chap1_test bank 51-75Q

Question 1

Question 51: In a public corporation, which of the following reports directly to the owners of a firm?

A) CFO
B) CEO
C) Board of directors
D) Audit committee

Answer 1

Answer: C) Board of directors

Explanation: In a public corporation, the board of directors (C) is responsible for representing the interests of the owners (the shareholders). The board oversees the company’s management, including the CEO and CFO, to ensure it acts in the best interest of the shareholders.

Question 2

Question 52: Which of the following is primarily responsible for managing all financial aspects of a firm?

A) CFO
B) CEO
C) Board of directors
D) Audit committee

Answer 2

Answer: A) CFO

Explanation: The Chief Financial Officer (CFO) (A) is primarily responsible for managing all financial aspects of a firm. This includes financial planning, financial reporting, budgeting, and managing the financial team. The CEO (B) is responsible for the overall management of the firm.

Question 3

Question 53: Which of the following is responsible for performing an independent audit of a firm’s financial statements?

A) CFO
B) CEO
C) CPA firm
D) Audit committee

Answer 3

Answer: C) CPA firm

Explanation: A CPA (Certified Public Accountant) firm (C) is responsible for performing an independent audit of a firm’s financial statements. The audit committee (D) typically oversees this process, but it’s the CPA firm that conducts the audit to provide an objective evaluation of the company’s financial statements.

Question 4

Question 54: How is a CPA firm insulated from being pressured by management?

A) The audit committee approves hiring, firing, and paying fees to external auditors.
B) The chairman of the board approves the external auditor’s fees as well as the engagement letter.
C) The IRS approves the external auditor’s fees as well as the engagement letter.
D) The CPA firm is not insulated from management.

Answer 4

Answer: A) The audit committee approves hiring, firing, and paying fees to external auditors.

Explanation: The insulation of a CPA firm from pressure by management is often achieved by having the audit committee (A) approve the hiring, firing, and payment of fees to external auditors. This helps maintain the independence and objectivity of the audit process.

Question 5

Question 55: Among the following, who is typically responsible for managing a large corporation’s financial function?
A) The CEO
B) The Chairman of the board
C) The Vice-President - Production
D) The CFO

Answer 5

Answer: D) The CFO

Explanation: The Chief Financial Officer (CFO) is typically responsible for managing a large corporation’s financial function. The CFO plays a crucial role in overseeing financial operations, financial planning, financial reporting, and managing the financial team. While the CEO has overall responsibility for the company, the CFO is specifically focused on financial matters, making them the key individual responsible for the company’s financial function. The Chairman of the board has a different role, presiding over the board of directors, and the Vice-President of Production is primarily responsible for production-related matters.

Question 6

Question 56: From the owner’s perspective, which of the following should be the goal of a firm?

A) Profit maximization
B) Revenue maximization
C) Stockholder’s wealth maximization
D) Tax minimization

Answer 6

Answer: C) Stockholder’s wealth maximization

Explanation: From the owner’s perspective, the primary goal of a firm should be stockholder’s wealth maximization (C). This goal considers the long-term value creation for shareholders, which is driven by factors like profit, revenue, and effective tax management. Maximizing stockholder’s wealth considers both the return on investment (profits) and the timing of those returns.

Question 7

Question 57: When analysts and investors determine the value of a firm’s stock, they should consider:

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

Answer 7

Answer: D) all of the above

Explanation: When analysts and investors determine the value of a firm’s stock, they should consider all of the factors mentioned (A, B, and C). The size of expected cash flows, the timing of these cash flows, and the risk associated with the investment are all critical factors that impact the valuation of a stock.

Question 8

Question 58: From the owner’s perspective, which of the following should be the primary focus of managers?

A) Profit maximization
B) Revenue maximization
C) COGS minimization
D) None of the above should be the primary focus.

Answer 8

Answer: D) None of the above should be the primary focus.

Explanation: From the owner’s perspective, managers should primarily focus on stockholder’s wealth maximization rather than profit, revenue, or cost minimization in isolation. Stockholder’s wealth maximization considers the overall long-term value creation for shareholders

Question 9

Question 59: Which of the following would generally increase shareholder’s wealth?

