UNIT 16 QBANK Flashcards
What is the formula for calculating working capital?
A) Assets – liabilities
B) Current assets ÷ current liabilities
C) Current assets – current liabilities
D) Assets + liabilities
C) Current assets – current liabilities
Explanation
Working capital = current assets – current liabilities.
A toy company is experiencing sudden strong demand for a game. Purchasing this company’s stock may prove profitable in the short run. This company’s stock might best be termed as
A) a short sale.
B) a growth.
C) a cyclical.
D) a special situation.
D) a special situation.
Explanation
Special situations arise when a company shows unusual profit potential resulting from nonrecurring circumstances. These situations might include new management, the discovery of a valuable natural resource on corporate property, patents pending, or the introduction of a new product.
All of the following would be considered current assets except
A) inventory.
B) a warehouse.
C) marketable securities.
D) cash.
B) a warehouse.
Explanation
Current assets are those that are either cash or expected to generate cash within the next year. Warehouses are fixed assets used for many years.
The business cycle is generally viewed as having how many stages?
A) Two
B) Six
C) Three
D) Four
D) Four
Explanation
Economists recognize four stages in the business cycle: peak (prosperity), contraction (decline), trough, and expansion (recovery). Because it is a cycle, there is no set starting point or end to the business cycle, but the four stages always occur in the same order.
ABC has the following recorded on its balance sheet:
Current Assets $50,000 Fixed Assets $100,000 Notes payable $40,000 Accounts Payable $25,000 ABC's net worth is
A) –$35,000.
B) $110,000.
C) $85,000.
D) $35,000.
C) $85,000.
Explanation
Net worth is assets – liabilities. Therefore, ABC’s net worth is 150,000 – 65,000 = 85,000.
Those industries that are least affected by normal business cycles are
A) defensive industries.
B) special situation.
C) growth industries.
D) cyclical industries.
A) defensive industries.
Explanation
Defensive industries are least affected by normal business cycles. Companies in defensive industries produce nondurable consumer goods, such as food, pharmaceuticals, and tobacco or supply essential services such as those supplied by utility companies. Public consumption of such goods remains fairly steady throughout the business cycle.
Industries that tend to be highly sensitive to inflation, deflation and the ups and downs of business trends would best be described as
A) defensive.
B) cyclical.
C) growth.
D) Keynesian.
B) cyclical.
Explanation
Cyclical industries are highly sensitive to business cycles (the ups and downs of business trends) and inflationary or deflationary trends. Most cyclical industries produce durable goods, such as heavy machinery, or material such as steel to be utilized by other industries like the automobile industry. Demand for such goods increases when we are in periods of prosperity but during recessions, the demand for such products declines as manufacturers postpone investments in new capital goods and consumers postpone purchases of these goods.
Companies in defensive industries would be the manufactures of
A) fighter jets.
B) pharmaceuticals.
C) automobiles.
D) armored personnel carriers.
B) pharmaceuticals.
Explanation
Defensive industries are those that make products that are not as sensitive to economic cycles because people use the same amount of these products regardless of the condition of the economy. Other examples would be food and utilities.
A company very concerned about liquidity would want
A) high price-to-earnings ratio.
B) low current ratio.
C) low price-to-earnings ratio.
D) high current ratio.
D) high current ratio.
Explanation
The current ratio is a measure of liquidity. The higher the ratio, the more liquid the company. This has no bearing on whether high or low price-to-earnings ratios are desirable.
A company’s net worth belongs to its
A) stockholders.
B) bond holders.
C) president and CEO.
D) board of directors (BOD).
A) stockholders.
Explanation
A company’s net worth (assets − liabilities) belongs to the business owners (its stockholders).
ABC Corporation raised capital through an offering of equity securities. Which component of the balance sheet has changed as a result?
A) Long-term liabilities
B) Current assets
C) Current liabilities
D) Fixed assets
B) Current assets
Explanation
When equity securities are issued, cash (a current asset) and net worth increases. Fixed assets and liabilities remain unchanged as a result of the offering.
In what order do the following economic phases typically occur?
I. Recovery
II. Trough
III. Decline
IV. Prosperity
A) IV, III, I, II
B) II, I, III, IV
C) III, IV, I, II
D) I, IV, III, II
D) I, IV, III, II
I. Recovery
IV. Prosperity
III. Decline
II. Trough
Explanation
Expansion (recovery) is considered to be the beginning of the business cycle, followed by the peak (prosperity), contraction (decline), and trough.
ABC and MNO both have the same market price and shares outstanding for their common stock. If ABC’s price-to-earnings ratio is higher, that would indicate
A) ABC sales are lower than MNO’s.
B) ABC’s net income is higher than MNO’s.
C) ABC’s net income is less than MNO’s.
D) ABC’s sales are higher than MNO’s.
C) ABC’s net income is less than MNO’s.
Explanation
If ABC’s price-to-earnings ratio is higher than MNO’s, then its earnings (defined as net income ÷ shares outstanding) is lower than MNO’s. The information provided does not provide enough detail to know whether ABC or MNO had higher sales.
Which of the following is considered to be the order of the stages in a business cycle?
A) Trough, contraction, expansion, peak
B) Peak, expansion, contraction, trough
C) Expansion, peak, contraction, trough
D) Contraction, trough, peak, expansion
C) Expansion, peak, contraction, trough
Explanation
The correct order for the stages of a business cycle is expansion followed by a peak, then a contraction that ends in a trough. The cycle then repeats. Note that because this order represents a cycle, the correct answer has no set starting point or ending point, as long as the stages are shown in the right order.
Your client, Randall Stephens, has been bearish on LMN stock and sold it short several months ago. He now believes the company is in a good position for a turnaround and wants to change his strategy on LMN. What should he do to implement his new strategy?
A) Buy to close his existing position and open a new long position in the stock
B) Sell short QRS to close his existing position
C) Sell an equal number of shares to his existing position
D) Buy an equal number of shares to his existing short position
A) Buy to close his existing position and open a new long position in the stock
Explanation
Buying to close will eliminate his existing position, but if he now wants to engage in a bullish strategy on LMN, he would need to buy additional shares.
