Pre-Assessment Questions Flashcards
Which type of financial statement is used to determine the short-term viability of a company?
Statement of cash flows
Which statement describes the historical cost principle?
Most assets are valued at their original cost when acquired by a company.
The accounts receivable balance is modified after determining collectibility.
Most assets are valued at their fair market value when acquired by a company.
An asset’s value changes annually depending on the generally accepted market cost.
Most assets are valued at their original cost when acquired by a company.
Which financial method allows external users to determine the net worth of a business?
Measuring cost of capital
Comparing cash flows
Calculating financial ratios
Analyzing financial statements
Analyzing financial statements
What does a spontaneous account refer to?
An account on the balance sheet that changes when net income is changed
An account on the income statement that cyclically appears
An account on the balance sheet and income statement that is calculated using the time value of money
An account on the balance sheet and income statement that tends to vary when sales are changed
An account on the balance sheet and income statement that tends to vary when sales are changed
A company invested $400,000 in real estate and later sold the real estate for $500,000.
What was the rate of return on this investment?
25%
Which scenario represents an opportunity cost?
Mary keeps money in her purse instead of partnering in her friend’s popular lemonade stand.
John buys a new skateboard instead of a keeping his money in his wallet.
John spends his entire $15 allowance on ice cream instead of spending it on jelly beans.
Mary earns $30 from pet-sitting instead of earning $30 from babysitting.
Mary keeps money in her purse instead of partnering in her friend’s popular lemonade stand.
A manager is planning to receive a lump sum in the future and wants to determine the value of that lump sum in today’s dollars.
What must be done to the future cash flow to determine this value?
Discount
Compound
Annuitize
Mature
Discount
The time to maturity of bond A is 20 years, whereas the time to maturity of bond B is 5 years.
What happens to the market prices of these bonds if market interest rates rise?
The price of bond A increases faster than the price of bond B increases.
The price of bond A increases at the same rate that the price of bond B decreases.
The price of bond A decreases faster than the price of bond B decreases.
The price of bond A decreases at the same rate that the price of bond B increases.
The price of bond A decreases faster than the price of bond B decreases.
Which term describes a bond that is unsecured by any type of collateral?
Debenture
Preferred
Callable
Zero-coupon
Debenture
What describes the rights of creditors holding secured debt?
They have recourse to any and all company assets should the loan default.
They have recourse to specific assets of the company should the loan default.
They have no recourse to any assets of the company should the company liquidate.
They only have claim on company assets after common stockholders receive their share should the company liquidate.
They have recourse to specific assets of the company should the loan default.
Why are bonds a better financing option than issuing stock or incurring a bank loan?
Bonds have less restrictive loan terms than bank loans.
The principal balance of a bond never has to be paid back.
The company’s debt-to-equity ratio is positively affected by bonds.
Bonds always represent short-term borrowing.
Bonds have less restrictive loan terms than bank loans.
The average debt-to-equity ratio for commercial banks is approximately 2.5. A commercial bank has a debt-to-equity ratio of 2.2.
What does this indicate?
The bank has a normal debt-to-equity ratio for its industry.
The bank is on the verge of bankruptcy.
The bank needs a timely infusion of equity financing.
The bank is having a difficult time acquiring equity financing.
The bank has a normal debt-to-equity ratio for its industry.
An investor is only interested in obtaining stable returns in a stock investment.
Why would this investor purchase a preferred stock?
It normally pays a fixed dividend on a recurring basis.
It only pays dividends if the firm offers them.
It provides corporate voting rights.
It has a senior claim to debtors in the case of company bankruptcy.
It normally pays a fixed dividend on a recurring basis.
What is an advantage of the payback period method?
It is convenient and easy to use.
How is the payback period method applied to capital project analysis?
In determining time to recapture the initial investment
In calculating the ratio of payoff to investment
In comparing investments with unequal life spans
In calculating actual annual profitability
In determining time to recapture the initial investment
