1. Which of the following is an advantage of corporations relative to partnerships and sole proprietorships? Reduced legal liability for investorsHarder to transfer ownershipLower taxesMost common form of organization2. Dividends _____. represent an expense and are an operating activityrepresent an obligation and are an operating activityrepresent a distribution of earnings and are a financing activityrepresent an asset and are an investing activity3. Below is a partial list of account balances for LBJ Company:Cash $15,000Prepaid insurance 5,000Accounts receivable 2,500Accounts payable 3,000Notes payable 6,000Common stock 10,000Dividends 500Revenues 15,000Expenses 13,000What did LBJ Company show as total debits? $34,000$36,000$70,000$31,0004. Under the accrual basis of accounting, revenues are recorded and reported _____. when companies receive payments for jobs performed or products providedwhen companies have provided products or performed serviceswhen companies receive payments prior to providing products or performing serviceswhen companies receive payments after providing products or performing services5. In a period of increasing prices, which inventory cost flow assumption will result in the highest amount of net income? LIFOThe average cost methodFIFOIncome tax expense for the period will be the same under all assumptions.6. Equipment was purchased for $55,000 on January 1, 2011. Freight charges of $2,200 were incurred and there was a cost of $1,800 for installation. It is estimated the equipment will have a $5,500 salvage value at the end of its 5-year useful life. Depreciation expense for 2011 using the straight-line method will be _____. $10,340$10,700$10,260$9,9007. Payne Corporation issues 100 twenty-year, 6%, $1,000 bonds dated July 1, 2010, at 94. The journal entry to record the issuance will show a _____. debit to Cash of $100,000credit to Bonds Payable of $94,000credit to Premium on Bonds Payable of $4,000debit to Discount on Bonds Payable of $6,0008. Accounts receivable arising from sales to customers amounted to $80,000 and $120,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $2,000,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is _____.$2,040,000$2,000,000$1,200,000$1,960,0009. If you are making comparisons within a company to detect changes in financial relationships and significant trends, you are performing what type of analysis? Industry averages analysisIntercompany analysisCommon-size analysisIntracompany analysis10. The formula for performing horizontal analysis is _____. (Current Year Amount minus Base Year Amount) divided by Current Year AmountBase Year Amount divided by Current Year AmountCurrent Year Amount minus Base Year Amount(Current Year Amount minus Base Year Amount) divided by Base Year Amount11.Horizontal analysis of comparative financial statements includes the _____. development of common-size statementscalculation of liquidity ratioscalculation of dollar amount changes and percentage changes from the previous year to the current yearevaluation of financial statement data that expresses each item in a financial statement as a percentage of a base amount12. A common measure of solvency is the _____.asset turnovercurrent cash debt coverage ratiocash debt coverage ratiocurrent ratio13. Stockholders would be most interested in which of the following ratios? Days in inventoryFree cash flowCurrent ratioAverage collection period14. To calculate the market value of a bond, we need to _____. multiply the bond price times the interest ratecalculate the present value of the principal onlycalculate the present value of the interest onlycalculate the present value of both the principal and interest paymentsTrue/False 1.The financial manager should examine available risk-return trade-offs and make his decision based upon the greatest expected return. False2.Only a few financial decisions involve some sort of risk-return tradeoff. False3.The sole proprietorship can be described as the absence of any legal business structure. True4.In a general partnership, all partners have unlimited liability for the actions of any one partner when that partner is conducting business for the firm. True5.There is no legal distinction made between the assets of the business and the personal assets of the owners in the limited partnership. False6.General partners have unrestricted transferability of ownership, while limited partners must have the consent of all partners to transfer their ownership. False7.Ultimate control in a corporation is vested in the board of directors. False8.There are a significant number of legal requirements to follow when establishing a sole proprietorship. False9.Limited partners may actively manage the business. False10.The life of a corporation is not dependent upon the status of the investors. True11.A sole proprietorship is the most desirable business form in all circumstances. False12.In a sole proprietorship, the owner is personally responsible without limitation for the liabilities incurred. True13.In a limited partnership, at least one general partner must remain in the association; the privilege of limited liability still applies to this partner. False14.In a general