A) Receiving cash flows sooner rather than later.
B) Increased government regulation.
C) Receiving larger cash flows.
D) Rapid growth in the overall economy.

Answer 9

Answer: A) Receiving cash flows sooner rather than later.

Explanation: Receiving cash flows sooner (A) rather than later generally increases shareholder’s wealth because it allows for the reinvestment of funds to generate additional returns. Increased government regulation (B) and other factors can have complex effects on shareholder’s wealth.

Question 10

Question 60: Which of the following factors or activities can be controlled by a firm’s managers?

A) Capital budgeting
B) The level of economic activity
C) The level of market interest rates
D) Stock market conditions

Answer 10

Answer: A) Capital budgeting

Explanation: Managers can control capital budgeting decisions (A) within the firm, including investment choices, project selection, and allocation of resources. Factors like the level of economic activity (B), market interest rates (C), and stock market conditions (D) are external to the firm and not directly controlled by managers.

Question 11

Question 61: One reason for the existence of agency problems between managers and stockholders is that:

A) Management is separate from ownership.
B) Managers know how to manage the firm better than stockholders.
C) Stockholders have unreasonable expectations about managerial performance.
D) None of the above.

Answer 11

Answer: A) Management is separate from ownership.

Explanation: One reason for the existence of agency problems between managers and stockholders is that management is separate from ownership (A). In most large corporations, ownership is dispersed among many shareholders, while the day-to-day management is carried out by a separate group of individuals, often managers or executives.

Question 12

Question 62: Who among the following is the “principal” in the agency relationship of a corporation?

A) A company engineer
B) The CEO of the firm
C) A stockholder
D) The board of directors

Answer 12

Answer: C) A stockholder

Explanation: In the agency relationship of a corporation, the stockholders (C) are considered the “principals.” They are the owners of the firm and delegate authority to the managers (agents) to operate the company on their behalf.

Question 13

Question 63: _____ has (have) a legal responsibility to represent stockholders’ interests.

A) A chairman
B) A CEO
C) A corporation’s board of directors
D) All of the above

Answer 13

Answer: C) A corporation’s board of directors

Explanation: The board of directors (C) of a corporation has a legal responsibility to represent the interests of the stockholders. They are elected to oversee the management and ensure that it acts in the best interests of the shareholders.

Question 14

Question 64: An example of an agency cost is:

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

Answer 14

Answer: B) A manager expensing a lavish dinner on the company expense report.

Explanation: An example of an agency cost is when a manager acts in a way that benefits themselves at the expense of the shareholders, such as expensing a lavish dinner on the company’s expense report (B). This behavior can increase costs and reduce the value of the firm.

Question 15

Question 65: Which of the following mechanisms can help align the behavior of managers with the goals of stockholders?

A) Well-designed management compensation
B) Managerial labor market
C) An independent board of directors
D) All of the above

Answer 15

Answer: D) All of the above

Explanation: All of the mechanisms listed (A, B, and C) can help align the behavior of managers with the goals of stockholders. Well-designed management compensation (A) can provide incentives for managers to act in the shareholders’ best interests. The managerial labor market (B) can also discipline managers as they compete for executive positions. An independent board of directors (C) can provide oversight and ensure that management acts in the shareholders’ best interests.

Question 16

Question 66: If a firm has had an agency conflict which is reflected by a poor performing stock for a long period of time, then the firm may become a target of:

A) an SEC investigation.
B) a corporate raider.
C) an IRS investigation.
D) a bankruptcy lawyer.

Answer 16

Answer: B) a corporate raider.

Explanation: When a firm experiences agency conflicts and its stock performs poorly for an extended period, it may become a target for a corporate raider (B). Corporate raiders often see undervalued companies as opportunities for acquisition, which can lead to changes in management and strategy

Question 17

Question 67: Executives that repeatedly put their own interests before that of the firm may find that they have difficulty in finding another job after their current one. This is an example of:

A) the managerial labor 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.

Answer 17

Answer: A) the managerial labor market disciplining managers.

