Deck 1: Foundations

Question 1

Common stock is considered to be a:

A) real Asset.
B) financial Asset.
C) debt Instrument.
D) Both b & c

Answer 1

B

Question 2

Which of the following is not a real asset?

A) Equipment
B) Land
C) Stock
D) None of the above

Answer 2

C

Question 3

Financial assets:

A) are legal documents.
B) give their owners claims to past cash flows.
C) include stocks and bonds.
D) Both a & c
E) All of the above

Answer 3

D

Question 4

A financial market is:

A) a place where investors can buy and sell securities.
B) the stock market.
C) regulated by well-defined rules and regulations.
D) All of the above

Question 5

Which of the following is considered a security?

A) IBM stock
B) IBM bond
C) US government bond
D) All of the above

Question 6

Which of the following is true of financial assets?

A) Companies issue financial assets to earn revenue.
B) Investors purchase financial assets to earn a return.
C) The ownership of financial assets cannot be transferred.
D) Investors purchase financial assets because they are virtually risk free.

Question 7

Financial assets:

A) include cars, houses, and factory equipment.
B) provide some kind of service.
C) have value because of claims to future cash flows.
D) are not legal documents.

Question 8

Financial assets can be distinguished from real assets in that financial assets:

A) are pieces of paper rather than tangible, physical objects.
B) are not intended to provide services like transportation or shelter.
C) have value because they provide their owners with claims to future cash flows.
D) All of the above

Question 9

A loan backed by an asset the lender can sell to pay off the loan if the borrower defaults is called _____.

A) amortized
B) collateralized
C) guaranteed
D) riskless

Question 10

Which of the following is not one of the three major areas of finance?

A) Accounting
B) Investments and financial markets
C) Financial management of companies
D) The banking system

Question 11

A ____ is licensed to trade securities on behalf of investors.

A) stockbroker
B) securities analyst
C) market maker
D) corporation

Question 12

The principal legal difference between a stockholder and a bondholder is:

A) the stockholder receives interest and the bondholder receives dividends.
B) only the bondholder can attend annual meetings.
C) the bondholder has an ownership interest and the shareholder is a lender.
D) the shareholder has an ownership interest and the bondholder is a lender.

Question 13

A ____ pools the contributions of many investors and employs a professional manager to select securities that match a particular set of investment goals.

A) mutual fund
B) stock
C) bond
D) real asset

Question 14

Financial assets like stocks and bonds have value because:

A) they represent ownership of companies.
B) people are proud to own them.
C) they provide tangible benefits as do real assets.
D) they give their owners command over future cash flows.

Question 15

Stocks and bonds are financial assets that are called ____.

A) alternative assets
B) commodities
C) real assets
D) securities

Question 16

Which of the following represents a real asset?

A) Land
B) Bonds
C) Stocks
D) Both a & c
E) All of the above

Question 17

Which of the following is not true regarding bonds?

A) Both principal and interest are paid to the investor
B) Bondholders are owners of the borrowing firm
C) Buying a bond means lending money
D) All of the above

Question 18

A person buying a ____ is called an investor.

A) bond
B) stock
C) mutual fund
D) All of the above

Question 19

Which of the following is not a financial market?

A) Bond market
B) A market in which small business owners buy and sell their companies
C) Stock market
D) All of these are financial markets

Question 20

The prices that investors pay for securities are determined by:

A) The collateral of the firm's liabilities and the profitability of the firm.
B) The profits of the firm and the stability of those profits.
C) What financial advisors think of the company.
D) The cash flows investors expect to receive from owning them.

Question 21

A collection of securities is called a:

A) basket.
B) conglomerate.
C) portfolio.
D) Any of the above

Question 22

Accounting is:

A) focused on cash flow.
B) the language of finance.
C) an outgrowth of economics.
D) Both a & b

Question 23

Finance has its theoretical roots in ____, but requires a practical understanding of ____.

A) accounting, economics
B) accounting, the stock market
C) mathematics, accounting
D) economics, accounting

Question 24

The executive in charge of the finance department is the company's:

A) CEO.
B) COO.
C) CFO.
D) CIO.

