Chapter Quiz Review (1-3)

Question 1

Which one of the following situations is most apt to create an agency conflict?

A) Hiring an independent consultant to study the operating efficiency of the firm.
B) Compensating a manager based on his or her division’s net income.
C) Laying off employees during a slack period.
D) Giving all employees a bonus if a certain level of efficiency is maintained.
E) Basing management bonuses on the length of employment.

Answer 1

Basing management bonuses on the length of employment.

Question 2

Deandre and Mason both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Deandre and Mason will equally share in the decision making and in the business profits or losses. Which type of business did they create if they both have full personal liability for the firm’s debts?

A) Limited Partnership
B) Sole Proprietorship
C) Joint Stock Company
D) General Partnership
E) Corporation

Answer 2

General Partnership

Question 3

The shareholders of Qiang’s Markets would benefit if the firm were to be acquired by Better Foods. However, Weil’s board of directors rejects the acquisition offer. This is an example of:

A) An agency conflict.
B) A working capital decision.
C) A corporate takeover.
D) A compensation issue.
E) A capital structure issue.

Answer 3

An agency conflict.

Question 4

You contacted your stock broker this morning and placed an order to sell 300 shares of stock that trades on the NYSE. This sale will occur in the:

A) Over-the-Counter Market
B) Primary Market
C) Secondary Market
D) Dealer Market
E) Tertiary Market

Answer 4

Secondary Market

Question 5

Limited liability companies are primarily designed to:

A) Provide the benefits of the corporate structure only to foreign-based entities.
B) Allow companies to reorganize themselves through the bankruptcy process.
C) Provide limited liability while avoiding double taxation.
D) Allow a portion of their owners to enjoy limited liability while granting the other portion of their owners control over the entity.
E) Spin off a wholly owned subsidiary.

Answer 5

Provide limited liability while avoiding double taxation.

Question 6

The principle of risk-return trade-off means that:

A) Higher risk investments must earn higher returns.
B) A rational investor will only take on higher risk if he expects a higher return.
C) An investor who takes more risk will earn a higher return.
D) An investor who bought stock in a small corporation five years ago has more money than an investor who bought U.S. Treasury bonds five years ago.

Answer 6

A rational investor will only take on a higher risk if he expects a higher return.

Question 7

The primary goal of financial management is to maximize:

A) Current dividends.
B) Market share.
C) Current profits.
D) The market value of existing stock.
E) Revenue growth.

Answer 7

The market value of existing stock.

Question 8

Which one of the following best describes the primary intent of the Sarbanes-Oxley Act of 2002?

A) Decrease the number of corporations that can be publicly traded.
B) Increase the number of firms that “go dark”.
C) Increase the protections against corporate fraud.
D) Limit secondary issues of corporate securities.
E) Increase the dividends paid to shareholders.

Answer 8

Increase the protections against corporate fraud.

Question 9

Vera opened a used bookstore and is both the 100 percent owner and the store’s manager. Which type of business entity does Vera own if she is personally liable for all the store’s debts?

A) Sole proprietorship
B) Corporation
C) Limited partnership
D) General partnership
E) Joint stock company

Answer 9

Sole proprietorship

Question 10

Company A reports sales of​ $100,000 and a net income of​ $15,000. Company B reports sales of​ $100,000 and a net income of​ $10,000. Therefore:

A) Company B is creating less value for its shareholders than Company A.
B) Company A’s cash flow is $5,000 more than Company B’s cash flow.
C) Company B’s accounts receivable must be higher than Company A’s accounts receivable.
D) Company A’s cash flow may be higher or lower than Company B’s cash flow even though A’s net income is higher.

Answer 10

Company A’s cash flow may be higher or lower than Company B’s cash flow even though A’s net income is higher.

Question 11

A company borrows​ $2,000,000 and uses the money to purchase high-technology machinery for its operations. Borrowing​ $2,000,000 is an example of​ ____________ and purchasing machinery is an example of​ ______________.

A) Cash flow from investing, cash flow from operations.
B) Cash flow from investing, cash flow from financing.
C) Cash flow from financing, cash flow from investing.
D) Cash flow from financing, cash flow from operations.

Answer 11

Cash flow from financing, cash flow from investing.

Question 12

All else held constant, the book value of owners’ equity will decrease when:

A) Taxable income increases.
B) The market value of inventory increases.
C) A long-term debt is repaid.
D) Cash is used to pay an accounts payable.
E) Dividends exceed net income for a period.

Answer 12

Dividends exceed net income for a period.

Question 13

Which one of the following changes during a year will increase cash flow from assets but not affect the operating cash flow?

A) Increase in accounts receivable.
B) Decrease in cost of goods sold.
C) Increase in depreciation.
D) Increase in accounts payable.
E) Increase in sales.

Answer 13

Increase in accounts payable.

Question 14

A negative cash flow to stockholders indicates a firm:

A) Had a net loss for the year.
B) Paid dividends that exceeded the amount of the new net equity.
C) Received more from selling stock than it paid out to shareholders.
D) Repurchased more shares than it sold.
E) Had a positive cash flow to creditors.

