Test Bank for Corporate Finance Online, 2nd Edition
Strengthen your understanding with Test Bank for Corporate Finance Online, 2nd Edition, packed with challenging questions and expert solutions.
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1
Corporate Finance Online, 2e (Eakins/McNally)
Chapter 1 Introduction to Finance
LO1: Understand the Features of CFO
1) Section 1.1 does not contain any questions.
LO2: Understand the Four Facets of Finance
1) Finance is
A) the study of investment management.
B) the study of the stock exchange.
C) the study of the capital market and its many players.
D) the study of money management for personal use.
Answer: C
Explanation: C) Finance is the study of the capital market and its many players.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
2) What is the purpose of the capital market?
A) To match people with money to entrepreneurs with great business ideas or concepts
B) To more easily regulate the flow of money between parties
C) To make money without trying
D) To allow people to buy stocks for retirement
Answer: A
Explanation: A) The capital market matches entrepreneurs with great business ideas or concepts
to people with money.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
Corporate Finance Online, 2e (Eakins/McNally)
Chapter 1 Introduction to Finance
LO1: Understand the Features of CFO
1) Section 1.1 does not contain any questions.
LO2: Understand the Four Facets of Finance
1) Finance is
A) the study of investment management.
B) the study of the stock exchange.
C) the study of the capital market and its many players.
D) the study of money management for personal use.
Answer: C
Explanation: C) Finance is the study of the capital market and its many players.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
2) What is the purpose of the capital market?
A) To match people with money to entrepreneurs with great business ideas or concepts
B) To more easily regulate the flow of money between parties
C) To make money without trying
D) To allow people to buy stocks for retirement
Answer: A
Explanation: A) The capital market matches entrepreneurs with great business ideas or concepts
to people with money.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
1
Corporate Finance Online, 2e (Eakins/McNally)
Chapter 1 Introduction to Finance
LO1: Understand the Features of CFO
1) Section 1.1 does not contain any questions.
LO2: Understand the Four Facets of Finance
1) Finance is
A) the study of investment management.
B) the study of the stock exchange.
C) the study of the capital market and its many players.
D) the study of money management for personal use.
Answer: C
Explanation: C) Finance is the study of the capital market and its many players.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
2) What is the purpose of the capital market?
A) To match people with money to entrepreneurs with great business ideas or concepts
B) To more easily regulate the flow of money between parties
C) To make money without trying
D) To allow people to buy stocks for retirement
Answer: A
Explanation: A) The capital market matches entrepreneurs with great business ideas or concepts
to people with money.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
Corporate Finance Online, 2e (Eakins/McNally)
Chapter 1 Introduction to Finance
LO1: Understand the Features of CFO
1) Section 1.1 does not contain any questions.
LO2: Understand the Four Facets of Finance
1) Finance is
A) the study of investment management.
B) the study of the stock exchange.
C) the study of the capital market and its many players.
D) the study of money management for personal use.
Answer: C
Explanation: C) Finance is the study of the capital market and its many players.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
2) What is the purpose of the capital market?
A) To match people with money to entrepreneurs with great business ideas or concepts
B) To more easily regulate the flow of money between parties
C) To make money without trying
D) To allow people to buy stocks for retirement
Answer: A
Explanation: A) The capital market matches entrepreneurs with great business ideas or concepts
to people with money.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
2
3) Which of these is NOT one of the basic questions for corporate finance?
A) How should we raise the money?
B) What are we going to make?
C) What do we do with our profits?
D) How big of a bonus should we get?
Answer: D
Explanation: D) The three questions for corporate finance are: How should we raise the money?
What are we going to make? Do we pay out our profits, or invest them?
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
4) Which one of these would a financial advisor say is most important?
A) Making decent dough over the long haul
B) Making a quick buck
C) Avoiding paying taxes whenever possible
D) Properly financing a large purchase
Answer: A
Explanation: A) Most importantly, financial advisors help you make decent dough over the long
haul.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
5) ________ would be the course where you learn to tell the good stocks from the bad, and the
sure things from the really risky.
A) Corporate Finance
B) Investments
C) Personal Finance
D) Derivative Securities
Answer: B
Explanation: B) Investments is the course where you learn to tell the good stocks from the bad,
and the sure things from the really risky.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
3) Which of these is NOT one of the basic questions for corporate finance?
A) How should we raise the money?
B) What are we going to make?
C) What do we do with our profits?
D) How big of a bonus should we get?
Answer: D
Explanation: D) The three questions for corporate finance are: How should we raise the money?
What are we going to make? Do we pay out our profits, or invest them?
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
4) Which one of these would a financial advisor say is most important?
A) Making decent dough over the long haul
B) Making a quick buck
C) Avoiding paying taxes whenever possible
D) Properly financing a large purchase
Answer: A
Explanation: A) Most importantly, financial advisors help you make decent dough over the long
haul.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
5) ________ would be the course where you learn to tell the good stocks from the bad, and the
sure things from the really risky.
A) Corporate Finance
B) Investments
C) Personal Finance
D) Derivative Securities
Answer: B
Explanation: B) Investments is the course where you learn to tell the good stocks from the bad,
and the sure things from the really risky.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
2
3) Which of these is NOT one of the basic questions for corporate finance?
A) How should we raise the money?
B) What are we going to make?
C) What do we do with our profits?
D) How big of a bonus should we get?
Answer: D
Explanation: D) The three questions for corporate finance are: How should we raise the money?
What are we going to make? Do we pay out our profits, or invest them?
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
4) Which one of these would a financial advisor say is most important?
A) Making decent dough over the long haul
B) Making a quick buck
C) Avoiding paying taxes whenever possible
D) Properly financing a large purchase
Answer: A
Explanation: A) Most importantly, financial advisors help you make decent dough over the long
haul.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
5) ________ would be the course where you learn to tell the good stocks from the bad, and the
sure things from the really risky.
A) Corporate Finance
B) Investments
C) Personal Finance
D) Derivative Securities
Answer: B
Explanation: B) Investments is the course where you learn to tell the good stocks from the bad,
and the sure things from the really risky.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
3) Which of these is NOT one of the basic questions for corporate finance?
A) How should we raise the money?
B) What are we going to make?
C) What do we do with our profits?
D) How big of a bonus should we get?
Answer: D
Explanation: D) The three questions for corporate finance are: How should we raise the money?
What are we going to make? Do we pay out our profits, or invest them?
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
4) Which one of these would a financial advisor say is most important?
A) Making decent dough over the long haul
B) Making a quick buck
C) Avoiding paying taxes whenever possible
D) Properly financing a large purchase
Answer: A
Explanation: A) Most importantly, financial advisors help you make decent dough over the long
haul.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
5) ________ would be the course where you learn to tell the good stocks from the bad, and the
sure things from the really risky.
A) Corporate Finance
B) Investments
C) Personal Finance
D) Derivative Securities
Answer: B
Explanation: B) Investments is the course where you learn to tell the good stocks from the bad,
and the sure things from the really risky.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
3
LO3: Understand the Function of the Financial System
1) Regulating the banking institutions is one of the Federal Reserve's duties.
Answer: TRUE
Explanation: The Federal Reserve has 3 duties: 1) Conduct monetary policy 2) Regulate banking
institutions 3) Provide financial services to depository institutions.
Diff: 1
Section: 3.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
2) Which of the following is NOT a financial intermediary?
A) Investment banks
B) The United States Treasury Department
C) Hedge funds
D) Insurance companies
E) Thrift institutions
Answer: B
Explanation: B) Financial Intermediaries include banks and thrifts, investment banks, pension,
mutual, and hedge funds, and insurance companies.
