Deck 1: Overview of Financial Management

Question 1

A financial manager is considering two projects,A and B; both are expected to add $5 million to profits.Project A is expected to add $5 million to profits this year,while Project B is expected to add $1 million to profits each year over the next five years.Which of the following statements is MOST correct?

A)The manager should select Project A because it maximizes profits.
B)The manager should select the project that maximizes long-term profits,not just one year of profits.
C)The manager should select Project A,of course.
D)The manager should select the project that causes shareholder wealth to increase the most,which could be A or B.

Answer 1

D

Question 2

Profit maximization is NOT an adequate goal of the firm when making financial decisions because:

A)it does not necessarily reflect shareholder wealth maximization.
B)it ignores the risk inherent in different projects that will generate the profits.
C)it can over-emphasize a project's short-term returns.
D)All of the above.

Answer 2

D

Question 3

The creation of value:

A)implies that one firm will gain at the expense of others.
B)provides benefits to society as scarce resources are directed to their most productive use.
C)is not a practical goal since it cannot be measured effectively.
D)is achieved only if cash flows exceed accounting profits.

Answer 3

B

Question 4

Which of the following goals of the firm are synonymous with the maximization of shareholder wealth?

A)Profit maximization
B)Risk minimization
C)Maximization of the total market value of the firm's common stock
D)None of the above

Question 5

Determining the best way to raise money to fund a firm's long-term investments in fixed assets is an example of which cash-related activity in the cash flow cycle?

A)Operating activity
B)Profitability activity
C)Investing activity
D)None of the above

Question 6

The cash flow cycle:

A)describes the flow of cash through a company.
B)illustrates that profits and cash flows are the same.
C)reminds a financial manager that profits are important.
D)focuses on financing activities only.

Question 7

The creation of value is driven by what factors?

A)Cash flow and growth
B)Growth and risk
C)Profitability and growth
D)Reducing risk

Question 8

Which of the following goals are in the best long-term interest of shareholders?

A)Profit maximization
B)Risk minimization
C)Maximizing the market value of the existing shareholders' common stock
D)Maximizing sales revenue

Question 9

Financing activities are concerned with:

A)determining whether a company's assets should be financed with debt or equity.
B)managing a firm's cash management procedures.
C)managing a firm's working capital.
D)planning sales of a corporation's equity capital.

Question 10

The financial manager is involved in these cash-related activities in the firm:

A)investing,working capital management,and financing.
B)real assets,financing,and investing
C)operations,profitability,and financing
D)investing,operating,and financing.

Question 11

Do corporate decisions that increase the value of the firm's equity benefit society as a whole?

A)Yes,as long as the value of the firm's equity increases,society is better off.
B)Yes.as long as the increase in the value of the firm's equity does not come at the expense of others.
C)No,any gain in the value of the firm's equity is always less than the cost to society.
D)No,any gains in the value of the firm's equity are perfectly offset by societal costs.

Question 12

In measuring value,the firm's focus should be on:

A)cash flow.
B)accounting profits.
C)time value of money.
D)earnings per share.

Question 13

Investing activities are concerned with:

A)how a firm can best manage its cash flows as they arise in its day-to-day operations.
B)vice president of productions and operations.
C)managing a firm's cash budgeting procedures.
D)managing a firm's working capital.

Question 14

The three basic types of cash-related activities that every business faces are:

A)investing,working capital management,and financing.
B)financing,operations,and investing.
C)working capital management,financing,and budgeting.
D)capital budgeting,investing,and cash management.

Question 15

The primary goal of a publicly owned firm is:

A)maximize profits.
B)minimize shareholder risk.
C)value creation.
D)maximize revenues.

Question 16

Cash management is typically the responsibility of the:

A)chief executive officer.
B)vice president of production and operations.
C)financial manager.
D)company internal auditor.

Question 17

Operating activities are concerned with:

A)determining whether a company's assets should be financed with debt or equity.
B)managing a firm's cash budgeting procedures.
C)managing a firm's working capital.
D)planning sales of a corporation's equity capital.

Question 18

Which of the following statements best represents what finance is about?

A)How political,social,and economic factors affect corporations
B)How corporations can maximize profits
C)How to create and maintain economic wealth
D)How to reduce shareholder risk

Question 19

If managers are making decisions to maximize shareholder wealth,then they are primarily concerned with making decisions that should:

A)positively affect profits.
B)increase the market value of the firm's common stock.
C)either increase or have no effect on the value of the firm's common stock.
D)Accomplish all of the above.

