are willing to pay for the bond. If $93.90 is the bid price, buyers are willing to pay only 93.9% of the bonds par value. In contrast, if the bid price is $101.55, buyers are willing to pay 101.55% of the bonds par value. If you;re buying a bond, you want the bid price to be under $100. But, if you're selling a bond, you want it to be over $100. The issuer is the corporation or governing body "issuing" the bond, or borrowing the money. The bond rating is the ranking that shows how likely it is that an issuer will repay the bond. The bond's interest rate is its coupon rate.
Which of the following represents an operating expense for a business:
Cost of utilities. This is an expense that is part of a business's day-to-day operation. Sales revenue is income coming into the business from sales. The cost of goods is the expense of purchasing the goods. Returns and allowances are refunds or price adjustments given to customers.
Which of the following is a plan in which investors can accumulate more and more shares of a company's stock, without having to pay the standard brokerage fees for purchasing them:
DRIP. A DRIP (Dividend Reinvestment Plan) is a way for investors to accumulate more and more shares of a company's stock, without having to pay the standard brokerage fees for purchasing them. A DSP (Direct Stock Purchase) is a plan in which investors make an initial stock purchase directly from the company, bypassing the brokerage house and its associated fees. A 401(k) is an employer-sponsored, tax-deferred retirement plan. An IRA (Individual Retirement Account) is a tax-deferred retirement plan you set up for yourself.
What is the process of reducing the value of a business's assets over a period of time?
Depreciation. The reduction in value of goods or assets occurring over a period of time is the process of depreciation. Business's depreciate their assets for accounting purposes because assets often decrease in value over time and need to be replaced. For example, a $10,000 color copier might be depreciated by 20% each year for the next five years. At the end of that time, it has no value. The process of reducing the value of a business's assets over a period of time is not reconciliation, adjustment, or consolidation.
Ratios are calculated by
Dividing one number by another. Ratios are all computed the same way—by dividing one number by another. Multiplication rarely plays a role in calculating financial ratios, although it may be used to compute a particular numerator or denominator. All ratios use division; there is not an option between multiplying or dividing depending on the ratio.
Which of the following sources provides its clients with detailed research reports about securities and offers them high levels of personal service:
Full-service brokerage firm. A full-service brokerage firm employs brokers who execute basic trades as well as offer investment planning, advice, and other services. Because they offer high levels of personal service, these types of firms usually charge high commissions. Online and discount brokerage firms provide clients with securities information; however, they offer fewer services, so clients assume more responsibility for managing their own investments. Boutique is not a term that is commonly used to describe a type of brokerage firm.
Which of the following pieces of legislation allows for the consolidation of commercial and investment banks, insurance companies, and securities firms:
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act repeals part of the Glass-Stegall Act of 1933 by allowing different types of financial institutions to form mergers or consolidate. The Community Reinvestment Act encourages commercial banks and other financial institutions to offer credit to borrowers in their local communities. The Sarbanes-Oxley Act of 2002 regulates corporations' and public accounting firms' activities.
When a business issues bonds, it agrees to repay the amount borrowed as well?
Interest. Some businesses issue bonds as a way of borrowing money. When the bonds mature after the designated period of time, the businesses repay the borrowers. Businesses also pay interest on the amount borrowed to encourage people to buy bonds. The advantage to the business is that it obtains needed funds. The advantage to those who purchase bonds is that they earn interest on their money. Stockholders receive dividends. The business earns a profit. Revenue is income.
Certificates of deposit and collectibles are types of
Investments. There are a wide range of investments available to individuals who want the opportunity to increase their worth. Some investments are riskier than others, which means that individuals might lose money rather than make money. Certificates of deposit are safe investments because they pay a guaranteed amount of interest over a specific period of time. Collectibles are a riskier type of investment because the collectible, such as a baseball card, might lose value over time and not have any worth. Certificates of deposit and collectibles are not types of accounts or securities. Certificates of deposit earn interest while collectibles may or may not increase in value.
The price-earnings (PE) ratio measures
Investors' expectations about a company's performance. PE is widely used because it reflects investors' expectations about a company's performance. It does not make a direct comparison between stock price and sales, nor does it measure management's ability to streamline operations. PE also does not measure stock price compared to shareholder's equity.
Which of the following is an advantage of a rolling budget?
It allows you to have a year-long budget in place at all times. One advantage to rolling budgets is that there is always a year-long budget in place. As each month goes by, another one is added. A rolling budget does not require less effort than an annual budget, but the effort is divided up throughout the year. Rolling budgets do not set an unchangeable annual budget. Indeed, they are often more flexible than a typical annual budget because they are assessed more frequently. Managers consult rolling budgets more frequently, not less.
Because Mia wants to be in charge of her investment portfolio and does not want to pay high commissions to a representative, she should consider obtaining securities information from a(n)
Online brokerage firm. Online brokerage firms provide clients with securities information via the Internet. Generally, online brokerage firms offer fewer services than full-service brokerage firms, so clients assume more responsibility for managing their own investments. A stockbroker is a licensed person who has the authority and expertise to buy and sell securities on behalf of a client. Stockbrokers often charge high fees or earn high commissions. Certified insurance agents and risk management officers do not always possess securities expertise or have reliable information about securities.
Which level of profit margin considers all the costs of doing business, such as salaries, rent, and utilities and the direct cost of bringing a product or service to market?
Operating profit margin. The direct cost of bringing the product to market and all the other costs of doing business, such as salaries, rent, and utilities, are reflected in operating profit margin. Gross profit margin considers only the direct costs of bringing the product to market. Pre-tax profit margin considers all of the above and interest expenses (or gains). Finally, net profit margin considers all expenses, including taxes.