Diff: 1
Section: 3.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
3) The primary role of a financial system is to
A) make savvy investors rich.
B) regulate the banking system.
C) enable financial managers to evaluate investment projects with a system that always selects
the correct opportunity for their firm.
D) channel funds from savers to borrowers who need funds for investment projects.
E) provide employees in financial institutions with a code of ethics.
Answer: D
Explanation: D) The financial system transfers money from suppliers to users.
Diff: 1
Section: 3.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
LO3: Understand the Function of the Financial System
1) Regulating the banking institutions is one of the Federal Reserve's duties.
Answer: TRUE
Explanation: The Federal Reserve has 3 duties: 1) Conduct monetary policy 2) Regulate banking
institutions 3) Provide financial services to depository institutions.
Diff: 1
Section: 3.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
2) Which of the following is NOT a financial intermediary?
A) Investment banks
B) The United States Treasury Department
C) Hedge funds
D) Insurance companies
E) Thrift institutions
Answer: B
Explanation: B) Financial Intermediaries include banks and thrifts, investment banks, pension,
mutual, and hedge funds, and insurance companies.
Diff: 1
Section: 3.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
3) The primary role of a financial system is to
A) make savvy investors rich.
B) regulate the banking system.
C) enable financial managers to evaluate investment projects with a system that always selects
the correct opportunity for their firm.
D) channel funds from savers to borrowers who need funds for investment projects.
E) provide employees in financial institutions with a code of ethics.
Answer: D
Explanation: D) The financial system transfers money from suppliers to users.
Diff: 1
Section: 3.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
4
LO4: Distinguish between Money and Capital Markets
1) Money market securities have maturities of one year or less.
Answer: TRUE
Explanation: Money Market securities mature less than 1 year from their issue date.
Diff: 1
Section: 4.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
2) T-bonds are money market securities, while T-bills and T-notes are traded in the capital
market.
Answer: FALSE
Explanation: T-Bills are instruments of the money market.
Diff: 1
Section: 4.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
3) Preferred stock pays a variable dividend.
Answer: FALSE
Explanation: Preferred stockholders receive a fixed dividend that does not change.
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
4) Capital markets have maturities of one year or less.
Answer: FALSE
Explanation: Capital markets are markets in which the securities have an original maturity
greater than 1 year.
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
LO4: Distinguish between Money and Capital Markets
1) Money market securities have maturities of one year or less.
Answer: TRUE
Explanation: Money Market securities mature less than 1 year from their issue date.
Diff: 1
Section: 4.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
2) T-bonds are money market securities, while T-bills and T-notes are traded in the capital
market.
Answer: FALSE
Explanation: T-Bills are instruments of the money market.
Diff: 1
Section: 4.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
3) Preferred stock pays a variable dividend.
Answer: FALSE
Explanation: Preferred stockholders receive a fixed dividend that does not change.
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
4) Capital markets have maturities of one year or less.
Answer: FALSE
Explanation: Capital markets are markets in which the securities have an original maturity
greater than 1 year.
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
5
5) According to your text, major players in the money market include all of the following
EXCEPT
A) the U.S. Treasury.
B) the Federal Reserve System.
C) commercial banks.
D) companies.
E) the U.S. Commerce Department.
Answer: E
Explanation: E) The U.S. Commerce Department is not a major player in the money market.
Diff: 1
Section: 4.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
6) Which of the following is NOT considered a capital market security?
A) Mortgage-backed securities
B) Corporate bonds
C) Common stock
D) Foreign currencies
E) Municipal bonds
Answer: D
Explanation: D) Foreign currencies are not capital market securities
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
7) Money markets are markets for
A) foreign currency exchange.
B) corporate stocks.
C) long-term bonds.
D) short-term debt securities.
E) preferred securities.
Answer: D
Explanation: D) In a money market, the securities are short term and highly liquid.
Diff: 1
Section: 4.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
5) According to your text, major players in the money market include all of the following
EXCEPT
A) the U.S. Treasury.
B) the Federal Reserve System.
C) commercial banks.
D) companies.
E) the U.S. Commerce Department.
Answer: E
Explanation: E) The U.S. Commerce Department is not a major player in the money market.
Diff: 1
Section: 4.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
6) Which of the following is NOT considered a capital market security?
A) Mortgage-backed securities
B) Corporate bonds
C) Common stock
D) Foreign currencies
E) Municipal bonds
Answer: D
Explanation: D) Foreign currencies are not capital market securities
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
7) Money markets are markets for
A) foreign currency exchange.
B) corporate stocks.
C) long-term bonds.
D) short-term debt securities.
E) preferred securities.
Answer: D
Explanation: D) In a money market, the securities are short term and highly liquid.
Diff: 1
Section: 4.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
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6
8) Which of the following statements is TRUE regarding common and preferred shares?
A) Preferred shareholders have more voting power than common shareholders.
B) Common shareholders are guaranteed a fixed dividend.
C) Common shareholders have a more senior claim against assets than preferred shareholders.
D) Preferred shareholders are entitled to their dividends before common shareholders
E) Common shareholders earn a better return than preferred shareholders.
Answer: D
Explanation: D) Preferred shareholders are entitled to their dividends before common
shareholders.
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
9) Common stockholders expect to receive a return through capital gains and
A) interest payments.
B) dividends.
C) fixed periodic dividends.
D) coupon payments.
E) receiving shares of preferred stock.
Answer: B
Explanation: B) Common shareholders receive a dividend at the discretion of the board.
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
10) Which of the following is NOT a major participant in the money market?
A) Money market mutual funds
B) Commercial banks
C) Wall Street dealers
D) Federal Reserve
E) U.S. Treasury
Answer: C
Explanation: C) The players in the money market are the U.S. Treasury, Corporations, Banks,
Funds, Federal Reserve, Insurance Cos, Pensions, and Banks.
Diff: 1
Section: 4.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
8) Which of the following statements is TRUE regarding common and preferred shares?
A) Preferred shareholders have more voting power than common shareholders.
B) Common shareholders are guaranteed a fixed dividend.
C) Common shareholders have a more senior claim against assets than preferred shareholders.
D) Preferred shareholders are entitled to their dividends before common shareholders
E) Common shareholders earn a better return than preferred shareholders.
Answer: D
Explanation: D) Preferred shareholders are entitled to their dividends before common
shareholders.
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
9) Common stockholders expect to receive a return through capital gains and
A) interest payments.
B) dividends.
C) fixed periodic dividends.
D) coupon payments.
E) receiving shares of preferred stock.
Answer: B
Explanation: B) Common shareholders receive a dividend at the discretion of the board.
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
10) Which of the following is NOT a major participant in the money market?
A) Money market mutual funds
B) Commercial banks
C) Wall Street dealers
D) Federal Reserve
E) U.S. Treasury
Answer: C
Explanation: C) The players in the money market are the U.S. Treasury, Corporations, Banks,
Funds, Federal Reserve, Insurance Cos, Pensions, and Banks.
Diff: 1
Section: 4.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
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7
11) Shares of ________ are units of ownership interest, or equity, in a corporation.
A) debt
B) common stock
C) bank loans
D) commercial paper
E) debentures
Answer: B
Explanation: B) Shares of Common Stock represent ownership in a corporation
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
12) ________ are long-term debt instruments business and government use to raise large sums of
money.
A) T-bills
B) Bonds
C) Common stocks
D) Preferred stocks
E) Commercial papers
Answer: B
Explanation: B) Bonds are debt instruments issued by governments and corporations with a
maturity of more than a year.
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
13) Which of the following statements best describes mutual funds?
A) They are illegal in the United States, but popular in Europe.