Question 20

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 often has a short-term focus.
C)maximization of dividend payout ratio is a better description of the goal of the firm.
D)Both A and B

Question 21

Financial management deals with the creation and maintenance of economic value or wealth.

Question 22

Borrowing monies from financial institutions to fund the firm's revenue growth is an example of which cash-related activity in the cash flow cycle?

A)Operating activity
B)Profitability activity
C)Investing activity
D)Financing activity

Question 23

The main duties of financial managers are:

A)assessing the current business situation and future financing needs.
B)developing long-term financing strategies.
C)assessing future investments.
D)All of the above.

Question 24

Which of the following best describes the ultimate task of the financial managers?

A)Profit maximization
B)Risk minimization
C)Maximization of shareholders' wealth
D)None of the above

Question 25

A corporate financial manager who is trying to create value for its shareholders:

A)is not concerned with ethics but rather with writing iron-clad contracts.
B)can safely ignore ethics as long as no laws are broken.
C)must behave ethically to stay out of jail.
D)is concerned with ethics because unethical behavior destroys trust,and businesses cannot function without a certain degree of trust.

Question 26

Which of the following is NOT a cash-related activity of the financial manager?

A)Operating
B)Systems
C)Financing
D)Auditing

Question 27

Which of the following best describes the role of financial managers?

A)Maximization of the total market value of the firm's common stock
B)Profit maximization
C)Risk minimization
D)None of the above

Question 28

Cash flows and profits are synonymous,in other words,higher cash flows equal higher profits

Question 29

Raising new capital through the sale of common equity is an example of which cash-related activity in the cash flow cycle?

A)Operating activity
B)Profitability activity
C)Investing activity
D)Financing activity

Question 30

To generate cash to invest in fixed assets,a firm can issue equity or obtain a loan from a bank.This is an example of which cash-related activity in cash flow management?

A)Operating activity
B)Profitability activity
C)Investing activity
D)Financing activity

Question 31

In general,financial managers are concerned with which of the following?

A)Creating economic wealth
B)Making investment decisions that optimize economic value
C)Making business decisions that optimize economic wealth
D)All of the above

Question 32

Which of the following goals of the firm is equivalent to the maximization of shareholder wealth?

A)Profit maximization
B)Risk minimization
C)Maximization of the total market value of the firm's common stock
D)None of the above

Question 33

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)None of the above

Question 34

Day-to-day cash management is one of the fundamental concepts that a nonfinancial manager should understand in order to:

A)better assess the e current environment in which the firm operates.
B)better assess future financing requirements.
C)better understand the role of capital markets in raising long-term funds.
D)better measure and create value for the shareholders.

Question 35

Offering discounts to accelerate the collection of accounts receivables in an example of which cash-related activity in the cash flow cycle?

A)Operating activity
B)Profitability activity
C)Investing activity
D)Financing activity

Question 36

What does it mean to "maximize the value of the firm"? In general,how is value created? What factors determine value and how does each affect the value of the firm?

Question 37

If managers are making decisions to maximize shareholder wealth,they are primarily making decisions that:

A)maximize sales revenue.
B)minimize risk.
C)maximization of the market value of shareholders' common stock.
D)reduce the costs of borrowing.

Question 38

Which of the following are fundamental concepts that nonfinancial managers need to understand?

A)How current business conditions can affect the firm's performance.
B)How to project financial statements and future investment needs.
C)How capital markets work to raise long-term capital.
D)All of the above.

Question 39

Financial statement analysis is one of the fundamental concepts that a nonfinancial manager should understand in order to:

A)better assess the current environment in which the firm operates.
B)better assess the future financing requirements.
C)better understand the role of capital markets in raising long-term funds.
D)better measure and create value for the shareholders.

Question 40

Ensuring that there is adequate cash to pay the firm's suppliers is an example of which cash-related activity in the cash flow cycle?

A)Operating activity
B)Profitability activity
C)Investing activity
D)Financing activity

Question 41

Financial managers work with the managers from the other functional areas of business.For example: When the financial manager provides funds for activities such as the development of products or services,they are probably working with which functional area?

