Deck 1: The Financial Manager and the Company

Question 1

The dollar difference between current assets and liabilities is called working capital.

Answer 1

False

Question 2

The process of transferring ownership of a sole proprietorship is relatively easy.

Answer 2

False

Question 3

Most large companies are incorporated in New South Wales because of its favourable tax treatment of corporate income and its laws protecting the rights of its owners.

Answer 3

False

Question 4

Unlimited liability means that the owner of a company is responsible for paying all the company's bills.

Question 5

Capital assets are generally short term in nature.

Question 6

A patent is a productive asset for a technology-based company.

Question 7

The treasurer of a company usually reports to the CFO of the company.

Question 8

When insolvency occurs, the company will always be liquidated.

Question 9

The most fundamental way that a business can grow in size is from the reinvestment of cash flows or earnings.

Question 10

A sole proprietorship is an owner's only business.

Question 11

The financing decision determines how companies raise cash to pay for their investments.

Question 12

The financial manager is responsible for making decisions that are in the best interest of the company's owners.

Question 13

The external auditors of the company report their findings directly to the CFO of the company.

Question 14

A good capital budgeting decision is one in which the benefits are worth more to the company than the cost of the asset.

Question 15

Privately held companies are allowed to have shareholders.

Question 16

The greatest number of businesses in Australia are companies.

Question 17

General partners in a business have limited liability with regard to their company's obligations.

Question 18

Companies do not have their income subject to double taxation.

Question 19

The local Liberal Party is a stakeholder in a local company that makes no political donations to either party.

Question 20

Intangible assets generate most of a company's cash flows.

Question 21

Capital budgeting involves:

A) how a company's day-to-day financial matters should be managed.
B) how the company should finance its assets.
C) which productive assets the company should employ.
D) all of the above.

Question 22

An agency problem can arise when the agent of the company is the sole owner of the company.

Question 23

The cash remaining after the company has met its operating expenses, payments to creditors, and tax is called:

A) earnings per share.
B) capital contributed in excess of par.
C) residual cash.
D) dividends.

Question 24

Which of the following are stakeholders?

A) a shareholder
B) a lender
C) the tax department
D) all of the above

Question 25

Which of the following asset purchase decisions are the most important to the company?

A) an intangible asset
B) a tangible asset
C) a financing decision
D) all of the above

Question 26

Maximising revenue should be the goal of the company.

Question 27

If you have loaned capital to a company, then you could be:

A) a shareholder.
B) a stakeholder.
C) a partner.
D) all of the above.

Question 28

A good capital budgeting decision is:

A) one in which the benefits of the project are equal to the cost of the asset.
B) one in which the benefits of the project are less than the cost of the asset.
C) one in which the benefits of the project are more than the cost of the asset.
D) all of the above.

Question 29

Financial managers make decisions that:

A) maximise the owners' wealth.
B) accord with the owners' decisions.
C) maximise the owners' share values.
D) all of the above.

Question 30

Current liabilities are liabilities that:

A) will be converted to cash within a year.
B) must be paid within a year.
C) will be converted to equity within a year.
D) none of the above

Question 31

Financing decisions involve:

A) raising cash to pay for investments.
B) trade-offs between advantages and disadvantages.
C) long-term borrowing for productive assets.
D) all of the above.

Question 32

Capital budgeting decisions generally involve:

A) the fixed asset portion of the balance sheet.
B) the short-term portion of the balance sheet.
C) the current liability portion of the balance sheet.
D) all of the above.

Question 33

Financial markets in which equity and debt instruments with maturities greater than one year are traded are called:

A) money markets.
B) capital markets.
C) share markets.
D) none of the above.

Question 34

Corruption in business does not affect the functioning of the financial markets.

Question 35

Working capital management decisions involve:

A) how a company's day-to-day financial matters should be managed.
B) how the company should finance its assets.
C) which productive assets the company should employ.
D) all of the above.

Question 36

The owners of a company are unaffected by agency costs.

Question 37

Cash dividends are paid out of:

A) residual cash.
B) liquidated assets.
C) long-term debt.
D) operating expenses.

Question 38

Where liquidation follows insolvency, the ___________ is/are always paid first.

A) employees
B) government
C) creditors
D) owners

Question 39

An ethical business culture is the most effective way to protect the public:

Question 40

A draftsman is an example of:

A) a productive asset.
B) an intangible asset.
C) a nebulous asset.
D) none of the above.

Question 41

One reason for the existence of agency problems between managers and shareholders is that:

A) there is a separation of ownership and control of the company.
B) managers know how to manage the company better than shareholders.
C) shareholders have unreasonable expectations about managerial performance.
D) none of the above

Question 42

Which of the following business organisational forms subjects the owner(s) to unlimited liability?

A) sole trader
B) limited partnership
C) company
D) public company

Question 43

Which of the following cannot be engaged in managing the business?

A) a sole trader
B) a general partner
C) a limited partner
D) none of the above

Question 44

When analysts and investors determine the value of a company's shares, they should consider:

A) the size of the expected cash flows associated with owning the shares.
B) the timing of the cash flows.
C) the riskiness of the cash flows.
D) all of the above.

Question 45

Which of the following is an appropriate goal for the company?

A) profit maximisation
B) revenue maximisation
C) shareholder wealth maximisation
D) tax minimisation

Question 46

Shareholders elect ______________ to represent their interest in the company.