B) They enable investors to buy many shares of stock in a single firm at a lower cost than using a
stockbroker.
C) They provide good investment returns, but insufficient diversification.
D) They enable many investors with limited funds to buy a diversified portfolio.
E) They appeal only to wealthy investors.
Answer: D
Explanation: D) A mutual fund is a professionally managed pool of money which comes from a
disparate group of investors who exchange their money for shares in the fund.
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
11) Shares of ________ are units of ownership interest, or equity, in a corporation.
A) debt
B) common stock
C) bank loans
D) commercial paper
E) debentures
Answer: B
Explanation: B) Shares of Common Stock represent ownership in a corporation
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
12) ________ are long-term debt instruments business and government use to raise large sums of
money.
A) T-bills
B) Bonds
C) Common stocks
D) Preferred stocks
E) Commercial papers
Answer: B
Explanation: B) Bonds are debt instruments issued by governments and corporations with a
maturity of more than a year.
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
13) Which of the following statements best describes mutual funds?
A) They are illegal in the United States, but popular in Europe.
B) They enable investors to buy many shares of stock in a single firm at a lower cost than using a
stockbroker.
C) They provide good investment returns, but insufficient diversification.
D) They enable many investors with limited funds to buy a diversified portfolio.
E) They appeal only to wealthy investors.
Answer: D
Explanation: D) A mutual fund is a professionally managed pool of money which comes from a
disparate group of investors who exchange their money for shares in the fund.
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
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8
14) The ________ is a financial relationship created by a number of institutions with
arrangements that allow the suppliers and demanders of long-term funds to make transactions.
A) money market
B) eurobond market
C) bond market
D) capital market
E) futures market
Answer: D
Explanation: D) Capital markets are markets in which securities have an original maturity
greater than one year.
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
15) Which of the following are rights of stockholders?
A) To share in the firm's profits after all other creditors have been satisfied
B) To be guaranteed a dividend
C) To decide whether or not to pay taxes on capital gains
D) To vote for directors, but never on specific issues
E) To avoid losses when the firm's prospects decline
Answer: A
Explanation: A) Stockholders are residual claimants, meaning they share in the profits after all
other creditors have been satisfied.
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
LO5: Learn the Difference between Primary and Secondary Markets
1) The ________ price is ________ the ________ price.
A) bid; above; ask
B) bid; below; ask
C) ask; below; bid
D) ask; above; bid
E) Both B and D are correct.
Answer: E
Explanation: E) The ask price is the price the seller wants to receive and the bid price is the
price the buyer is willing to pay.
Diff: 1
Section: 5.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
14) The ________ is a financial relationship created by a number of institutions with
arrangements that allow the suppliers and demanders of long-term funds to make transactions.
A) money market
B) eurobond market
C) bond market
D) capital market
E) futures market
Answer: D
Explanation: D) Capital markets are markets in which securities have an original maturity
greater than one year.
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
15) Which of the following are rights of stockholders?
A) To share in the firm's profits after all other creditors have been satisfied
B) To be guaranteed a dividend
C) To decide whether or not to pay taxes on capital gains
D) To vote for directors, but never on specific issues
E) To avoid losses when the firm's prospects decline
Answer: A
Explanation: A) Stockholders are residual claimants, meaning they share in the profits after all
other creditors have been satisfied.
Diff: 1
Section: 4.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
LO5: Learn the Difference between Primary and Secondary Markets
1) The ________ price is ________ the ________ price.
A) bid; above; ask
B) bid; below; ask
C) ask; below; bid
D) ask; above; bid
E) Both B and D are correct.
Answer: E
Explanation: E) The ask price is the price the seller wants to receive and the bid price is the
price the buyer is willing to pay.
Diff: 1
Section: 5.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
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9
2) A firm raises capital to finance new equipment by selling bonds in the
A) secondary market.
B) primary market.
C) futures market.
D) options market.
E) federal funds market.
Answer: B
Explanation: B) Primary markets are for securities offered for sale for the first time.
Diff: 1
Section: 5.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
3) The ________ is the financial market in which securities are initially issued.
A) private placement
B) OTC
C) primary market
D) secondary market
E) NASDAQ
Answer: C
Explanation: C) Primary markets are for securities offered for sale for the first time.
Diff: 1
Section: 5.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
4) In the over-the-counter market, dealers are linked with the purchasers and sellers of securities
through the ________ system.
A) NASDAQ
B) NYSE
C) AMEX
D) SEC
E) NYMEX
Answer: A
Explanation: A) NASDAQ is a computerized dealer market.
Diff: 1
Section: 5.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
2) A firm raises capital to finance new equipment by selling bonds in the
A) secondary market.
B) primary market.
C) futures market.
D) options market.
E) federal funds market.
Answer: B
Explanation: B) Primary markets are for securities offered for sale for the first time.
Diff: 1
Section: 5.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
3) The ________ is the financial market in which securities are initially issued.
A) private placement
B) OTC
C) primary market
D) secondary market
E) NASDAQ
Answer: C
Explanation: C) Primary markets are for securities offered for sale for the first time.
Diff: 1
Section: 5.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
4) In the over-the-counter market, dealers are linked with the purchasers and sellers of securities
through the ________ system.
A) NASDAQ
B) NYSE
C) AMEX
D) SEC
E) NYMEX
Answer: A
Explanation: A) NASDAQ is a computerized dealer market.
Diff: 1
Section: 5.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
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10
5) The over-the-counter market is
A) the New York Stock Exchange.
B) an organized stock exchange.
C) a physical place where securities are bought and sold.
D) an intangible market for unlisted securities.
E) where commodities futures are bought and sold.
Answer: D
Explanation: D) The over the counter market is an intangible market for unlisted securities.
Diff: 1
Section: 5.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
6) What do we call a market in which the price of a security is an accurate estimate by the market
of its true value?
A) Efficient Market
B) Law of One Price
C) Effective Market
D) Primary Market
E) Secondary Market
Answer: E
Explanation: E) One of the most important roles of the secondary market is establishing security
prices.
Diff: 1
Section: 5.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
7) Which of the following is a role of the secondary market?
A) Keep prices level
B) Give information for securities on sale in the primary market
C) Trade long term securities only
D) Offer securities for sale for the first time
E) Establishing security prices
Answer: E
Explanation: E) One of the most important roles of the secondary market is establishing security
prices.
Diff: 1
Section: 5.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
5) The over-the-counter market is
A) the New York Stock Exchange.
B) an organized stock exchange.
C) a physical place where securities are bought and sold.
D) an intangible market for unlisted securities.
E) where commodities futures are bought and sold.
Answer: D
Explanation: D) The over the counter market is an intangible market for unlisted securities.
Diff: 1
Section: 5.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
6) What do we call a market in which the price of a security is an accurate estimate by the market
of its true value?
A) Efficient Market
B) Law of One Price
C) Effective Market
D) Primary Market
E) Secondary Market
Answer: E
Explanation: E) One of the most important roles of the secondary market is establishing security
prices.
Diff: 1
Section: 5.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
7) Which of the following is a role of the secondary market?
A) Keep prices level
B) Give information for securities on sale in the primary market
C) Trade long term securities only
D) Offer securities for sale for the first time
E) Establishing security prices
Answer: E
Explanation: E) One of the most important roles of the secondary market is establishing security
prices.
Diff: 1
Section: 5.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
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11
8) ________ are further divided into two groups: Auctions and Dealer markets.
A) Secondary markets
B) Primary markets
C) Money markets
D) Capital markets
E) Investment markets
Answer: A
Explanation: A) Secondary markets are further divided into two groups: (1) Auctions and (2)
Dealer markets.
