chap1_test bank 76-86Q Flashcards
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: 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 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: 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 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: 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 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: 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 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: 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.
Question 76: The golden rule is an example of:
A) a current law.
B) a civil law.
C) an unworkable rule in financial markets.
D) an ethical norm.
Answer: D) an ethical norm.
Explanation: The golden rule is an ethical norm (D) that suggests treating others as you would like to be treated. It is not a law or regulation but a guiding principle for ethical behavior.
Question 77: An example of an economy that had trouble in establishing a stock market and attracting foreign investment is:
Choices:
A) Russia.
B) China.
C) The Czech Republic.
D) Japan.
Answer: A) Russia.
Explanation: Russia (A) faced difficulties in establishing a stable stock market and attracting foreign investment due to various economic and political factors.
Question 78: Corruption in business:
Choices:
A) creates inefficiencies in an economy.
B) inhibits growth in an economy.
C) slows the rate of economic growth in a country.
D) all of the above.
Answer: D) all of the above.
Explanation: Corruption in business (A, B, C) has detrimental effects on an economy, including creating inefficiencies, inhibiting growth, and slowing down economic development. Therefore, “all of the above” is the correct answer.
Question 79: Which corporate officer, when he or she is guilty of serious misconduct, can subject the firm to heavy losses in financial wealth?
A) Marketing Manager.
B) CFO.
C) Chief Technology Officer.
D) Chief Risk Officer.
Answer: B) CFO.
Explanation: The Chief Financial Officer (CFO) (B) plays a critical role in managing a firm’s financial operations. Serious misconduct by the CFO can lead to financial losses and damage to the firm’s financial health.
Question 80: An officer of a firm who is a majority owner in a competing firm will probably be subject to:
A) an IRS audit.
B) a conflict of interest with his/her stockholders.
C) arbitrage profit returns to the SEC.
D) an FBI investigation.
Answer: B) a conflict of interest with his/her stockholders.
Explanation: An officer of a firm who is also a majority owner in a competing firm is likely to face a conflict of interest with his/her stockholders (B). Such a situation can raise ethical and legal concerns regarding divided loyalties.
Question 81: _____ 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) None of the above
Answer: B) Information asymmetry.
Explanation: Information asymmetry (B) refers to a situation in which one party in a business transaction possesses information that is not available to other parties, creating an imbalance of knowledge.
Question 82: With regard to information, a central idea of fairness suggests that:
A) decisions should be made on an even playing field.
B) insiders should be able to trade whenever they want.
C) insiders should never be able to trade.
D) outsiders should not be allowed to trade since, by definition, they are at a disadvantage.
Answer: A) decisions should be made on an even playing field.
Explanation: Fairness in the context of information (A) suggests that decisions should be made on an even playing field, where all parties have equal access to relevant information, reducing the impact of information asymmetry.
Question 83: The legal system and market forces impose substantial costs on individuals and institutions that engage in unethical behavior. Which of the following would not be an example of these costs?
A) Financial losses
B) Legal fines
C) Agency conflicts
D) Jail time
Answer: C) Agency conflicts.
Explanation: Agency conflicts (C) are conflicts of interest between principals and agents within a firm. While they can result from unethical behavior, they are not typically imposed as costs by the legal system or market forces. In contrast, financial losses (A), legal fines (B), and jail time (D) are common costs imposed on individuals and institutions engaging in unethical behavior.
Question 84. Explain what should be the goal of a firm.
Ans: The goal of a firm should be to maximize stockholders’ wealth, which in most cases is
equivalent to maximizing the price of the shares of the firm. Note that this is not the same as maximizing profits, since maximizing profits can occur while taking on too much risk (which can lower the value of the stockholders’ investment). Maximizing profits also does not take the timing of the profits into account. Profits, moreover, should not be confused with cash. Maximizing stockholders’ wealth is also not the same as minimizing risk, which can occur without taking any risks.
Question 85. Explain how agency costs might be found within a firm whose CEO owns no shares in the firm and whose compensation package is unaffected by the profits (cash or accounting profits) of the firm.
Ans: Since the manager has no ownership interest in the firm, he/she has no incentive to make the cash profits of the firm as high as possible. In fact, he/she has a personal incentive to have the firm pay for as many personal luxuries as possible since his/her compensation package will be completely unaffected by the decision to purchase the luxuries. In a firm like the above, we might expect the firm to expend a material amount of resources on items that the manager should probably pay for him/herself.