Question 25

The functions of the finance department include all of the following activities except:

A) paying employees and vendors.
B) selling products to customers.
C) receiving payments from customers.
D) selling stock.
E) paying dividends.

Question 26

Historically, the field of finance was limited to:

A) accounting.
B) raising money.
C) activities of investors.
D) financial management.

Question 27

Which of the following are true about accounting?

A) Accounting is a system of record keeping
B) Accounting focuses on cash flow
C) Accounting emphasizes financial theory
D) Both a & b

Question 28

The finance function and the accounting function look at the sale of product to a customer on credit in different ways. Which of the following best describes that difference?

A) Accounting views the sale as a completed transaction to be recorded as revenue while finance views it as incomplete until the cash is received.
B) Finance views the sale as a completed transaction to be recorded as revenue while accounting views it as incomplete until the cash is received.
C) Accounting is more interested in the cash inflows and outflows than finance.
D) Finance is more interested in reporting the appropriate transactions in the proper time period than accounting.

Question 29

Raising money and handling financial relationships with outsiders is a function of the:

A) controller.
B) treasury department.
C) accounting department.
D) All of the above

Question 30

A company can raise money to purchase assets by:

A) borrowing money.
B) issuing stock.
C) using money earned.
D) Both a & b
E) All of the above

Question 31

The price that investors are willing to pay for a firm's securities can best be described by which of the following statements?

A) If a company is performing poorly, investors will not buy that company's securities.
B) If a company is performing well, investors will buy the company's stock at almost any price because the price of the stock should increase.
C) Since the value of a company's securities depends largely on future cash flows, investors will consider the company's performance in estimating the future cash flows that will come from owning its securities.
D) Since risk is difficult to assess for any particular company, investors don't usually consider risk when deciding how much to pay for a company's securities.

Question 32

If a company buys a machine for $10,000 cash and plans to depreciate it at $1,000 per year for 10 years, the two most important aspects of this transaction to the finance manager (as opposed to the accountant) are:

A) the purchase of the machine and the tax savings from the depreciation expense.
B) recording the purchase of the machine and its depreciation expense.
C) calculating depreciation expense and its compliance with the tax code.
D) the impact on factory capacity due to the equipment purchase.

Question 33

Which of the following is part of the finance department?

A) Quality control
B) Purchasing
C) Treasury
D) Marketing

Question 34

Which of the following is an example of financing?

A) An investor purchases stocks and bonds
B) A company issues stock to raise money to purchase assets
C) An investors buys shares in a mutual fund to earn a return
D) An investor sells stocks and bonds

Question 35

Companies finance the purchase of assets through:

A) debt financing, the sale of bonds.
B) equity financing, the sale of stock.
C) lease financing.
D) Only a. and b. above
E) All of the above

Question 36

Financial management involves:

A) financial input for general business decisions.
B) providing oversight for the management of money in other departments.
C) judging the feasibility of projects.
D) Both a & c
E) All of the above

Question 37

The ____ is the largest stock exchange in the world.

A) American Stock Exchange
B) Chicago Stock Exchange
C) New York Stock Exchange
D) Tokyo Stock Exchange

Question 38

A financial market is a(n):

A) framework or organization in which investors can buy and sell securities.
B) agency setup to certify creditworthiness of companies.
C) market place that requires physical presence for participation.
D) market in which both financial and real assets can be sold.

Question 39

Responsibilities of the finance department include, but are not limited to:

A) managing the company's money.
B) providing financial input to general business decisions.
C) looking over everyone else's shoulder to make sure they're using money effectively.
D) All of the above

Question 40

Day to day responsibilities of the finance department include:

A) maintaining detailed knowledge of activities in major financial markets.
B) keeping operating expenses to an absolute minimum.
C) providing financial input to general business decisions.
D) All of the above

Question 41

Which of the following groups is not a stakeholder in a corporation?

A) Customers
B) Government Officials
C) Creditors
D) Suppliers

Question 42

The principal financial advantage of the corporate form of organization is:

A) ease of transferability of ownership.
B) accumulation of earnings for retention in the business.
C) limited liability.
D) ease of raising money through selling stock.