Diff: 1
Section: 5.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
LO6: Learn about the Structure and Governance of Corporations
1) Agency costs are fees paid by the management of a corporation to compensate any investor
that feels it has suffered a loss due to the agency problem.
Answer: FALSE
Explanation: Agency costs are the loss of shareholder wealth associated with managerial waste
and the cost of resources used to monitor agents' behavior and align incentives.
Diff: 1
Section: 6.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
2) Which of the following are agency costs?
I. Forgoing an investment opportunity which would add to the market value of the owner's
equity
II. Paying a dividend to each of the existing shareholders
III. Purchasing new equipment which increases the value of each share of stock
IV. Hiring outside auditors to verify the accuracy of the company financial statements
A) I and III only
B) I and IV only
C) II and III only
D) II and IV only
E) I, II, and IV only
Answer: B
Explanation: B) Agency costs are the loss of the principal's wealth associated with the agent's
waste and cost of resources used to monitor agents' behavior and align incentives.
Diff: 1
Section: 6.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
8) ________ are further divided into two groups: Auctions and Dealer markets.
A) Secondary markets
B) Primary markets
C) Money markets
D) Capital markets
E) Investment markets
Answer: A
Explanation: A) Secondary markets are further divided into two groups: (1) Auctions and (2)
Dealer markets.
Diff: 1
Section: 5.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
LO6: Learn about the Structure and Governance of Corporations
1) Agency costs are fees paid by the management of a corporation to compensate any investor
that feels it has suffered a loss due to the agency problem.
Answer: FALSE
Explanation: Agency costs are the loss of shareholder wealth associated with managerial waste
and the cost of resources used to monitor agents' behavior and align incentives.
Diff: 1
Section: 6.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
2) Which of the following are agency costs?
I. Forgoing an investment opportunity which would add to the market value of the owner's
equity
II. Paying a dividend to each of the existing shareholders
III. Purchasing new equipment which increases the value of each share of stock
IV. Hiring outside auditors to verify the accuracy of the company financial statements
A) I and III only
B) I and IV only
C) II and III only
D) II and IV only
E) I, II, and IV only
Answer: B
Explanation: B) Agency costs are the loss of the principal's wealth associated with the agent's
waste and cost of resources used to monitor agents' behavior and align incentives.
Diff: 1
Section: 6.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
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12
3) What is the principal-agent problem?
A) When the principal misrepresents the agent to the board
B) When an agent does not maximize the utility of the principal
C) The cost of training new agents
D) When an agent misrepresents the principal to the board
Answer: B
Explanation: B) The principal-agent problem is the problem and cost that occurs when an agent
does not maximize the utility of the principal.
Diff: 1
Section: 6.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
4) Agency costs pose the biggest problem for
A) insiders.
B) shareholders.
C) directors.
D) agents.
E) executives.
Answer: B
Explanation: B) When principals cannot monitor agents, managers have the opportunity to use
resources to benefit themselves and not the shareholders.
Diff: 1
Section: 6.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
5) In a broad sense, every business asset is ultimately owned by
A) individuals.
B) the federal government.
C) foreign governments.
D) trust funds.
E) none of the above.
Answer: A
Diff: 1
Section: 6.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
3) What is the principal-agent problem?
A) When the principal misrepresents the agent to the board
B) When an agent does not maximize the utility of the principal
C) The cost of training new agents
D) When an agent misrepresents the principal to the board
Answer: B
Explanation: B) The principal-agent problem is the problem and cost that occurs when an agent
does not maximize the utility of the principal.
Diff: 1
Section: 6.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
4) Agency costs pose the biggest problem for
A) insiders.
B) shareholders.
C) directors.
D) agents.
E) executives.
Answer: B
Explanation: B) When principals cannot monitor agents, managers have the opportunity to use
resources to benefit themselves and not the shareholders.
Diff: 1
Section: 6.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
5) In a broad sense, every business asset is ultimately owned by
A) individuals.
B) the federal government.
C) foreign governments.
D) trust funds.
E) none of the above.
Answer: A
Diff: 1
Section: 6.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
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13
6) Which of the following statements is TRUE?
A) The presence of asymmetric information in financial markets increases the likelihood that
these markets are efficient.
B) Accounting profits are always more important to shareholders than cash flows.
C) Managers should choose investment projects that maximize shareholder wealth.
D) The study of finance only benefits students who aspire to careers in business.
E) Investors should not be compensated with a higher return for owning risky securities since
they should know better than to buy stock in a firm that has uncertain prospects.
Answer: C
Explanation: C) The goal of management is to maximize the share price—in other words,
maximize shareholder wealth.
Diff: 1
Section: 6.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
7) Which of the following is an advantage of a partnership?
A) No license, charter, or agreement legally required
B) Joint liability for company debts
C) Least regulated form of business
D) Ownership is easy to transfer
E) Can raise money using capital markets (debt and equity)
Answer: A
Explanation: A) Advantages of a partnership include no license, charter, or agreement legally
required, and pay personal taxes on all business income.
Diff: 1
Section: 6.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
8) The top of the organizational chart of organizations is
A) CEO.
B) Board of Directors.
C) V.P. of Finance.
D) shareholders.
E) Executive Chairman.
Answer: D
Explanation: D) At the top of the organizational chart for a corporation are shareholders, who
are owners of the company.
Diff: 1
Section: 6.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
6) Which of the following statements is TRUE?
A) The presence of asymmetric information in financial markets increases the likelihood that
these markets are efficient.
B) Accounting profits are always more important to shareholders than cash flows.
C) Managers should choose investment projects that maximize shareholder wealth.
D) The study of finance only benefits students who aspire to careers in business.
E) Investors should not be compensated with a higher return for owning risky securities since
they should know better than to buy stock in a firm that has uncertain prospects.
Answer: C
Explanation: C) The goal of management is to maximize the share price—in other words,
maximize shareholder wealth.
Diff: 1
Section: 6.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
7) Which of the following is an advantage of a partnership?
A) No license, charter, or agreement legally required
B) Joint liability for company debts
C) Least regulated form of business
D) Ownership is easy to transfer
E) Can raise money using capital markets (debt and equity)
Answer: A
Explanation: A) Advantages of a partnership include no license, charter, or agreement legally
required, and pay personal taxes on all business income.
Diff: 1
Section: 6.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
8) The top of the organizational chart of organizations is
A) CEO.
B) Board of Directors.
C) V.P. of Finance.
D) shareholders.
E) Executive Chairman.
Answer: D
Explanation: D) At the top of the organizational chart for a corporation are shareholders, who
are owners of the company.
Diff: 1
Section: 6.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
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14
9) Which of the following is the best way to prevent an agency problem between shareholders
and managers?
A) Maintain a proportional relationship between a manager's bonus and the number of
employees in the firm.
B) Compensate managers to a significant degree with shares of stock in their firm.
C) Reward managers if they keep costs below the budgeted amount.
D) Pay managers a bonus if their division exceeds its targeted market share.
E) Pay managers a bonus if their division exceeds its quarterly sales target.
Answer: B
Explanation: B) Aligning managers interest with shareholder interest helps prevent the
principal-agent problem.
Diff: 1
Section: 6.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
LO7: Learn Six Important Ideas in Finance
1) The higher the probability that the return on an investment will not pay off its averaged
promised value, the higher the expected return must be to induce an investor to invest in it.
Answer: TRUE
Explanation: Higher risk requires higher return.
Diff: 1
Section: 7.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
2) A firm's net income is a true representation of cash flows available to the stockholders.
Answer: FALSE
Explanation: Net income is a number meant to represent the average profit available to
shareholders.
