41. Jones Manufacturing needs $450,000 to build a new plant. It must also spend $200,000 on new equipment for the
plant. Both of these needs are examples of
a. equity-capital needs.
b. debt-capital needs.
c. short-term financing needs.
d. long-term financing needs.
e. cash–flow problems.
42. The ratio is based on the principle that a high-risk investment should generate higher financial returns for a
business and more conservative decisions often generate lesser returns.
a. return on owners’ equity
b. risk-return
c. earnings
d. investment-to-equity
e. quick return
43. Sally Overall is thinking about two different decisions. One decision is quite risky, while the other decision is more
conservative. To help her make the right decision, she decides to calculate the
a. quick ratio.
b. management analysis.
c. money factor.
d. risk-return ratio.
e. entrepreneurial ratio.
44. To be successful while pursuing a career in finance, an employee must
a. graduate from a four-year university.
b. have a strong background in accounting or mathematics.
c. have fifteen years of experience.
d. be driven by a motive to become very rich.
e. start a career as a bank officer.
45. Todd develops a plan for obtaining and using the money necessary for his company to implement its goals. This is
called a(n)
a. credit policy.
b. capital budget.
c. operational plan.
d. financing agreement.
e. financial plan.
46. Maria has been asked by top management to develop financial
one– to ten-year period.
a. strategies
b. directives
c. plans
d. objectives
e. goals
that the company will achieve over the next
47. The steps in effective financial planning are
a. establishing organizational goals and objectives, identifying expenses, and budgeting.
b. establishing organizational goals and objectives, budgeting for financial needs, and identifying sources of
financing.
c. developing a plan of action, monitoring the plan, and evaluating.
d. identifying sources of financing, budgeting, and evaluating.
e. None of these answers are correct.
48. A statement that projects income and/or expenditures over a specified future period is called a
a. financial plan.
b. cash flow plan.
c. resources plan.
d. resource allocation statement.
e. budget.
49. Kliting Co. is concerned with whether or not it will be able to pay its bills with money coming in from sales. It would
be helpful for Kliting to prepare a to better understand its needs.
a. capital budget
b. zero-based budget
c. cash budget
d. loan application
e. revolving credit agreement
50. When each new budget is based on the dollar amounts contained in the budget from the preceding year, a company
is using budgeting.
a. zero-base
b. traditional
c. cash
d. capital
e. production
51. Each year Caliente, Inc., follows a budgeting process. The first step is always to look at the previous year’s budget
and see if anything needs to be updated. Caliente uses budgeting.
a. cash
b. traditional
c. capital
d. zero-base
e. historical
52. At Furman Company, managers go through a lengthy budgeting process wherein each department manager is
required to provide documentation justifying every expected expense. Furman uses budgeting.
a. zero-base
b. cash
c. recurring
d. traditional
e. response
53. Tom Jackson, president of Jackson Manufacturing, suspects that the managers of two departments have been
padding their budgets for the last three years. To eliminate this problem, Tom would
a. fire the managers.
b. hire an efficiency expert.
c. hire a new accountant.
d. use zero-base budgeting.
e. use traditional budgeting.
54. A tool that managers use to estimate major expenditures for assets, expansion of facilities, and mergers and
acquisitions is called a(n)
a. capital budget.
b. cash budget.
c. revenue forecast.
d. zero budget.
e. equity budget.
55. The primary sources of funds available to a business include all of the following except
a. debt capital.
b. sales of assets.
c. government grants.
d. sales revenue.
e. equity capital.
56. The greatest part of a firm’s financing is provided by
a. debt equity.
b. sale of assets.
c. government grants.
d. sales revenue.
e. equity capital.
57. Jacob and Molly decide to start a new cake-decorating business. They each contribute $10,000 to get the business
off the ground. This money is considered
a. sales revenue.
b. long–term debt.
c. equity capital.
d. short-term financing.
e. cash flow.
58. Money received from the sale of shares of ownership in a business is called
a. sales revenue.
b. debt capital.
c. equity capital.
d. factor proceeds.
e. cash flow.
59. Money obtained through various types of loans is called
a. cash flow.
b. factor proceeds.
c. dividends.
d. equity capital.
e. debt capital.
60. Which of the following sources of funds would be the last resort for a corporation?
a. Sales revenues
b. Common stock
c. Preferred stock
d. Debt capital
e. The sale of assets
61. Sara Lee Corporation is a large conglomerate of businesses participating in a variety of industries. A few years
ago, Sara Lee was considering the purchase of Bryan Foods. If Bryan Foods represented a tremendous opportunity
to make the company more successful, Sara Lee may, as a last resort, have considered
a. seeking short-term financing.
b. using trade credit to pay for Bryan Foods.
c. using future sales revenues for the purchase of Bryan Foods.
d. sharing the idea with competitors as a possible joint venture.
e. selling assets from another division to pay for Bryan Foods.