partnership, there is a distinction between business and personal assets. False15.In order to maximize shareholder wealth, a firm must consider historical costs as an integral part of their decision-making.16.Financial management is concerned with the maintenance and creation of wealth. True True17.Shareholder wealth is measured by the market value of the firm’s common stock. True True18.The agency problem arises due to the separation of ownership and control in a firm. True19.There is little, if any, difference between a business error and an ethical error. False20.For markets to be efficient, price adjustments to new information must be correct. False21.Ethical dilemmas frequently exist in finance. True22.Even though diversification can eliminate risk, it also makes it more difficult to measure a project’s or an asset’s risk. True23.Consider the following equally likely project outcomes: Profit XY Pessimistic prediction$0$500 Expected outcome$ 500$500 Optimistic prediction$1000 $500 a.Project Y has less uncertainty than Project X. b.Project X has more variability than Project Y. c.a and b. d.Since Projects X and Y have the same expected outcomes of $500, investors will view them as identical in value.24.Maximization of shareholder wealth as a goal is superior to profit maximization because: a.it considers the time value of the money. b.following the shareholder wealth maximization goal will ensure high stock prices. c.it considers uncertainty. d.a and c.25.Why is maximizing shareholder wealth a better goal than maximizing profits? a.Maximizing shareholder wealth places greater emphasis on the short term. b.Maximizing profits ignores the uncertainty that is related to expected profits. c.Maximizing shareholder wealth gives superior consideration to the entire portfolio of shareholder investments. d.Maximizing profits gives too much weight to the tax position of shareholders.26. Profit maximization does not adequately describe the goal of the firm because: a.profit maximization does not require the consideration of risk. b.profit maximization ignores the timing of a project’s return. c.maximization of dividend payout ratio is a better description of the goal of the firm. d.a and b.27. Consider cash flows for Projects X and Y such as: Project XProject Y Year 1$3000 $0 Year 2$0$3000 A rational person would prefer receiving cash flows sooner because: a.the money can be reinvested. b.the money is nice to have around. c.the investor may be tired of a particular investment. d.the investor is indifferent to either proposal.28. What is the chief disadvantage of the sole proprietorship as a form of business organization when compared to the corporate form? a.Sole proprietorships are subject to double taxation of profits. b.The cost of formation. c.Inadequate profit sharing. d.Owners have unlimited liability.29. Which of the following is not true for limited partnerships? a. Limited partners can only manage the business. b. One general partner must exist who has unlimited liability. c. Only the name of general partners can appear in the name of the firm. d. Limited partners may sell their interest in the company.30 .In terms of organizational costs, which of the following sequences is correct, moving from lowest to highest cost? a.General partnership, sole proprietorship, limited partnership, corporation b.Sole proprietorship, general partnership, limited partnership, corporation c.Corporation, limited partnership, general partnership, sole proprietorship d.Sole proprietorship, general partnership, corporation, limited partnership31.Coplon, Inc., an industrial firm, earned $180,000 in dividends in 1993 on their stock holding in the Finco Company. How much of the dividends are excluded from Coplon’s taxable income? a.$27,000 b.None c.$126,000 d.$153,00032.Which one of the following categories of owners enjoys limited liability? a.General partners in a limited partnership b.Shareholders (common stock) of a corporation c.Sole proprietors d.Both a & b33. Which of the following is a characteristic of a limited partnership? a.It allows one or more partners to have limited liability. b.It requires one or more of the partners to be a general partner to whom the privilege of limited liability does not apply. c.It prohibits the limited partners from participating in the management of the partnership. d.all of the above.34.Which of the following categories of owners have limited liability? a.General partners b.Sole proprietors c.Shareholders of a corporation d.Both a and b35.Which of the statements below is true? a.The sole proprietorship and the general partnership both feature unlimited liability. b.It is very complicated (legally) to establish a corporation. c.No legal criterion exists for a general partnership. d.All of the above are true.36.Which of the following types of business forms is the most ideal in terms of attracting new capital? a.Sole proprietorship b.Limited partnership c.General partnership d.A public corporation37.Which forms of organization are free of initial legal requirements? a.Sole proprietorship b.General partnership c.Corporation d.Both a and b38. For these types of organization, no distinction is made between business and personal