Diff: 1
Section: 7.4
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
9) Which of the following is the best way to prevent an agency problem between shareholders
and managers?
A) Maintain a proportional relationship between a manager's bonus and the number of
employees in the firm.
B) Compensate managers to a significant degree with shares of stock in their firm.
C) Reward managers if they keep costs below the budgeted amount.
D) Pay managers a bonus if their division exceeds its targeted market share.
E) Pay managers a bonus if their division exceeds its quarterly sales target.
Answer: B
Explanation: B) Aligning managers interest with shareholder interest helps prevent the
principal-agent problem.
Diff: 1
Section: 6.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
LO7: Learn Six Important Ideas in Finance
1) The higher the probability that the return on an investment will not pay off its averaged
promised value, the higher the expected return must be to induce an investor to invest in it.
Answer: TRUE
Explanation: Higher risk requires higher return.
Diff: 1
Section: 7.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
2) A firm's net income is a true representation of cash flows available to the stockholders.
Answer: FALSE
Explanation: Net income is a number meant to represent the average profit available to
shareholders.
Diff: 1
Section: 7.4
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
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15
3) $100 today is worth
A) the same as $100 to be received in one year, since the inflation rate has been low recently and
funds received in the near future should have the same purchasing power that they have today.
B) less than $100 to be received in one year, since many people will spend money foolishly
today and will become more careful in their spending habits as they mature.
C) more than $100 to be received in one year, since you can invest the money received today for
this period, leaving you with more than $100 in the future.
D) the same as a future receipt of $100, since the physical characteristics of U.S. currency are
unchanged for long periods of time.
E) less than $100 received by someone ten years ago, since many products have been improved
over this time period.
Answer: C
Explanation: C) A dollar today is worth more than the promise of a dollar next year.
Diff: 1
Section: 7.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
4) As the risk of a stock investment increases
A) return will increase.
B) return will decrease.
C) required rate of return will decrease.
D) required rate of return will increase.
E) the beta approaches zero.
Answer: D
Explanation: D) As the risk of an investment increases, the required return will increase.
Diff: 1
Section: 7.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
5) Which of the following statements about risk is FALSE?
A) Risk is one of the determinants of the required return.
B) Risk requires the possibility of at least one outcome less favorable than the expected value.
C) Risk requires the possibility of more than one outcome.
D) High risk should require low return.
Answer: D
Explanation: D) Higher risk requires higher returns.
Diff: 1
Section: 7.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
3) $100 today is worth
A) the same as $100 to be received in one year, since the inflation rate has been low recently and
funds received in the near future should have the same purchasing power that they have today.
B) less than $100 to be received in one year, since many people will spend money foolishly
today and will become more careful in their spending habits as they mature.
C) more than $100 to be received in one year, since you can invest the money received today for
this period, leaving you with more than $100 in the future.
D) the same as a future receipt of $100, since the physical characteristics of U.S. currency are
unchanged for long periods of time.
E) less than $100 received by someone ten years ago, since many products have been improved
over this time period.
Answer: C
Explanation: C) A dollar today is worth more than the promise of a dollar next year.
Diff: 1
Section: 7.1
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
4) As the risk of a stock investment increases
A) return will increase.
B) return will decrease.
C) required rate of return will decrease.
D) required rate of return will increase.
E) the beta approaches zero.
Answer: D
Explanation: D) As the risk of an investment increases, the required return will increase.
Diff: 1
Section: 7.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
5) Which of the following statements about risk is FALSE?
A) Risk is one of the determinants of the required return.
B) Risk requires the possibility of at least one outcome less favorable than the expected value.
C) Risk requires the possibility of more than one outcome.
D) High risk should require low return.
Answer: D
Explanation: D) Higher risk requires higher returns.
Diff: 1
Section: 7.2
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
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16
6) The efficient market hypothesis states that
A) requiring firms to issue more stock will reduce volatility.
B) requiring investors to hold securities longer will reduce volatility.
C) electing a pro-business Republican president makes the market more efficient.
D) taxing security returns will raise prices.
E) markets price securities fairly at all times and that new information is rapidly reflected in the
price.
Answer: E
Explanation: E) The efficient market hypothesis states that markets price securities fairly at all
times and that new information is rapidly reflected in the price.
Diff: 1
Section: 7.3
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
7) Information Asymmetry is
A) false information spread by competitors.
B) when two pieces of information counteract each other.
C) when some know more than others.
D) when information is not reflected properly in the market.
E) incomplete information.
Answer: C
Explanation: C) Information asymmetry is when information is not spread evenly among all
participants.
Diff: 1
Section: 7.5
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
6) The efficient market hypothesis states that
A) requiring firms to issue more stock will reduce volatility.
B) requiring investors to hold securities longer will reduce volatility.
C) electing a pro-business Republican president makes the market more efficient.
D) taxing security returns will raise prices.
E) markets price securities fairly at all times and that new information is rapidly reflected in the
price.
Answer: E
Explanation: E) The efficient market hypothesis states that markets price securities fairly at all
times and that new information is rapidly reflected in the price.
Diff: 1
Section: 7.3
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
7) Information Asymmetry is
A) false information spread by competitors.
B) when two pieces of information counteract each other.
C) when some know more than others.
D) when information is not reflected properly in the market.
E) incomplete information.
Answer: C
Explanation: C) Information asymmetry is when information is not spread evenly among all
participants.
Diff: 1
Section: 7.5
AACSB: Analytical Skills
Learning Outcome: F-01: Describe the different financial markets and the role of the financial
managers
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1
Corporate Finance Online, 2e (Eakins/McNally)
Chapter 2 Financial Statements and Ratio Analysis
LO1: Describe the Three Financial Statements Needed for Financial Analysis
1) Using financial information to aid in decision making is called
A) "what-if" analysis.
B) factor analysis.
C) financial analysis.
D) quantitative analysis.
E) managerial economics.
Answer: C
Explanation: C) Financial analysis is the process of using financial information to assist in
investment and financial decision making.
Diff: 1
Section: 1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
2) Which of the following is NOT a commonly used source of information for financial analysis?
A) A consultant's analysis of industry conditions
B) Key employees' guesses about future trends
C) The Securities and Exchange Commission's filings
D) The firm's annual report
E) The economic data from a forecasting firm
Answer: B
Explanation: B) Financial analysis is the process of using financial information to assist in
investment and financial decision making.
Diff: 1
Section: 1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
3) Which of the following is one of the financial statements critical to financial statement
analysis?
A) 8-K
B) SEC registration statement
C) Disclosure
D) 10-Q
E) Statement of Cash Flows
Answer: E
Explanation: E) The three financial statements critical to analysis are the balance sheet, the
income statement, and the statement of cash flows.
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
Corporate Finance Online, 2e (Eakins/McNally)
Chapter 2 Financial Statements and Ratio Analysis
LO1: Describe the Three Financial Statements Needed for Financial Analysis
1) Using financial information to aid in decision making is called
A) "what-if" analysis.
B) factor analysis.
C) financial analysis.
D) quantitative analysis.
E) managerial economics.
Answer: C
Explanation: C) Financial analysis is the process of using financial information to assist in
investment and financial decision making.
Diff: 1
Section: 1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
2) Which of the following is NOT a commonly used source of information for financial analysis?
A) A consultant's analysis of industry conditions
B) Key employees' guesses about future trends
C) The Securities and Exchange Commission's filings
D) The firm's annual report
E) The economic data from a forecasting firm
Answer: B
Explanation: B) Financial analysis is the process of using financial information to assist in
investment and financial decision making.
Diff: 1
Section: 1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
3) Which of the following is one of the financial statements critical to financial statement
analysis?