A)Human Resourses
B)Information Technology
C)Marketing
D)Operations

Question 42

Assessing the current business environment is NOT a fundamental concept related to financial management.

Question 43

The ability to identify the key industry drivers of success is a fundamental concept that a nonfinancial manager should understand in order to:

A)better assess the current environment in which the firm operates.
B)better assess future financing requirements.
C)better understand the role of capital markets in raising long-term funds.
D)better measure and create value for shareholders.

Question 44

The ability to analyze the company's strengths and weaknesses is a fundamental concept that a nonfinancial manager should understand in order to:

A)better assess the current environment in which the firm operates.
B)better assess future financing requirements.
C)better understand the role of capital markets in raising long-term funds.
D)better measure and create value for the shareholder.

Question 45

In what important ways do financial managers and the accounting discipline interact?

Question 46

Financial managers work with the managers from the other functional areas of business.For example: When the financial manager provides funds for activities such as training and hiring,they are probably working with which functional area?

A)Human Resourses
B)Information Technology
C)Marketing
D)Operations

Question 47

Although the firm has many important stakeholders,the ________ are most important because they are essentially the owners of the firm.

A)Shareholders
B)Investment bankers
C)Lenders
D)Managers

Question 48

Which of the following is NOT a disadvantage of a sole proprietorship as a form of business organization compared to the corporate form of business organization?

A)Access to the capital markets
B)Unlimited liability of the owners
C)Subject to the double taxation
D)Limited liability of the shareholders

Question 49

The ________ measure a firm's performance over a specified period of time whereas a ________ provides a snapshot of the firm as of a specific date.

A)income and balance sheets; cash flow statement
B)balance sheet and cash flow statement; income statement
C)income and cash flow statements; balance sheet
D)None of the choices are correct.

Question 50

Accounting supports financial managers by providing all of the following EXCEPT:

A)identifying relevant data related to the activities of the firm.
B)presenting data in an agreed-upon and standardized form known as generally accepted accounting practices.
C)summarizing the firm's economic activity in the form of financial statements.
D)generating revenue for the firm.

Question 51

Which of the following is NOT an advantage of a sole proprietorship?

A)Minimum legal requirements to start the business
B)Firm exists until dissolved by the owner
C)Limited liability
D)None of the above

Question 52

This form of business ownership does NOT avoid double taxation.

A)Limited partnership
B)"S" corporation
C)"C" corporation
D)Limited liability company

Question 53

Some fundamental concepts that nonfinancial managers need to understand include:

A)the ability to assess day-to-day cash management.
B)the ability to assess future financing requirements.
C)the ability to understand the role of capital markets in raising long-term funds.
D)All of the above.

Question 54

An understanding of how the company's cost of capital is determined is one of the fundamental concepts that a nonfinancial manager should understand in order to:

A)better assess the current environment in which the firm operates.
B)better assess future financing requirements.
C)better understand the role of capital markets in raising long-term funds.
D)better measure and create value for the shareholders.

Question 55

The ability to understand the short-term and long-term impact of investment decisions is a fundamental concept that a nonfinancial manager should understand in order to:

A)better assess the current environment in which the firm operates.
B)better assess future financing requirements.
C)better understand the role of capital markets in raising long-term funds.
D)None of the above.

Question 56

Financial Managers rely on the firm's ________ department to relay key financial data,such as cash flow statements,to aid in capital budgeting and financing decisions.

A)human resources
B)accounting
C)marketing
D)operations

Question 57

An understanding of the role of capital markets is one of the fundamental concepts that a nonfinancial manager should understand in order to:

A)better assess the current environment in which the firm operates.
B)better assess future financing requirements.
C)better understand the role of the capital markets in raising long-term funds.
D)better measure and create value for the shareholders.

Question 58

S-type corporations and limited liability companies are taxed like partnerships,but have the advantage of limited liability for their owners.

Question 59

Each functional area is,in some way,involved in the generation or consumption of cash.

Question 60

Which of the following organizational forms accounts for the greatest number of firms?

A)"S" Corporation
B)Limited partnership
C)Sole proprietorship
D)"C" corporation

Question 61

Which type of business organization is the best for attracting new equity capital?