62. Which of the following might be considered the most drastic step in securing funding, often a last resort for a
corporation?
a. Using sales revenue
b. Equity capital funding
c. Short-term borrowing from a bank
d. Debt capital funding
e. Sale of assets
63. Financial managers should
a. ignore minor budgeting problems and concentrate on major problems when budgeting.
b. establish a means of monitoring financial performance on an interim basis.
c. prepare budgets and hope for the best.
d. hire a person to go over interim budgets.
e. fire or demote individual managers when budgeting goals are not achieved.
64. Which of the following is not a characteristic of short-term financing?
a. It must be repaid within three years.
b. It is easier to obtain than long-term financing.
c. There is less risk of nonpayment to the lender.
d. The amounts are usually smaller than amounts obtained through long–term sources.
e. There is a close working relationship between borrower and lender.
65. Melissa feels confident about obtaining short-term financing for her art gallery because, like many companies, she
has a(n)
a. unlimited source of financing available to her.
b. relatively large amount of money she can borrow.
c. stockpile of cash to use in place of short-term financing.
d. relationship with the friend of her banker.
e. close working relationship with a lender.
66. Short-term financing not backed by collateral is called
a. debt capital.
b. unsecured financing.
c. mortgage bonds.
d. trade credit.
e. unprotected financing.
67. When a seller allows a buyer thirty to sixty days to pay for a purchase, the sales arrangement is called
a. a bank loan.
b. trade credit.
c. a promissory note.
d. equity financing.
e. None of these answers is correct.
68. The most popular form of short-term financing is
a. bank loans.
b. trade credit.
c. sale of bonds.
d. sale of stock.
e. loans from insurance companies.
69. Mrs. Thomas has received an invoice from the manufacturer for which she distributes products. The invoice states
credit terms of 3/10, net/30. Puzzled by this, she calls on you to explain. You indicate that the notation 3/10 means
that
a. she may take a 30 percent discount if she pays the invoice within three days.
b. she must pay the entire amount in three days.
c. after three days, she must pay the new amount in ten days.
d. her line of credit is equivalent to three-tenths of the dollar value of her business.
e. she may take a 3 percent discount if she pays the invoice within ten days.
70. Max Beauty Supply has ordered $5,000 worth of merchandise from Kelly’s Beauty Supply, Inc. The invoice to Max
has discount terms of 2/10, net/30. Max writes a check within ten days for
a. $100.
b. $1,000.
c. $4,000.
d. $4,900.
e. $5,000.
71. Jackson Ski Equipment receives an invoice for $10,000 worth of merchandise from one of its suppliers. The invoice
has discount terms of 2/10, net/60. Twenty days later, Jackson Ski Equipment writes a check for
invoice.
a. $10,200
b. $10,000
c. $9,800
d. $9,000
e. $200
to pay the
72. Beard Auction receives an invoice from one of its European suppliers for antiques. The amount of the invoice is
$40,000 with terms of 3/10, net/60. If the invoice is paid on day 20, Beard is entitled to a cash discount and
will write the check for .
a. $1,200; $1,200
b. $1,200; $38,800
c. $0; $40,000
d. $0; $41,200
e. $0; $1,200
73. Sanchez Company sells its garden hoses to Gary’s Lawn and Garden Center but does not require Gary’s to pay for
them right away. If this is a standard trade-credit agreement, Gary‘s will have to pay for the garden hoses in
a. 30 to 60 days.
b. 1 to 20 days.
c. 45 to 90 days.
d. 60 to 180 days.
e. as many days as it takes to sell the merchandise.
74. Dillon Wholesale Foods allows retailers to purchase merchandise using trade credit. For Dillon, this type of
transaction
a. is written off as a bad-debt expense.
b. is an unusual type of transaction between a wholesaler and retailers.
c. should be paid within thirty to sixty days.
d. is referred to as a notes payable account by Dillon’s accountants.
e. creates a liability for Dillon Wholesale.
75. A written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date is called
a. a promissory note.
b. collateral.
c. a factor account.
d. a charge account.
e. a term loan agreement.
76. Harlen Manufacturing is hesitant to extend trade credit to Brendan Drake. Instead, Brendan agrees to sign a
promissory note. Harlen prefers this note because
a. it specifies when the goods will be delivered.
b. the money will still be paid if Brendan declares bankruptcy.
c. it is a legally binding and enforceable agreement.
d. it is a form of commercial paper.
e. it will receive the money from Brendan much sooner.
77. Which of the following is not an advantage that promissory notes have over trade credit from the perspective of the
seller?
a. Notes are legally binding agreements.
b. Most notes earn interest for the seller.
c. Notes are negotiable instruments.
d. The company extending credit can sell the note and receive the money quickly.
e. The seller may demand payment from the buyer at any time.
78. Kevin received unsecured financing from a bank for his plumbing business. This means that Kevin did not have to
provide the bank with any
a. application forms.
b. collateral.
c. reasons for the loan.
d. promise to pay interest.
e. scheduled monthly payments.
79. The lowest rate of interest charged by a bank for a short-term loan is known as
a. the discount rate.
b. dividends.
c. add-on interest.
d. the compound interest rate.
e. the prime interest rate.
80. The cost of borrowing money that is reserved for large corporations with excellent credit ratings is called the
a. prime interest rate.
b. bank discount.
c. discount factor.
d. add-on interest rate.
e. compound interest rate.