A) 8-K
B) SEC registration statement
C) Disclosure
D) 10-Q
E) Statement of Cash Flows
Answer: E
Explanation: E) The three financial statements critical to analysis are the balance sheet, the
income statement, and the statement of cash flows.
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
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2
4) Which of the following is a variation of the accounting identity?
A) Assets − Fixed assets = Equity − Liabilities
B) Owner's equity = Assets − Liabilities
C) Equity − Liabilities = Assets
D) Assets + Equity = Liabilities
E) Assets + Lease obligations = Equity + Liabilities
Answer: B
Explanation: B) Assets = Liabilities + Owners' Equity
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
5) Balance sheets
A) show how the firm raised funds to purchase assets.
B) report a firm's activities over a period of time.
C) describe a firm's cash flows.
D) provide information about a firm's labor costs.
E) may not balance if the firm suffered a net loss.
Answer: A
Explanation: A) Liabilities and owners' equity provide the funds for the purchase of assets.
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
6) The right-hand side of the balance sheet shows
A) the cash flow generated by a firm's assets.
B) how the firm financed its assets.
C) the level of accumulated depreciation.
D) profits earned by the firm in the current period.
E) the firm's good will.
Answer: B
Explanation: B) Right-hand side shows liabilities and owners equity.
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
4) Which of the following is a variation of the accounting identity?
A) Assets − Fixed assets = Equity − Liabilities
B) Owner's equity = Assets − Liabilities
C) Equity − Liabilities = Assets
D) Assets + Equity = Liabilities
E) Assets + Lease obligations = Equity + Liabilities
Answer: B
Explanation: B) Assets = Liabilities + Owners' Equity
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
5) Balance sheets
A) show how the firm raised funds to purchase assets.
B) report a firm's activities over a period of time.
C) describe a firm's cash flows.
D) provide information about a firm's labor costs.
E) may not balance if the firm suffered a net loss.
Answer: A
Explanation: A) Liabilities and owners' equity provide the funds for the purchase of assets.
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
6) The right-hand side of the balance sheet shows
A) the cash flow generated by a firm's assets.
B) how the firm financed its assets.
C) the level of accumulated depreciation.
D) profits earned by the firm in the current period.
E) the firm's good will.
Answer: B
Explanation: B) Right-hand side shows liabilities and owners equity.
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
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3
7) The ________ is a snapshot of the firm at a particular point in time.
A) income statement
B) statement of cash flows
C) statement of retained earnings
D) balance sheet
E) None of the above
Answer: D
Explanation: E) The balance sheet is a financial snapshot of the firm.
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
8) An income statement contains all of the following EXCEPT
A) revenues.
B) assets.
C) losses.
D) gains.
E) expenses.
Answer: B
Explanation: B) Income statements show revenues—expenses which result in losses or gains.
Diff: 1
Section: 1.2
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
9) Which of the following is NOT included in a cash flow statement?
A) Labor productivity
B) Interest earnings
C) Cash flow from operations
D) Depreciation expense
E) The increase in long-term debt
Answer: A
Explanation: A) The statement of cash flows only deals with cash inflows and outflows.
Diff: 1
Section: 1.3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
7) The ________ is a snapshot of the firm at a particular point in time.
A) income statement
B) statement of cash flows
C) statement of retained earnings
D) balance sheet
E) None of the above
Answer: D
Explanation: E) The balance sheet is a financial snapshot of the firm.
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
8) An income statement contains all of the following EXCEPT
A) revenues.
B) assets.
C) losses.
D) gains.
E) expenses.
Answer: B
Explanation: B) Income statements show revenues—expenses which result in losses or gains.
Diff: 1
Section: 1.2
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
9) Which of the following is NOT included in a cash flow statement?
A) Labor productivity
B) Interest earnings
C) Cash flow from operations
D) Depreciation expense
E) The increase in long-term debt
Answer: A
Explanation: A) The statement of cash flows only deals with cash inflows and outflows.
Diff: 1
Section: 1.3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
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4
10)
What is short-term debt for Le Chateau?
A) 0
B) 494
C) 9,868
D) 12,027
Answer: A
Explanation: A) Le Chateau has no short-term debt in current liabilities.
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
10)
What is short-term debt for Le Chateau?
A) 0
B) 494
C) 9,868
D) 12,027
Answer: A
Explanation: A) Le Chateau has no short-term debt in current liabilities.
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
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5
11) What is the connection between the income statement and the balance sheet?
A) The income statement captures the flow of activity during the year and the balance sheet is a
'snapshot' of the company at the end of the year.
B) The income statement shows the profit earned by the owners and the balance sheet shows the
book value of the owner's equity.
C) Net income (minus dividends) is added to retained earnings in the balance sheet.
D) Accounting laws require that companies report both statements.
E) The cash flow statement draws from both the income statement and the balance sheet.
Answer: C
Explanation: C) Net income (minus dividends) is added to retained earnings in the balance
sheet.
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
12) The left-hand side of the balance sheet reports the book value of the assets that the company
has and the right-hand side reports how they were financed.
Answer: TRUE
Explanation: The left-hand side of the balance sheet reports assets and the right-hand side
reports liabilities and owners' equity. The liabilities and owners' equity show, mainly, the
original value of the investments made by owners and lenders.
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
13) Earnings are the same thing as net income.
Answer: TRUE
Explanation: Net income is the company's profit. Synonyms include earnings.
Diff: 1
Section: 1.2
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
LO2: Explain the Goals of Financial Statement Analysis
1) Section 2.2 does not contain any questions.
11) What is the connection between the income statement and the balance sheet?
A) The income statement captures the flow of activity during the year and the balance sheet is a
'snapshot' of the company at the end of the year.
B) The income statement shows the profit earned by the owners and the balance sheet shows the
book value of the owner's equity.
C) Net income (minus dividends) is added to retained earnings in the balance sheet.
D) Accounting laws require that companies report both statements.
E) The cash flow statement draws from both the income statement and the balance sheet.
Answer: C
Explanation: C) Net income (minus dividends) is added to retained earnings in the balance
sheet.
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
12) The left-hand side of the balance sheet reports the book value of the assets that the company
has and the right-hand side reports how they were financed.
Answer: TRUE
Explanation: The left-hand side of the balance sheet reports assets and the right-hand side
reports liabilities and owners' equity. The liabilities and owners' equity show, mainly, the
original value of the investments made by owners and lenders.
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
13) Earnings are the same thing as net income.
Answer: TRUE
Explanation: Net income is the company's profit. Synonyms include earnings.
Diff: 1
Section: 1.2
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
LO2: Explain the Goals of Financial Statement Analysis
1) Section 2.2 does not contain any questions.
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6
LO3: Perform Financial Statement Analysis
1) In cross-sectional analysis, a firm's financial ratios are
A) judged against the performance of firms in the same industry.
B) compared with the firm's ratios from the most recent period.
C) compared with ratios from all firms.
D) compared with a general standard.
E) plotted over time to isolate trends.
Answer: A
Explanation: A) Cross sectional analysis is the comparison of one firm to other similar firms.
Diff: 1
Section: 3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
2) The four-digit codes used by the government to classify firms into industries are known as
A) ratio standards.
B) EIC codes.
C) USIC codes.
D) financial benchmarks.
E) SIC codes.
Answer: E
Explanation: E) Standard Industrial Classification (SIC) codes are four-digit codes given to
firms by the government.
Diff: 1
Section: 3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
3) When financial ratios are compared to financial ratios from previous years, a ________ is
conducted.
A) cross-time
B) SIC code
C) time series
D) cross-sectional
E) None of the above
Answer: C
Explanation: C) A time series analysis involves comparing the firm's current performance to
prior periods.