A) a chairman
B) a CEO
C) a board of directors
D) a and c

Question 47

Which of the following is responsible for performing an independent audit of the company's financial statements?

A) CFO
B) CEO
C) CPA company
D) audit committee

Question 48

Which of the following reports directly to the owners of the company (assume the company is a public company)

A) CFO
B) CEO
C) board of directors
D) audit committee

Question 49

How is the CPA company insulated from being pressured by management?

A) The audit committee approves the external auditor's fees and assists with the auditor's report.
B) The chairman of the board approves the external auditor's fees and assists with the auditor's report.
C) The tax department approves the external auditor's fees and assists with the auditor's report.
D) The CPA company is not insulated from management.

Question 50

Which of the following is a principal within the agency relationship?

A) a company engineer
B) the CEO of the company
C) a shareholder
D) the board of directors

Question 51

About 75 per cent of all businesses in Australia are:

A) sole traders.
B) partnerships.
C) companies.
D) limited liability partnerships.

Question 52

Which of the following is responsible for seeing that the best possible financial analysis is presented?

A) CFO
B) CEO
C) board of directors
D) audit committee

Question 53

Which organisational form(s) accounts for more than 75 per cent of the revenues of all businesses in Australia?

A) sole trader
B) partnership
C) company
D) a and b

Question 54

An example of a direct agency cost is:

A) a manager turning down a value-contributing project because of its risks.
B) a manager expensing a large dinner on the company expense report.
C) a manager using too little debt within the company's capital structure because of the additional risk associated with debt.
D) all of the above.

Question 55

Which of the following organisational forms is subject to the most legal regulations?

A) sole trader
B) partnership
C) private company
D) public company

Question 56

What form of business organisation is described in a legal sense as a 'person'?

A) a sole trader
B) a partnership
C) a company
D) none of the above

Question 57

Which of the following is considered a hybrid organisational form?

A) sole trader
B) partnership
C) company
D) limited liability partnership

Question 58

Which organisational form best enables a business to sell its securities to the market?

A) sole trader
B) partnership
C) private company
D) public company

Question 59

Which of the following can help align the behaviour of managers with the goals of shareholders?

A) management compensation
B) managerial labour markets
C) an independent board of directors
D) all of the above

Question 60

Which organisational form best enables the owners of the company to monitor the actions of other owners of the same company?

A) sole trader
B) partnership
C) private company
D) public company

Question 61

Explain how agency costs might be found within a company whose CEO owns no shares in the company, and whose compensation package is unaffected by the profits (cash or accounting profits) of the company.

Question 62

Incentives for ethical behaviour are:

A) market forces.
B) legislation.
C) insolvency.
D) all of the above.

Question 63

_____________occur(s) when one party in a business transaction has information that is unavailable to the other parties in the transaction.

A) Profits
B) Information asymmetry
C) Information efficiency
D) Financial advantage

Question 64

What is the main purpose of the ASX Corporate Governance Council recommendations?

A) to disclose the roles of the board.
B) to safeguard the integrity of all material matters.
C) to promote and maintain investor confidence.
D) to facilitate internal control.

Question 65

If a company has had an agency problem that is reflected in a poor performing share for a long period of time, then the company may become a target of _________________.

A) an ASIC investigation.
B) a corporate raider.
C) a tax department investigation.
D) an insolvency lawyer.

Question 66

A society's ideas about what actions are right and wrong are:

A) morals.
B) ethics.
C) laws.
D) unwritten laws.

Question 67

A director who is not an employee of the company is called an:

A) executive director.
B) internal director.
C) independent director.
D) official director.

Question 68

An officer of a company that is a majority owner in a competing company will probably be subject to:

A) a tax audit.
B) a conflict of interest with his shareholders.
C) arbitrage profit returns to ASIC.
D) a police investigation.

Question 69

You have a friend who tells you that ethics are completely unimportant in business since a number of laws have been set up for us to know the rules of the game. Please discuss.

Question 70

Who or what is responsible for setting the agenda at meetings of the board of directors?

A) the chairman
B) the board of directors
C) nominating committee
D) audit committee

Question 71

Executives that repeatedly put their own interests before that of the company may find that they have difficulty finding another job after their current one. This is an example of:

A) the managerial labour market disciplining managers.
B) the market for corporate control.
C) the board of directors affecting the prospects of a manager.
D) none of the above.

Question 72

Explain what the goal of the company should be.

Question 73

Which corporate officer, when he or she is guilty of serious misconduct, can subject the company to the most serious losses in financial wealth?

A) CEO
B) CFO
C) Chief Technology Officer
D) Chief Risk Officer

Question 74

The golden rule is an example of:

A) a current law.
B) a historical law.
C) an unworkable rule in financial markets.
D) an ethical norm.

Question 75

Which of the following is NOT one of the strategies incorporated in the Sarbanes-Oxley Act of 2002?

A) attain greater board independence
B) establish compliance programs
C) establish ethics programs
D) dictate maximum compensation levels

Question 76

An example of an economy that had trouble establishing a share market and attracting foreign investment is:

A) Russia.
B) China.
C) Greece.
D) Japan.

Question 77

Which of the following powers does the audit committee have the authority to do?

A) audit the personal bank account of the CEO
B) question any person employed by the company
C) audit the compensation files of companies in the same industry
D) none of the above

Question 78

The point in time when ownership of a compensation-related option or sum of shares passes to the manager refers to:

A) the agency date.
B) the compensation payment date.
C) granting.
D) vesting.