assets. a. Sole proprietorship b. General partnership c. Limited partnership d. All of the above e. Both a and b39.Which of the following is a significant disadvantage of a general partnership? a.The cost of forming it is high. b.Each partner is fully responsible for the liabilities incurred by the partnership. c.There is a risk associated with the industry in which it operates. d.Forming the business is very complex.40.Which of the following should be considered when assessing the financial impact of business decisions? a.The amount of projected earnings b.The risk-return tradeoff c.The timing of projected earnings; i.e., when they are expected to occur d.The amount of the investment in a given project e.All of the above41. Which of the following forms of business organization is the dominant economic force in the United States? a.The sole proprietorship b.The general partnership c.The limited partnership d.The joint venture e.The corporation42.Which of the following reasons is most responsible for corporations being the most important form of business organization in the United States? a.Corporations have limited life. b.Stockholders have unlimited liability. c.Corporations are subject to less government regulation than the other forms of business organization. d.Corporations have the ability to raise larger sums of capital than the other forms of business organization. e.Corporations are subjected to less taxation than the other forms of business organization.43.How could you compensate an investor for taking on a significant amount of risk? a.Increase the expected rate of return. b.Raise more debt capital. c.Offer stock at a higher price. d.Increase sales.44.Which of the following would be most likely to align the interests of managers and shareholders? a. Fixed but high salaries b. Large bonuses c. Stock options d. All of the above e. None of the above45.What does the agency problem refer to? a.The conflict that exists between the board of directors and the employees of the firm b.The problem associated with financial managers and Internal Revenue agents c.The conflict that exists between stockbrokers and investors d.The problem that results from potential conflicts of interest between the manager of a business and the stockholders e.None of the above46.A limited liability company (LLC) is: a.able to retain limited liability for owners. b.taxed like a corporation. c.a cross between a partnership and a corporation. d.a and c. e.all of the above.47.Purchasing a security of a company that is issuing their stock for the first time publicly would be considered: a.a secondary market transaction. b.an initial public offering. c.a seasoned new issue. d.both a and b.48.In measuring value, the focus should be on: a.cash flow. b.accounting profits. c.time value of money. d.earnings per share.49.Which of the following is true regarding accounting profits? a.Received by the firm and reinvested b.Reflects money in hand c.Represents actual money received and paid out d.Equals cash in the bank50.Which of the following statements is true regarding competitive markets? a.Large profits exist over the long run. b.Product differentiation produces insulation for competitors. c.Cost advantages attract new entrants. d.Both b and c.51.Which of the following decrease new competition in competitive markets? a.Economies of scale b.Proprietary technology c.Product differentiation d.Both a and b e.All of the above52. Cost advantages in competitive markets: a.have the potential to create large profits. b.deter new entrants from entering. c.can be created by economies of scale. d.all of the above.53.Which of the following is a characteristic of an efficient market? a.Small number of individuals. b.Opportunities exist for investors to profit from publicly available information. c.Security prices reflect fair value of the firm. d.Immediate response occurs for new public information.54. Diversification increases when ________ decreases. a.variability b.return c.risk d.a and c e.all of the above55. IBM issuing new shares of common stock would be classified as: a. a new seasoned issue. b. an initial public offering. c. a secondary market transaction. d. a and b.56. According to the agency problem, _________ represent the principals of a corporation. a.shareholders b.managers c.employees d.suppliers57. The opening of new international markets to the U.S. can be attributed to: a.acceptance of a free market system by third world countries. b.regulation of U.S. industries. c.increase in information technology. d.a and c. e.all of the above. Short-Answer Questions58.Briefly discuss mechanisms that can be used to align the interests of shareholders and managers.59.Briefly discuss why financial decision makers must focus on incremental cash flows when evaluating new projects.60.Discuss the risk/return tradeoff and how it relates to finance.61.Compare and contrast primary market and secondary market transactions as it relates to the flow of funds in the transactions.62.Discuss how new entrants are deterred from entering a competitive market.63.What is incremental cash flow and how is it used in project analysis?
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