Diff: 1
Section: 3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
LO3: Perform Financial Statement Analysis
1) In cross-sectional analysis, a firm's financial ratios are
A) judged against the performance of firms in the same industry.
B) compared with the firm's ratios from the most recent period.
C) compared with ratios from all firms.
D) compared with a general standard.
E) plotted over time to isolate trends.
Answer: A
Explanation: A) Cross sectional analysis is the comparison of one firm to other similar firms.
Diff: 1
Section: 3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
2) The four-digit codes used by the government to classify firms into industries are known as
A) ratio standards.
B) EIC codes.
C) USIC codes.
D) financial benchmarks.
E) SIC codes.
Answer: E
Explanation: E) Standard Industrial Classification (SIC) codes are four-digit codes given to
firms by the government.
Diff: 1
Section: 3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
3) When financial ratios are compared to financial ratios from previous years, a ________ is
conducted.
A) cross-time
B) SIC code
C) time series
D) cross-sectional
E) None of the above
Answer: C
Explanation: C) A time series analysis involves comparing the firm's current performance to
prior periods.
Diff: 1
Section: 3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
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7
4) All of the following are problems with cross-sectional financial analysis EXCEPT that
A) an industry may be dominated by a few firms.
B) annual reports sometimes do not disclose divisional financial data.
C) many firms are conglomerates.
D) it provides no basis for comparison to other firms.
E) there may be no obvious firms to be used for comparison.
Answer: D
Explanation: D) All of the following are problems with cross-sectional financial analysis except
that it provides no basis for comparison to other firms.
Diff: 1
Section: 3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
5) Each of the following is a ratio category EXCEPT
A) productivity ratios.
B) market ratios.
C) liquidity ratios.
D) financing ratios.
E) activity ratios.
Answer: A
Explanation: A) Ratios are grouped into categories: Profitability, Liquidity, Activity, Financing,
and Market.
Diff: 1
Section: 3.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
6) ________ ratios measure the efficiency with which assets are converted to sales or cash.
A) Liquidity
B) Activity
C) Profitability
D) Market
E) Financing
Answer: B
Explanation: B) Activity ratios measure the efficiency with which assets are converted to sales
or cash.
Diff: 1
Section: 3.4
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
4) All of the following are problems with cross-sectional financial analysis EXCEPT that
A) an industry may be dominated by a few firms.
B) annual reports sometimes do not disclose divisional financial data.
C) many firms are conglomerates.
D) it provides no basis for comparison to other firms.
E) there may be no obvious firms to be used for comparison.
Answer: D
Explanation: D) All of the following are problems with cross-sectional financial analysis except
that it provides no basis for comparison to other firms.
Diff: 1
Section: 3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
5) Each of the following is a ratio category EXCEPT
A) productivity ratios.
B) market ratios.
C) liquidity ratios.
D) financing ratios.
E) activity ratios.
Answer: A
Explanation: A) Ratios are grouped into categories: Profitability, Liquidity, Activity, Financing,
and Market.
Diff: 1
Section: 3.1
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
6) ________ ratios measure the efficiency with which assets are converted to sales or cash.
A) Liquidity
B) Activity
C) Profitability
D) Market
E) Financing
Answer: B
Explanation: B) Activity ratios measure the efficiency with which assets are converted to sales
or cash.
Diff: 1
Section: 3.4
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
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8
7) Find the return on assets if net income was $55,000, total assets are $115,000, EBIT was
$100,000, and equity is $75,000.
A) 73.3%
B) 63.1%
C) 87.0%
D) 47.8%
E) 55.0%
Answer: D
Explanation: D) Return on assets =
Return on assets = = 47.8%
Diff: 2
Section: 3.2
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
8) What is the return on equity if net income was $55,000, total assets are $115,000, EBIT was
$100,000, and equity is $75,000?
A) 47.8%
B) 63.1%
C) 73.3%
D) 87.0%
E) 55.0%
Answer: C
Explanation: C) Return on equity =
Return on equity = = 73.3%
Diff: 2
Section: 3.2
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
7) Find the return on assets if net income was $55,000, total assets are $115,000, EBIT was
$100,000, and equity is $75,000.
A) 73.3%
B) 63.1%
C) 87.0%
D) 47.8%
E) 55.0%
Answer: D
Explanation: D) Return on assets =
Return on assets = = 47.8%
Diff: 2
Section: 3.2
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
8) What is the return on equity if net income was $55,000, total assets are $115,000, EBIT was
$100,000, and equity is $75,000?
A) 47.8%
B) 63.1%
C) 73.3%
D) 87.0%
E) 55.0%
Answer: C
Explanation: C) Return on equity =
Return on equity = = 73.3%
Diff: 2
Section: 3.2
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
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9
9) Sales for a firm are $500,000, cost of goods sold are $400,000, and interest expenses are
$20,000. What is the gross profit margin?
A) 16.0%
B) 20.0%
C) 4.0%
D) 25.0%
E) 30.0%
Answer: B
Explanation: B) Gross profit margin =
Gross profit margin = = 20%
Diff: 2
Section: 3.2
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
10) If net income was $10,000, interest expense was $4,000, and taxes were $1,000, what is the
operating profit margin if sales were $50,000?
A) 28%
B) 30%
C) 22%
D) 10%
E) 20%
Answer: B
Explanation: B) Operating profit margin =
Operating profit margin = = 30%
Diff: 2
Section: 3.2
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
9) Sales for a firm are $500,000, cost of goods sold are $400,000, and interest expenses are
$20,000. What is the gross profit margin?
A) 16.0%
B) 20.0%
C) 4.0%
D) 25.0%
E) 30.0%
Answer: B
Explanation: B) Gross profit margin =
Gross profit margin = = 20%
Diff: 2
Section: 3.2
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
10) If net income was $10,000, interest expense was $4,000, and taxes were $1,000, what is the
operating profit margin if sales were $50,000?
A) 28%
B) 30%
C) 22%
D) 10%
E) 20%
Answer: B
Explanation: B) Operating profit margin =
Operating profit margin = = 30%
Diff: 2
Section: 3.2
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
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10
11) If net income after tax was $10,000, interest expense was $4,000, and taxes were $1,000,
what is the net profit margin if sales were $50,000?
A) 10%
B) 30%
C) 22%
D) 28%
E) 20%
Answer: E
Explanation: E) Net profit margin =
Net profit margin = = 20%
Diff: 2
Section: 3.2
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
12) The quick ratio improves upon the current ratio by
A) using more up-to-date information.
B) simplifying the calculation.
C) subtracting intangible assets like goodwill.
D) recognizing that inventory is the current asset that is easiest to value.
E) recognizing that inventory is the least liquid current asset.
Answer: E
Explanation: E) Since inventory may not always be easily converted into cash, the quick ratio is
a more conservative measure of liquidity.
Diff: 1
Section: 3.3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
13) What is the quick ratio if cash is $10,000, accounts receivable are $25,000, inventories are
$30,000, accounts payable are $40,000, and accrued payroll is $15,000?
A) 2.00
B) 1.18
C) 0.73
D) 1.13
E) 0.09
Answer: E
Explanation: E) Quick ratio =
Quick ratio = = 0.09
Diff: 3
Section: 3.3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
11) If net income after tax was $10,000, interest expense was $4,000, and taxes were $1,000,
what is the net profit margin if sales were $50,000?
A) 10%
B) 30%
C) 22%
D) 28%
E) 20%
Answer: E
Explanation: E) Net profit margin =
Net profit margin = = 20%
Diff: 2
Section: 3.2
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
12) The quick ratio improves upon the current ratio by
A) using more up-to-date information.
