Series 65: Economic Factors and Business Information - Practice Questions

The difference between current assets and current liabilities is called A. net worth B. working capital C. cash flow D. quick assets

B. Working capital (or net working capital) is, by definition, the difference between current assets and current liabilities.

The contraction phase of the business cycle is least likely accompanied by decreasing A. consumer spending B. economic output C. inflation pressure D. unemployment

D. An economic contraction is likely to feature increasing unemployment (i.e., decreasing employment), along with decreasing consumer spending, declining economic output, and decreasing inflation pressure.

A company has been experiencing increased earnings but has kept its dividend payments constant. As a result solely of this, the company's balance sheet would reflect A. decreased net working capital B. decreased net worth C. decreased retained earnings D. increased shareholders' equity

D. If earnings increase, retained earnings also increase. If the increased retained earnings are not paid out as dividends, shareholders' equity increases.

Which of the following choices are affected when a corporation purchases a printing press for cash? A. Current assets B. Current liabilities C. Working capital D. Total assets E. Total liabilities F. Net worth

A and C. A payment of cash reduces current assets. Whenever either current assets or current liabilities change, working capital is also affected. The new printing press increases the value of the fixed assets. Total assets, however, are unchanged because the decrease in current assets is offset by the increase in fixed assets.

A bond analyst is plotting a yield curve and notices that short-term maturities have higher yields than intermediate and long-term maturities. This is an example of a(n) A. inverted yield curve B. positive yield curve C. normal yield curve D. algorithmic yield curve

A. An inverted, or negative, yield curve is one that results when debt with short-term maturities has higher yields than those with maturities that are longer. A positive, or normal, yield curve results when the yields increase as maturities do.

Which are affected when a corporation declares a cash dividend? A. Current assets B. Current liabilities C. Working capital D. Total assets E. Total liabilities F. Net worth

B, C, E, and F. The declaration (not payment) of a dividend creates a current liability on the books of the corporation. Because current liabilities are affected, working capital and total liabilities also change. The declaration of a dividend reduces the net worth because the dividend will be paid from retained earnings. When the dividend is paid, current assets will decrease and current liabilities will decrease (this also decreases both total assets and total liabilities). Working capital does not change because both current assets and current liabilities decrease by the same amount.

The Conference Board has released information indicating an increase in the Help Wanted Index. Most analysts would take this as a sign of A. an impending recession B. likely wage inflation in the future C. an increase in manufacturing inventories D. a rising trade deficit

B. An increase in the Help Wanted Index signifies that employers are hiring—business is good. Competition for qualified workers will usually result in paying higher wages and that will translate to higher prices for goods and services (inflation).

Potential litigation for patent infringement would appear on a corporation's A. balance sheet as a deferred asset B. footnotes C. income statement as an expense D. statement of potential litigation

B. The footnotes to the financial statements carry information such as potential legal actions, accounting methods used (e.g., FIFO or LIFO), and off-book debt.

As a result of corporate transactions, a company's assets remain the same and its equity decreases. Which of the following statements is TRUE? A. Prepaid expenses decrease. B. Total liabilities increase. C. Accrued expenses decrease. D. Net worth increases.

B. The formula for the balance sheet is as follows: assets = liabilities + shareholders' equity. If assets stay the same and equity (net worth) decreases, liabilities must increase. Prepaid expenses are assets; accrued expenses are liabilities.

An investor is considering purchasing stock in Gigantous Corporation, a company that manufactures gigantic robots. The investor would be able to find information about off the books debt guarantees made by Gigantous Coporation A. In the income statement B. In the balance sheet C. In the footnotes to financial statements D. In form 10-K

C. Footnotes to the financial statements identify significant financial and management issues that may affect the company's overall performance, such as accounting methods used, extraordinary items, pending litigation, and management philosophy. Typically, a company separately discloses details about its long-term debt in the footnotes. These disclosures are useful for determining the timing and amount of future cash outflows. The disclosures usually include a discussion of the nature of the liabilities, maturity dates, stated and effective interest rates, call provisions and conversion privileges, restrictions imposed by creditors, assets pledged as security, and the amount of debt maturing in each of the next five years. Also disclosed in the footnotes would be off the books financing arrangements such as debt guarantees. Note: Footnotes are generally found on the bottom of the financial statements and can be several pages long.

The sum of a company's profits, after dividend payments, since the company's inception is called I. accumulated earnings II. cash flow III. earned surplus IV. retained earnings A. III and IV B. II, III, and IV C. I, III, and IV D. I and II

C. Although the most common term to describe this important part of a company's net worth is retained earnings, any of them may be used on the exam with the same meaning.

Core inflation is best described as an inflation rate A. for producers' raw materials B. the central bank views as acceptable C. that excludes certain volatile goods prices D. that represents a market basket of consumer items

C. Core inflation is measured using a price index that excludes food and energy prices.

A U.S.-based firm assembles electronic equipment using parts imported from Singapore. Its income statement looks like this: Sales: $60 million Wages: 30 million Parts: 16 million Expenses: 46 million Net Income: 14 million What is this firm's contribution to the U.S. GDP? A. $14 million B. $30 million C. $44 million D. $60 million

C. The question is how we measure this firm's contribution to U.S. output. At first glance, the answer would seem to be $60 million, the total value of its sales. However, $16 million of this was produced somewhere else, so it shouldn't be counted as part of the firm's—or the United States'— output. Thus, the correct answer is $44 million, the amount of value the firm has added to the imported parts.

As current interest rates go up, the market price of existing corporate bonds bearing lower interest rates will A. increase B. stay the same C. decrease D. change in unpredictable ways

C. There is an inverse relationship between interest rates and bond prices. This means that as current interest rates go up, the market price of existing bonds will go down.

Which of the following is NOT affected by the issuance of a bond? A. Assets B. Total liabilities C. Working capital D. Shareholders' equity

D. On the issuance of a bond, cash is received (thus increasing current assets) and long-term debt increases (increasing total liabilities). Because there is no corresponding increase in current liabilities, working capital will increase; it would have no effect on shareholders' equity.

Which of the following statements best describes what will happen when the value of the American dollar rises in relationship to foreign currencies? A. Foreign goods and services will become more expensive for Americans. B. The risk of stagflation will increase. C. Shares of foreign stock will be worth more in terms of American dollars. D. Foreign goods and services will become less expensive for Americans.

D. When the value of the dollar rises, it will buy more foreign money, making foreign goods and services less expensive for Americans. Because foreign securities are valued in foreign currencies, shares of foreign stock will be worth fewer American dollars when the value of the dollar increases.