Question 43

All of the following are characteristics of proprietorships except:

A) ease of formation.
B) income treated as part of the sole proprietor's income for tax purposes.
C) ease of raising additional money for expansion.
D) unlimited life.

Question 44

Which of the following does not represent a stakeholder in a corporation?

A) Television media
B) Stockholders
C) Management
D) Suppliers

Question 45

An S-type corporation is different from a C-type corporation in the following way(s):

A) the way they are taxed.
B) liability.
C) ability to sell stock.
D) All of the above

Question 46

Financial theory stems primarily from:

A) mathematics.
B) finance.
C) economics.
D) accounting.

Question 47

A proprietor who operates his/her own business can incorporate and become the only shareholder. This action might be taken to provide the owner with the limited liability of the corporate form. Which of the following best describes the impact of incorporation in this situation on the limited liability issue?

A) The owner has achieved the full protection of limited liability.
B) The owner can protect his/her personal assets unless fraud is involved in the conduct of the business.
C) The owner has achieved the full protection of limited liability except for default on borrowed funds.
D) The owner has in reality achieved very little in the way of limited liability protection.

Question 48

Which of the following apply to an S-type corporation?

A) Double taxation of earnings
B) Taxation similar to a partnership
C) Can be owned by another corporation
D) None of the above

Question 49

In finance the primary goal of management is to:

A) utilize its economic resources in the most advantageous way.
B) minimize all possible expenses.
C) maximize shareholder wealth which is generally achieved by maximizing stock price.
D) make the best use of its assets.

Question 50

Companies generally create liabilities that exceed assets by:

A) borrowing money they cannot repay.
B) issuing additional stock.
C) losing a lawsuit.
D) a and c

Question 51

_____ make entrepreneurs liable for loans made to their businesses.

A) Selling stocks
B) Losing a lawsuit
C) Unlimited liability
D) Personal guarantees

Question 52

A big disadvantage of proprietorships versus corporations is:

A) the inexperience of proprietors.
B) the difficulty of raising money to start or expand the business for proprietors.
C) taxes on the proprietor.
D) the limited personal liability of the proprietor.

Question 53

All of the following are characteristics of S Corporations except:

A) unlimited life.
B) unlimited liability for the stockholders.
C) avoidance of double taxation.
D) ease of raising additional capital for expansion.

Question 54

Stockholders own corporations. Which of the following is inconsistent with that role:

A) attend annual shareholder meetings as a forum for voicing discontent.
B) receive annual reports that detail the past, present, and future direction of the firm.
C) share in the firm's profits.
D) receive interest on the amount loaned to the company.

Question 55

The primary financial goal of a corporation is to maximize:

A) shareholders wealth.
B) earnings per share.
C) stock price.
D) Both a & c
E) All of the above

Question 56

Assume that pre-tax profit of $50,000 has been earned by a business, and the owner/proprietor wants to withdraw all of the after-tax profit for personal use. Assume the tax rate for a C corporation is 34%, while the rate for a person is 27%. The after-tax earnings available under the corporate and proprietorship forms are:

A) for a corporation, $33,000; for a proprietorship, $36,500.
B) for a corporation, $23,760; for a proprietorship, $36,500.
C) for either a corporation or a proprietorship, $36,500.
D) for either a corporation or a proprietorship, $23,760.

Question 57

The primary advantage of the proprietor form of business over the corporate form is:

A) ease of raising capital (money.)
B) avoidance of double taxation.
C) unlimited life.
D) limited liability.

Question 58

The maximization of shareholders wealth is measured by increases in:

A) profits.
B) earnings.
C) stock price.
D) sales.

Question 59

All of the following are characteristics of C Corporations except:

A) unlimited life.
B) limited liability for the stockholders.
C) avoidance of double taxation.
D) ease of raising additional capital for expansion.

Question 60

Which of the following is a stakeholder of a corporation?

A) The stock exchange where the corporation is listed
B) The currency exchange for foreign corporations
C) Competitors of the corporation
D) Suppliers of the corporation

Question 61

The conflict of interest between management and stockholders is known as:

A) the stockholder/management problem.
B) the management problem.
C) the agency problem.
D) a problem relating to excess compensation.

