chap1_test bank 26-50Q Flashcards
- Which of the following is a stakeholder?
A) An employee
B) A lender
C) The IRS
D) All of the above
Answer: D) All of the above
Explanation: All of the options (A, B, and C) represent stakeholders in a firm. Employees (A) have a stake in the firm’s success, lenders (B) have a financial stake in repayment, and government agencies like the IRS (C) may also have an interest in the firm’s financial compliance.
- A trademark is an example of:
A) a liquid asset.
B) an intangible asset.
C) a contingent asset.
D) none of the above.
Answer: B) an intangible asset
Explanation: A trademark is an intangible asset. It represents intellectual property and has value to the firm but lacks physical substance. Intangible assets can include patents, trademarks, copyrights, and other non-physical assets.
- What is not a characteristic of a shareholder?
A) Expects to receive dividends
B) Expects to receive a capital gain on their investment
C) Expects to receive interest
D) Expects to have rights as defined in the corporation’s charter and bylaws
Answer: C) Expects to receive interest
Explanation: Shareholders generally do not expect to receive interest on their shares. Instead, they typically expect to receive dividends and may hope for capital gains if the value of their shares appreciates. Shareholders also have certain rights in accordance with the corporation’s charter and bylaws.
- Which of the following is a basic source of funds for a firm?
A) Debt
B) Equity
C) Asset liquidations
D) Both A and B
Answer: D) Both A and B
Explanation: Both debt (A) and equity (B) are basic sources of funds for a firm. Debt is borrowed capital that the firm is obligated to repay, while equity represents ownership interests in the firm. Asset liquidations (C) can also be a source of funds but may not be considered “basic” in the same way as debt and equity.
- The cash remaining with the firm after paying its operating expenses, making payments to creditors, and taxes is called:
A) earnings per share.
B) capital contributed in excess of par.
C) residual cash flow.
D) assets.
Answer: C) residual cash flow
Explanation: Residual cash flow is the cash remaining with the firm after covering operating expenses, payments to creditors, and taxes. It represents the cash available for other purposes, such as reinvestment or distribution to shareholders.
- Cash dividends are paid out of:
A) residual cash flows.
B) liquidated assets.
C) long-term debt.
D) all of the above.
Answer: A) residual cash flows
Explanation: Cash dividends are typically paid out of the firm’s residual cash flows, which are the funds remaining after covering operating expenses, debt payments, and taxes. Residual cash flows are the cash available for distribution to shareholders after meeting all other financial obligations and operational needs of the company. Paying dividends out of residual cash flows ensures that the firm does not jeopardize its financial stability and ability to meet other financial obligations. Liquidated assets (B) and long-term debt (C) may not be the primary sources of funds for regular dividend payments, although asset liquidation can be one way to generate cash for extraordinary dividends. Option (D) “all of the above” is not the correct answer because while residual cash flows are the primary source of regular dividend payments, it doesn’t encompass all the options provided
- 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.
Answer: B) must be paid within a year
Explanation: Current liabilities are obligations that are expected to be settled within one year. They represent short-term debts and financial obligations that the firm must pay in the near future.
- Current assets are assets 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) must be depreciated.
Answer: A) will be converted to cash within a year
Explanation: Current assets are assets that are expected to be converted into cash or used up within one year. They include items like cash, accounts receivable, and inventory.
- The capital budgeting decision process can be described as:
A) how a firm’s day-to-day financial matters should be managed.
B) how a firm should finance its assets.
C) which productive assets a firm should purchase.
D) all of the above.
Answer: C) which productive assets a firm should purchase
Explanation: The capital budgeting decision process involves determining which productive assets a firm should acquire or invest in. It focuses on long-term investment decisions and evaluating potential projects or purchases based on their expected returns and costs.
- Working capital management decisions help to determine:
A) how a firm’s day-to-day financial matters should be managed.
B) how a firm should finance its assets.
C) which productive assets a firm should purchase.
D) all of the above.
Answer: A) how a firm’s day-to-day financial matters should be managed
Explanation: Working capital management decisions pertain to the management of a firm’s short-term assets and liabilities to ensure its day-to-day financial operations are effectively managed. These decisions focus on liquidity, cash flow, and short-term financial stability.
Question 36: Capital budgeting decisions generally have the most effect on:
A) the 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.
Answer: A) the asset portion of the balance sheet
Explanation: Capital budgeting decisions involve long-term investment in productive assets. As a result, they primarily impact the asset portion of the balance sheet, as these decisions concern the acquisition or disposal of long-term assets that contribute to the firm’s long-term value.
Question 37: A good capital budgeting decision is:
A) one in which the perceived benefits of the project are equal to the cost of the asset.
B) one in which the perceived benefits of the project are less than the cost of the asset.
C) one in which the perceived benefits of the project are more than the cost of the asset.
D) all of the above.
Answer: C) one in which the perceived benefits of the project are more than the cost of the asset
Explanation: A good capital budgeting decision is one in which the expected benefits (such as future cash flows or returns) from the investment are greater than the cost of acquiring the asset. This ensures that the decision adds value to the firm.
Question 38: 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) Over the counter exchange.
D) none of the above.
Answer: B) capital markets
Explanation: Capital markets are financial markets where long-term equity and debt securities with maturities greater than one year are traded. These markets provide a platform for businesses and governments to raise long-term funds.
Question 39: Financial markets in which equity and debt instruments with maturities less than one year are traded are called:
A) money markets.
B) capital markets.
C) Over the counter exchange.
D) none of the above.
Answer: A) money markets
Explanation: Money markets are financial markets where short-term debt and money market instruments with maturities less than one year are traded. These markets are primarily used for short-term borrowing and lending.
Question 40: The profitability of a firm can be negatively affected by:
A) too much inventory.
B) too little inventory.
C) either A or B.
D) neither A nor B.
Answer: C) either A or B
Explanation: The profitability of a firm can be negatively affected by both too much inventory (A) and too little inventory (B). Excessive inventory ties up funds and can lead to storage costs and obsolescence, while too little inventory can result in lost sales and customer dissatisfaction. The optimal inventory level is crucial for profitability.