Answer 14

Received more from selling stock than it paid out to shareholders.

Question 15

Production equipment is classified as:

A) A net working capital item.
B) A current liability.
C) A current asset.
D) An intangible fixed asset.
E) A tangible fixed asset.

Answer 15

A tangible fixed asset.

Question 16

The recognition principle states that:

A) Sales should be recorded when the earnings process is virtually completed, and the value of the sale can be determined.
B) Costs should be recorded when paid.
C) Sales should be recorded when the payment for that sale is received.
D) Costs should be recorded on the income statement whenever those costs can be reliably determined.
E) Costs of producing an item should be recorded when the sale of that item is recorded as revenue.

Answer 16

Sales should be recorded when the earnings process is virtually completed, and the value of the sale can be determined.

Question 17

Firms that compile financial statements according to GAAP:
A) Can still manipulate their earnings to some degree.
B) Have no discretion over the timing of recording either revenue or expense items.
C) Record both income and expenses as soon as the amount for each can be ascertained.
D) Must record all expenses when incurred.
E) Record income and expenses at the time they affect the firm’s cash flows.

Answer 17

Can still manipulate their earnings to some degree.

Question 18

Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant?

A) A decrease in dividends paid.
B) A decrease in the cash flow to creditors.
C) An increase in net capital spending.
D) An increase in the change in net working capital.
E) An increase in depreciation.

Answer 18

An increase in depreciation.

Question 19

If two companies have the same revenues and operating expenses, their net incomes will still be different if one company finances its assets with more debt and the other company with more equity. True or False?

Answer 19

True.

Question 20

Over the past year, a firm decreases its current assets and increased its current liabilities. As a result, the firm’s net working capital:

A) Remained constant.
B) Had to increase.
C) Was unaffected as the changes occurred in the firm’s current accounts.
D) Had to decrease.
E) Could have either increased, decreased, or remained constant.

Answer 20

Had to decrease.

Question 21

A firm has a current ratio of 1.4 and a quick ratio of .9. Given this, you know for certain that the firm:

A) Has more cash than inventory.
B) Has more current liabilities than it does current assets.
C) Pays cash for its inventory.
D) Has positive net working capital.
E) Has more than half its current assets invested in inventory.

Answer 21

Has positive net working capital.

Question 22

All else held constant, which one of the following will decrease if a firm increases its net income?

A) Profit margin.
B) Return on assets.
C) Price-sales ratio.
D) Return on equity.
E) Price-earnings ratio.

Answer 22

Price-earnings ratio.

Question 23

Borrowing more money will increase a company’s return on equity, all else equal, because the company is using financial leverage, but it also adds to the riskiness of the company. True or False? Explain why.

Answer 23

True.

If everything else stays constant, borrowing will increase the return on equity because shareholders do not need to invest as much as in the unleveraged case. Meanwhile, the financial risk is higher because if the economic environment is not as good as forecasted, the company still needs to pay interest so that the losses will be intensified.

Question 24

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.

A) Cash payment of an account payable.
B) Cash sale of inventory at a loss.
C) Credit sale of inventory at cost.
D) Cash payment on an account receivable.
E) Cash purchase of inventory.

Answer 24

Cash payment of an account payable.

Question 25

Which ratio was primarily designed to monitor firms with negative earnings?

A) Market-to-book ratio.
B) ROE
C) Profit margin
D) ROA
E) Price-sales ratio.

Answer 25

Price-sales ratio.

Question 26

Mader’s Camping Supply reduced its general and administrative costs this year. This cost improvement will increase which of the following ratios?

I. Profit margin
II. Return on assets
III. Total asset turnover
IV. Return on equity

A) I, II, III, and IV
B) I and II only
C) I and III only
D) II, III, and IV only
E) I, II, and IV only

Answer 26

I, II, and IV only.

Question 27

Builder’s Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm’s sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

A) Statement of cash flows
B) Income statement
C) Common-size balance sheet
D) Balance sheet
E) Common-size income statement

Answer 27

Common-size income statement

Question 28

Which of the following ratios would be the poorest indicator of how rapidly the firm’s credit accounts are being collected?

A) Times interest earned.
B) Days in accounts receivable.
C) Accounts receivable turnover.
D) Average collection period.

Answer 28

Times interest earned.

Question 29

Scranton Paper Company generates $.97 in sales for every $1 invested in total assets. Which one of the following ratios would reflect this relationship?

A) Total asset turnover
B) Equity multiplier
C) Receivables turnover
D) Profit margin
E) Return on assets

Answer 29

Total asset turnover.

Question 30

Which one of these statements is true concerning the price-earnings (PE) ratio?

A) A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings.
B) A high PE ratio may indicate that a firm is expected to grow significantly.
C) PE ratios are unaffected by the accounting methods employed by a firm.
D) The PE ratio is a constant value for each firm.
E) The PE ratio is classified as a profitability ratio.

Answer 30

A high PE ratio may indicate that a firm is expected to grow significantly.