Question 62

____ is a growing practice in which people concern themselves with the activities of the issuing business.

A) Agency control
B) Morality analysis
C) Socially responsible investing
D) Wealth maximization

Question 63

Which of the following best describes the financial link between stockholders and bondholders?

A) The action of stockholders cannot affect the financial position of bondholders.
B) The action of stockholders can increase the risk of a business which will affect the financial position of bondholders.
C) The action of bondholders can increase the risk of a business which will affect the financial position of stockholders.
D) The actions of stockholders and bondholders are independent.
E) Both a. and c. are correct.

Question 64

Principals can use the all of the following techniques to control their agents (in a business setting) except:

A) compensation tied to performance.
B) stock options.
C) bond redemption.
D) the threat of firing.
E) perquisites.

Question 65

The agency problem exists primarily in companies of which:

A) ownership is widely dispersed.
B) common stock is closely held.
C) management has stock ownership.
D) Both a & c

Question 66

Which of the following is (are) effective in controlling the agency problem?

A) Tie a large part of managements' compensation to company profit
B) Offer numerous perquisites
C) Employ auditors to periodically review company books
D) Both a and c

Question 67

Which entity is most directly responsible for the accounting within the firm?

A) Treasurer
B) Controller
C) CFO
D) CEO

Question 68

What is double taxation?

A) It is when two separate tax authorities tax the same corporation.
B) It is a situation that only affects sole proprietorships.
C) It occurs when the business owner pays himself or herself a salary.
D) It occurs when earnings are taxed once at the corporate level and then taxed a second time as personal income.

Question 69

Which statement is true?

A) The finance department has an oversight responsibility for the effective management of the money other departments spend.
B) The Vice President of Finance is usually a position very different from that of a CFO.
C) The finance department will oversee the selling of stock, but not the paying of dividends.
D) Individual departments determine the feasibility of projects, while the finance department is only concerned with the funding of the project.

Question 70

Which is not a financial asset?

A) Stock
B) Bond
C) Shares in a mutual fund
D) Savings account

Question 71

Which is not a legitimate form of business organization?

A) Partnership
B) C-type corporation
C) T-type corporation
D) LLC

Question 72

What does it mean for a new business loan to be collateralized?

A) Should the business fail, the loan is simply not repaid.
B) The lender may sell a specific asset to recover the loan.
C) The borrower does not pay interest on the loan.
D) The borrower only pays interest when the entire loan is due.

Question 73

____ generally involves the use of power by one group to gain a benefit at the expense of others.

A) Unethical behavior
B) Shareholder wealth maximization
C) Limited liability
D) A personal guarantee

Question 74

Because of conflicts of interest between shareholders and management, it is in the interest of shareholders to monitor management's performance through:

A) regular management letters to shareholders.
B) visits to the corporate facility.
C) attendance at the annual shareholder meetings.
D) periodic financial reports reviewed by independent auditors.

Question 75

The most common example of abuse of the agency relationship is:

A) management's compensation and perquisites.
B) managers working long hours.
C) breach of fiduciary responsibilities.
D) gross disregard of bondholders' interests.

Question 76

Large corporations tend to be:

A) partnerships.
B) T-type corporations.
C) C-type corporations.
D) sole proprietorships.

Question 77

If a company uses a bond issue to raise capital, the financing is an example of:

A) equity financing.
B) debt financing.
C) lease financing.
D) debt and equity financing.

Question 78

All of the following constituencies would be considered stakeholders of a business except:

A) management and employees.
B) suppliers and creditors.
C) the local community in which the business operates.
D) stockholders.
E) All of the groups listed above are stakeholders.

Question 79

Which of the following best describes the agency relationship in a business setting?

A) Stockholders are the agents of the bondholders.
B) Management are the agents of the employees.
C) Bondholders are the agents of management.
D) Management are the agents of the stockholders.
E) Stockholders are the agents of the employees.

Question 80

Lenders protect themselves from conflicts of interest with shareholders through:

A) cooperative agreements signed by shareholders and lenders.
B) limiting the amount of funds bondholders lend.
C) loan agreements that prohibit companies from undertaking excessive risk.
D) offering lenders a share of profits.