Which of the following electronic internal accounting controls could be used to ensure that items are sold to customers only at prices that management has authorized:
Prerecorded data input. Many accounting software applications use prerecorded data input to ensure that items are sold to customers only at preselected prices. Business owners and/or management can enter product prices that they have formulated into the accounting application and effectively "lock" the prices in so that employees cannot change them. This prevents employees from overcharging or undercharging customers—both of which could cause financial problems for the business. Because employees cannot change the prices at will, accounting records for the product sales are more consistent, comparable, and easier to utilize in the business decision-making process.
An important purpose of full-disclosure laws and regulations is to
Provide information to investors so they can make informed decisions. Full-disclosure laws and regulations require companies to disclose—publicize—any information that could affect the value of the firms' stocks. Investors need this information so they can make informed buy, hold, or sell decisions about investments. Full-disclosure laws also prevent company employees and other insiders from using privileged information for their personal gain. Full-disclosure laws do not require companies to disclose every bit of information about their operations—some undisclosed trade secrets are permitted. Full-disclosure laws and regulations are not designed to impact par values of stock.
Of the following investments, which can bring roller-coaster ups and downs:
Stocks. Savings accounts, money market accounts, and bonds are stable investments that do not go up and down frequently. However, stocks can go up and down often. Stocks can fluctuate dramatically in the short term, and they can also increase (or decrease) significantly in the long term.
Which of the following is an example of an ownership investment:
Stocks. When people buy a company's stock, they are, in effect, becoming an owner of a piece of that company. Certificates of deposit, money market accounts, and savings accounts are examples of lending investments.
Who signs the Report of Management on the Financial Statements?
The CEO and the CFO. A corporation's CEO and CFO are both responsible for signing off on the financial statements, not just the CEO. The board of directors and the independent auditor's signatures do not appear on this page of the annual report.
In response to increased terrorism, what legislative act provides the U.S. government with the authority to monitor many types of electronic communications, including financial activities?
The USA PATRIOT Act. After the September 11th attack in 2001, the U.S. Congress passed legislation that provides the U.S. government more authority to monitor communications. The purpose is not to infringe on individual citizens' rights, but to provide the government with means to gather necessary intelligence to deter illegal or terrorist activities. Financial transactions are often indicators of potential terrorist activities and can help the government detect these types of situations, including money-laundry schemes. The Check Clearing for the 21st Century Act allows financial institutions to handle check transactions electronically. The Sarbanes-Oxley Act mandates that public businesses comply with specific accounting requirements. The Gramm-Leach-Bliley Act allows investment banks, commercial banks, insurance companies, and securities firms to consolidate.
Which of the following is a fundamental clue that it may be time to sell the stock you hold in a particular company:
The company is involved in questionable accounting practices. A fundamental clue that it may be time to sell the stock you hold in a particular company is a rise in the company's "troubles"—such as legal issues, shady CEOs, questionable accounting practices, and disagreements among key executives. Changing the company's business strategy and hiring a vice president of human resources can be positive company changes. Short-term stock price drops are not necessarily indicative of a long-term change in profitability.
Which of the following is a true statement about industries and sectors:
The economy is divided into sectors. The economy can be divided into sectors according to similar characteristics, such as business type or similar products. Sectors can be divided into more specific categories, called industries. And, industries can be divided into individual businesses. The more specific the category, the more similar the business characteristics.
When investors trade securities that have already been issued by a corporation, they are trading on
The secondary market. When investors trade securities that have already been issued by a corporation, they are trading on the secondary market. The secondary market is composed of stock exchanges, the over-the-counter market, and direct trading. An investor may trade on any of these and be trading on the secondary market.
Why do financial advisors conduct a fundamental analysis of a business before recommending it as an investment to clients?
To determine intrinsic value. A fundamental analysis is the study of all aspects of a company: the way it makes money, products, position in the industry, sales, earnings, etc. The purpose of conducting a fundamental analysis is to determine the intrinsic value of a business before recommending it as an investment to clients. Financial advisors want to find out if the business is performing well now, which is an indication of possible performance in the future. By determining the value of a business, financial advisors will know if it is a good investment. Financial advisors do not conduct a fundamental analysis of a business to negotiate a fair price or calculate a commission rate. Although they might prepare a written report to provide clients, that is not the reason for conducting the analysis.
Which investments, in particular, should an investor sell?
Those with the least potential for the future. An investor should sell the investments with the least potential for the future. Those with the most potential for the future should remain because they support the investor's goals. Investment performance in the most recent quarter—whether good or bad—should not be a major consideration in identifying which investments to sell. The potential for positive performance in the long term is more important than short-term ups and downs.
To be useful to businesses, financial information should be
Timely and understandable. Businesses obtain internal and external financial information to make decisions about their business activities. To make sound decisions, a business needs reliable and timely information that is presented in an understandable or logical way. The information should also be specific and relate to the situation at hand. Financial information does not need to be creative, transferable, or sensitive.
The stock table column that tells you how many shares were traded that day is labeled
VOL. Vol is short for Volume (sometimes called Sales). It records how many shares were traded that day. NET CHG stands for Net Change, or the difference between the closing price and the previous day's price. DIV is short for dividend, which is a portion of a company's profits, paid to shareholders each year. YLD% stands for Yield Percentage, which is determined by dividing the dividend into the current stock price.
A fund that invests in stocks that tend to be undervalued or overlooked is called a
Value fund. A fund that invests in stocks that tend to be undervalued or overlooked is called a value fund. Value fund managers choose stocks they think will appreciate in value over the long-term. A growth fund is a fund that invests in stocks that are most likely to appreciate in value over the short-term. A blend fund is a stock fund that contains both growth and value stocks. A sector fund is a fund that invests in stocks from one specific industry, such as oil.
