Chapter 1

Question 1

The science and art of managing money.

Answer 1

Finance

Question 2

Careers in finance typically fall into one of two broad categories:

Answer 2

Financial services and managerial finance.

Question 3

The area of finance concerned with the design and delivery of advice and financial products to individuals, businesses and governments.

Answer 3

Financial services

Question 4

Concerned with the duties of the financial manager working in a business.

Answer 4

Managerial finance

Question 5

Administers the financial affairs of all types of businesses: private and public, profit seeking and not for profit.

Answer 5

Financial managers.

Question 6

The three most common legal forms of business organizations

Answer 6

Sole proprietorship, partnership, corporation.

Question 7

Business owned by one person who operates it for his or her own profit.

Answer 7

Sole proprietorship

Question 8

Liabilities of the business are the entrepreneurs responsibility and that creditors can make claims against the entrepreneurs personal assets if the business fails to pay its debts.

Answer 8

Unlimited liability

Question 9

Consists of two or more owners doing business together for profit. Account for 8% of all businesses.

Answer 9

Partnership

Question 10

Written contract used to formally establish a business partnership.

Answer 10

Articles of partnership.

Question 11

Entity created by law.

Answer 11

Corporation

Question 12

Although only ___% of all US businesses are incorporated, the largest businesses nearly always are; corporates account for roughly ___% of total business revenues.

Answer 12

20; 80

Question 13

The owners of a corporation, whose ownership, or equity, takes the form of common stock or less frequently, preferred stock.

Answer 13

Stockholders

Question 14

Legal provision that limits stockholders liability for a corporations debt to the amount they initially invested in the firm by purchasing stock.

Answer 14

Limited liability

Question 15

The purest and most basic form of corporate ownership.

Answer 15

Common stock

Question 16

Periodic distributions of cash to the stockholders of a firm.

Answer 16

Dividends.

Question 17

Stockholders are sometimes referred to as _____ _______, meaning that stockholders are paid last, after employees, suppliers, tax authorities, and lenders receive what they are owned.

Answer 17

Residual claimants.

Question 18

Group elected by the firms stockholders and typically responsible for approving strategic goals and plans, setting general policy, guiding corporate affairs, and approving major expenditures.

Answer 18

Board of directors

Question 19

Corporate official responsible for managing the firms day to day operations and carrying out the policies established by the board of directors.

Answer 19

President or CEO

Question 20

Partnership in which one or more partners have limited liability as long as at least one partner (the general partner) has unlimited liability. The limited partners are passive investors that can’t take role in firms management.

Answer 20

Limited partnership

Question 21

A tax-reporting entity that allows certain corporations with 100 or fewer stockholders to choose to be taxed as partnerships. It’s stockholders receive the organizational benefits of a corporation and the tax advantages of a partnership.

Answer 21

S corporation

Question 22

Permitted in most states, gives its owners limited liability and taxation as a partnership. Can own more than 80% of another corporation, and corporations, partnerships can own these shares.

Answer 22

LLC

Question 23

Partners are liable for their own acts of malpractice, but not for those of other partners. Taxed as a partnership and is frequently used by legal and accounting professionals.

Answer 23

LLP

Question 24

Finance teaches that managers primary goal should be to maximize __________

Answer 24

The wealth of the firms owners, the stockholders.

Question 25

Key variables that managers must consider when making business decisions are ___ and ____

Answer 25

Return (cash flows) and risk.

Question 26

Amount earned during the period on behalf of each outstanding share of common stock, calculated by dividing the periods total earnings available for the firms common stockholders by the number of shares of common stock outstanding.

Answer 26

Earnings per share

Question 27

The chance that actual outcomes may differ from those expected.

Answer 27

Risk

Question 28

Requiring compensation to bear risk.

Answer 28

Risk averse

Question 29

Groups such as employees, customers, suppliers, creditors, owners and others who have a direct economic link to the firm.

Answer 29

Stakeholders

Question 30

Standards of conduct or moral judgement that apply to a persons engaged in commerce.

Answer 30

Business ethics

Question 31

The firms financial manager, who manages the firms cash, oversees its pension plans, and manages key risks.

Answer 31

Treasurer.

Question 32

The firms chief accountant, who is responsible for the firms accounting activities, such as corporate accounting, tax management, financial accounting, and cost accounting.

Answer 32

Controller

Question 33

The manager responsible for managing and monitoring the firms exposure to loss from currency fluctuations.

Answer 33

Foreign exchange manager.

Question 34

Primary economic principle in finance, states that financial decisions should be made and actions taken only when the added benefits exceed the added costs.

Answer 34

Marginal cost-benefit analysis

Question 35

Two differences between finance and accounting:

Answer 35

Emphasis on cash flows and decision making.

Question 36

In preparation of financial statements, recognizes revenue at the time of the sale and recognizes expenses when they are incurred.

Answer 36

Accrual basis

Question 37

Recognizes revenues and expenses only with respect to actual inflows and outflows of cash.

Answer 37

Cash basis

Question 38

Refers to the rules, processes, and laws by which companies are operated, controlled, and regulated.

Answer 38

Corporate governance

Question 39

Investors who own relatively small quantities of shares so as to meet personal investment goals.

Answer 39

Individual investors

Question 40

Investment professional such as banks, insurance companies, mutual funds, and pension funds that are paid to manage and hold large quantities of securities on behalf of others.

Answer 40

Institutional investors

Question 41

An act aimed at eliminating corporate disclosure and conflict of interest problems.

Answer 41

Sarbanes-Oxley Act

Question 42

Arrangement in which an agent acts in behalf of a principal. For example, shareholders of a company elect management to act on their behalf.

Answer 42

Principal-agent relationship

Question 43

Problems that arise when managers place personal goals ahead of the goals of shareholders.

Answer 43

Agency problems

Question 44

Costs arising from agency problems that are borne by shareholders and represent a loss of shareholder wealth.

Answer 44

Agency costs

Question 45

Compensation that corresponds with firm performance.

Answer 45

Structure management compensation

Question 46

Management compensations plans that tie management compensation to share price; one example involves the granting of stock options.

Answer 46

Incentive plans

Question 47

Options extended by the firm that allow management to benefit from increases in stock prices over time.

Answer 47

Stock options

Question 48

Plans that tie management compensation to measures such as EPS or growth in EPS. Performance shares, cash bonuses or both are used as compensation under these plans.

Answer 48

Performance plans

Question 49

Shares of stock given to management for meeting stated performance goals.

Answer 49

Performance shares.

Question 50

Cash paid to management for achieving certain performance goals.

Answer 50

Cash bonuses.