Explanation: Executives facing difficulties in finding new job opportunities due to their self-serving behavior is an example of the managerial labor market disciplining managers (A). When executives are seen as ineffective or unethical, they may face challenges in securing new employment.

Question 18

Question 68: Who among the following is responsible for setting an agenda at meetings of the board of directors?

A) Chairperson of the board of directors
B) President
C) Nominating committee
D) Manager

Answer 18

Answer: A) Chairperson of the board of directors

Explanation: The chairperson of the board of directors (A) is typically responsible for setting the agenda at meetings of the board. The chairperson plays a leadership role in ensuring that board meetings address important matters.

Question 19

Question 69: A director who is not an employee of the firm is called:

A) an executive director.
B) an inside director.
C) an independent director.
D) an official director.

Answer 19

Answer: C) an independent director.

Explanation: A director who is not an employee of the firm and does not have any significant ties or conflicts of interest with the firm is called an independent director (C). Independent directors are crucial for providing unbiased oversight.

Question 20

Question 70: Which of the following is NOT one of the goals of the Sarbanes-Oxley Act of 2002?

A) Attain greater board independence
B) Establish compliance programs
C) Establish ethics programs
D) Dictate maximum compensation levels

Answer 20

Answer: D) Dictate maximum compensation levels

Explanation: The Sarbanes-Oxley Act of 2002 focuses on goals such as attaining greater board independence, establishing compliance and ethics programs, and enhancing corporate governance and financial reporting. However, it does not dictate maximum compensation levels (D). Compensation-related matters are typically addressed through other regulations and guidelines.

Question 21

Question 71: Which of the following is not an example of an agency cost?

A) a lavish dinner or trip.
B) a missed investment opportunity.
C) a cost that results from a conflict of interest between the agent and the principal.
D) the cost of a new piece of equipment.

Answer 21

Answer: D) the cost of a new piece of equipment.

Explanation: An agency cost (A, B, or C) typically refers to expenses or losses incurred due to conflicts of interest between the agent and the principal. The cost of a new piece of equipment (D) is not typically considered an agency cost but rather a capital expenditure.

Question 22

Question 72: Which of the following does the audit committee have unconditional authority to do?

A) Audit the personal bank account of the CEO.
B) Question any person employed by the firm.
C) Audit the compensation files of firms in the same industry.
D) None of the above.

Answer 22

Answer: B) Question any person employed by the firm.

Explanation: The audit committee typically has the authority to question any person employed by the firm (B) as part of its oversight duties. However, it does not have unconditional authority to audit the personal bank account of the CEO (A) or the compensation files of other firms (C).

Question 23

Question 73: What is the major complaint by firms about the Sarbanes-Oxley Act of 2002?

A) The legislative maximum allowable compensation for a CEO.
B) The legal requirement to disclose project information.
C) The cost of compliance.
D) The cost of maintaining an SEC employed officer at the firm’s premises.

Answer 23

Answer: C) The cost of compliance.

Explanation: One major complaint by firms about the Sarbanes-Oxley Act of 2002 is the cost of compliance (C), which includes expenses related to implementing and maintaining the necessary controls and reporting mechanisms required by the act.

Question 24

Question 74: What is one of the actions that is not an objective of the Sarbanes-Oxley Act of 2002?

A) reducing agency costs in corporations.
B) restoring ethical conduct within the business sector.
C) improving the integrity of accounting reporting system within firms.
D) insuring that an IRS employee is present at the firm’s headquarters.

Answer 24

Answer: D) insuring that an IRS employee is present at the firm’s headquarters.

Explanation: The Sarbanes-Oxley Act of 2002 primarily focuses on objectives such as reducing agency costs (A), restoring ethical conduct (B), and improving accounting reporting integrity (C) but does not involve insuring that an IRS employee is present at the firm’s headquarters (D).

Question 25

Question 75: A society’s ideas about what actions are right and wrong are termed as:

A) rules and policies.
B) ethics.
C) laws.
D) unwritten laws.

Answer 25

Answer: B) ethics.

Explanation: A society’s ideas about what actions are right and wrong are termed as ethics (B). Ethics are a set of moral principles and standards that guide human behavior and help determine what is considered morally acceptable.