A)Sole proprietorship
B)Limited liability corporation
C)General partnership
D)A public corporation

Question 62

The limited liability company (LLC)form of business organization is:

A)able to retain limited liability for its owners.
B)a cross between a partnership and a corporation.
C)it is taxed like a partnership.
D)All of the above.

Question 63

Which of the following factors enable a public corporation to grow to a greater extent,and perhaps at a faster rate,than a partnership or proprietorship?

A)Access to the capital markets
B)Unlimited liability of the shareholders
C)Limited life
D)Elimination of double taxation corporate income

Question 64

Which of the following statements is TRUE?

A)An advantage of a corporation is that there is less regulation of the business.
B)An advantage of a corporation is that it is subject to double taxation.
C)Unlike a partnership,a disadvantage of a corporation is that it has limited liability.
D)Corporations face more regulations when compared to partnerships.

Question 65

Which is NOT a characteristic of a limited liability partnership?

A)One or more of the partners must be a general partner to whom the privilege of limited liability does not apply.
B)Prohibits the limited partners from participating in the management of the partnership.
C)Partners pay taxes on dividends distributed.
D)One or more partners have limited liability.

Question 66

A limited liability company is:

A)a limited partnership without limited partners.
B)just another name for a limited partnership.
C)a limited partnership without a general partner.
D)just another name for a corporation.

Question 67

The true owners of the corporation are the:

A)holders of debt issues of the firm.
B)board of directors of the firm.
C)creditors.
D)common stockholders.

Question 68

One of the advantages of a sole proprietorship is:

A)limited liability for its owners.
B)double taxation for its owners.
C)complexity of transferring ownership.
D)no significant legal requirements for starting the business.

Question 69

Which of the following statements about the corporate form of business organization is TRUE?

A)The corporate form has the disadvantage of double taxation relative to a sole proprietorship.
B)The corporate form is preferred over the sole proprietorship because a corporation is easier to form and faces less regulation.
C)Sole proprietorship is the most common form of business organization because liability is limited to the amount invested in the business by the sole proprietor.
D)The corporate form has the advantage of unlimited liability.

Question 70

A limited partnership provides limited liability to:

A)all general partners.
B)only limited partners responsible for day-to-day management of the firm's operations.
C)only to limited partners who do not participate in the management of the business.
D)all partners.

Question 71

The major disadvantage of a general partnership is:

A)each partner is fully responsible for the liabilities incurred by the partnership.
B)it is difficult to raise equity capital.
C)the costs of forming the partnership are high.
D)profits are taxed double.

Question 72

Which of the following organization forms accounts for the most revenue?

A)"S" corporation
B)Limited partnership
C)"C" corporation
D)Limited liability company

Question 73

Which of the following statements is/are advantages of incorporation?

A)Access to capital markets
B)Limited liability
C)Unlimited life
D)All of the above

Question 74

Which type of business ownership has limited liability?

A)Sole proprietors
B)General partners
C)Shareholders of a corporation
D)None of the above

Question 75

The distinguishing feature of a corporation is that:

A)a corporation is a legally defined,artificial being,separate from its owners.
B)there are no legal differences between the corporation and its owners.
C)it spreads the liability for its corporate obligations to all shareholders.
D)it provides limited liability only to small shareholders.

Question 76

Which of the following is NOT an advantage of a limited partnership?

A)Minimal legal requirements to start the business
B)Limited partnerships are limited in their management of the firm
C)Limited liability
D)None of the above

Question 77

This form of business organization does not distinguish between business and personal assets:

A)sole proprietorship.
B)limited liability corporation.
C)general partnership.
D)Both A and C

Question 78

Which type of business organization is subject to initial legal requirements?

A)Sole proprietorship
B)Limited liability corporation
C)"C" corporation
D)None of the above

Question 79

Which of the following statements regarding limited partnership is TRUE?

A)There is no limit on a limited partner's liability.
B)A limited partner is not liable until all the assets of the general partners have been exhausted.
C)A general partner's liability is limited by the amount of their investment.
D)A limited partner's liability is limited by the amount of their investment.

Question 80

Limited partnerships are not as prevalent as corporations because:

A)limited partners can lose up to three times the amount they invested in the partnership if the business goes bankrupt.
B)limited partnerships have the disadvantage of double taxation.
C)the general partner has no liability,making it difficult for the partnership to borrow money.
D)it is easier to transfer ownership by selling common stock than it is to sell the partnership.