B) simplifying the calculation.
C) subtracting intangible assets like goodwill.
D) recognizing that inventory is the current asset that is easiest to value.
E) recognizing that inventory is the least liquid current asset.
Answer: E
Explanation: E) Since inventory may not always be easily converted into cash, the quick ratio is
a more conservative measure of liquidity.
Diff: 1
Section: 3.3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
13) What is the quick ratio if cash is $10,000, accounts receivable are $25,000, inventories are
$30,000, accounts payable are $40,000, and accrued payroll is $15,000?
A) 2.00
B) 1.18
C) 0.73
D) 1.13
E) 0.09
Answer: E
Explanation: E) Quick ratio =
Quick ratio = = 0.09
Diff: 3
Section: 3.3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
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11
14) What is the current ratio if cash is $10,000, accounts receivable are $25,000, inventories are
$30,000, accounts payable are $40,000, and accrued payroll is $15,000?
A) 2.00
B) 1.18
C) 1.13
D) 0.64
E) 0.73
Answer: B
Explanation: B) Current ratio =
Current ratio = = 1.18
Diff: 3
Section: 3.3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
15) The quick ratio is 1.0. Current assets are $100,000 and current liabilities are $80,000. What
is the amount in the inventory account?
A) $20,000
B) $80,000
C) $125,000
D) $180,000
E) Cannot be determined with the information provided.
Answer: A
Explanation: A) Quick ratio =
1 =
80,000 = 100,000 - X
X = 20,000
Diff: 3
Section: 3.3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
14) What is the current ratio if cash is $10,000, accounts receivable are $25,000, inventories are
$30,000, accounts payable are $40,000, and accrued payroll is $15,000?
A) 2.00
B) 1.18
C) 1.13
D) 0.64
E) 0.73
Answer: B
Explanation: B) Current ratio =
Current ratio = = 1.18
Diff: 3
Section: 3.3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
15) The quick ratio is 1.0. Current assets are $100,000 and current liabilities are $80,000. What
is the amount in the inventory account?
A) $20,000
B) $80,000
C) $125,000
D) $180,000
E) Cannot be determined with the information provided.
Answer: A
Explanation: A) Quick ratio =
1 =
80,000 = 100,000 - X
X = 20,000
Diff: 3
Section: 3.3
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
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12
16) Find accounts receivable turnover if a firm has an accounts receivable of $80,000, a total
asset turnover of .75, and total assets of $230,000.
A) 2.15
B) 3.8
C) 2.9
D) 1.5
E) .65
Answer: A
Explanation: A) Accounts receivable turnover =
Step 1 - Use total asset turnover to calculate sales.
Total asset turnover =
.75 =
Sales = 172,500
Step 2 - Use the sales figure to solve for accounts receivable turnover.
Accounts receivable turnover = = 2.15
Diff: 3
Section: 3.4
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
17) Which of the following statements is TRUE?
A) The quick ratio is classified as an activity ratio.
B) Current assets are expected to be converted into cash in less than 2 years.
C) A firm's debt holders prefer a low quick ratio.
D) Activity ratios go hand in hand with liquidity ratios
E) Lower current ratios are always preferable.
Answer: D
Explanation: D) Activity ratios go hand in hand with liquidity ratios.
Diff: 1
Section: 3.4
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
16) Find accounts receivable turnover if a firm has an accounts receivable of $80,000, a total
asset turnover of .75, and total assets of $230,000.
A) 2.15
B) 3.8
C) 2.9
D) 1.5
E) .65
Answer: A
Explanation: A) Accounts receivable turnover =
Step 1 - Use total asset turnover to calculate sales.
Total asset turnover =
.75 =
Sales = 172,500
Step 2 - Use the sales figure to solve for accounts receivable turnover.
Accounts receivable turnover = = 2.15
Diff: 3
Section: 3.4
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
17) Which of the following statements is TRUE?
A) The quick ratio is classified as an activity ratio.
B) Current assets are expected to be converted into cash in less than 2 years.
C) A firm's debt holders prefer a low quick ratio.
D) Activity ratios go hand in hand with liquidity ratios
E) Lower current ratios are always preferable.
Answer: D
Explanation: D) Activity ratios go hand in hand with liquidity ratios.
Diff: 1
Section: 3.4
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
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13
18) What is a firm's total asset turnover if its fixed assets are $120,000, current assets are
$30,000, current liabilities are $44,000, sales were $200,000, and net income was $75,000?
A) 0.5 times
B) 2.2 times
C) 1.3 times
D) 2.0 times
E) 1.7 times
Answer: C
Explanation: C) Total asset turnover =
Total asset turnover = = 1.3
Diff: 3
Section: 3.4
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
19) A firm has current assets of $350,000, current liabilities of $200,000, cost of goods sold of
$250,000, and inventory of $75,000. The firm's inventory turnover is
A) 5.0 times.
B) 3.3 times.
C) 2.7 times.
D) 2.0 times.
E) 4.7 times.
Answer: B
Explanation: B) Inventory turnover =
Inventory turnover = = 3.3
Diff: 2
Section: 3.4
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
18) What is a firm's total asset turnover if its fixed assets are $120,000, current assets are
$30,000, current liabilities are $44,000, sales were $200,000, and net income was $75,000?
A) 0.5 times
B) 2.2 times
C) 1.3 times
D) 2.0 times
E) 1.7 times
Answer: C
Explanation: C) Total asset turnover =
Total asset turnover = = 1.3
Diff: 3
Section: 3.4
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
19) A firm has current assets of $350,000, current liabilities of $200,000, cost of goods sold of
$250,000, and inventory of $75,000. The firm's inventory turnover is
A) 5.0 times.
B) 3.3 times.
C) 2.7 times.
D) 2.0 times.
E) 4.7 times.
Answer: B
Explanation: B) Inventory turnover =
Inventory turnover = = 3.3
Diff: 2
Section: 3.4
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
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14
20) What is a firms times interest earned if it posts revenues of $200,000, taxes of $35,000,
expenses of $100,000, and interest of $30,000?
A) 3.3 times
B) 2.0 times
C) 2.2 times
D) 0.5 times
E) 1.3 times
Answer: A
Explanation: A) Times interest earned =
Times interest earned = = 3.3
Diff: 3
Section: 3.5
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
21) If a firm's total asset turnover is low, but its fixed asset turnover is high, which of the
following ratios should an analyst examine to locate the source of the problem?
A) Debt/equity
B) Price/earnings
C) Return on equity
D) Accounts receivable turnover
E) Times interest earned
Answer: D
Explanation: D) Accounts receivable is a part of total assets and is a logical next step to check if
fixed assets turnover is high.
Diff: 1
Section: 3.4
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
20) What is a firms times interest earned if it posts revenues of $200,000, taxes of $35,000,
expenses of $100,000, and interest of $30,000?
A) 3.3 times
B) 2.0 times
C) 2.2 times
D) 0.5 times
E) 1.3 times
Answer: A
Explanation: A) Times interest earned =
Times interest earned = = 3.3
Diff: 3
Section: 3.5
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
21) If a firm's total asset turnover is low, but its fixed asset turnover is high, which of the
following ratios should an analyst examine to locate the source of the problem?
A) Debt/equity
B) Price/earnings
C) Return on equity
D) Accounts receivable turnover
E) Times interest earned
Answer: D
Explanation: D) Accounts receivable is a part of total assets and is a logical next step to check if
fixed assets turnover is high.
Diff: 1
Section: 3.4
AACSB: Analytical Skills
Learning Outcome: F-02: Analyze the major types of financial statements
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