Fundamentals of Corporate Finance 3e Test Bank
Chapter 3: The Financial System and the Level of Interest Rates
1.
Generally accepted accounting principles (GAAP) are a set of authoritative guidelines that
define accounting practice at a particular point in time.
A)
True
B)
False
Ans:
A
2.
Generally accepted accounting principles determine the rules for how a company can issue
stocks to raise money.
A)
True
B)
False
Ans:
B
3.
The cost principle assumes that the parties to a transaction are economically rational and are
free to act independently of each other.
A)
True
B)
False
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
4.
The going concern assumption states that a business will be shutting down its operation in the
near future.
A)
True
B)
False
Ans:
B
5.
The balance sheet identifies the productive resources (assets) that a firm uses to generate
income, as well as the sources of funding from creditors (liabilities) and owners (shareholders’
equity) that were used to buy the assets.
A)
True
B)
False
Ans:
A
6.
The balance sheet identity can be stated as: Total assets = Total liabilities + Total stockholders’
equity.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
7.
In a balance sheet, assets are listed in order of their liquidity.
A)
True
B)
False
Ans:
A
8.
During rising prices, a company using the LIFO method assumes that the sale is from the
newest, highest-cost inventory.
A)
True
B)
False
Ans:
A
9.
During rising prices, a company using the FIFO method will sell its newest, highest-cost
inventory first.
A)
True
B)
False
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
10.
Book value is the amount a firm paid for its assets at the time of purchase.
A)
True
B)
False
Ans:
A
11.
The net book value of an asset is the historical cost less the accumulated depreciation.
A)
True
B)
False
Ans:
12.
The current market value of an asset is the amount that a firm would receive for the asset if it
were sold on the open market.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
13.
Preparing a marked-to-market balance sheet is rather straightforward because it is easy to
obtain market values for all assets and liabilities.
A)
True
B)
False
Ans:
B
14.
The income statement identifies the major sources of revenues generated by the firm and the
corresponding expenses that were needed to generate those revenues.
A)
True
B)
False
Ans:
A
15.
Depreciation and amortization are examples of prepaid expenses.
A)
True
B)
False
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
16.
The net cash provided by operating activities is another term used for net income.
A)
True
B)
False
Ans:
B
17.
Cash flows from operations are the net cash flows that support a firm’s principal business
activities.
A)
True
B)
False
Ans:
A
18.
Cash flows from operating activities involve buying and selling of long-term assets.
A)
True
B)
False
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
19.
Making and collecting loans, issuing and paying out on insurance contracts, and buying and
selling debt or equity instruments of other firms are examples of financing activities.
A)
True
B)
False
Ans:
B
20.
Typical financing activities include cash payments on the principal of long-term debt, cash
payments of dividends to shareholders, and cash purchases of treasury stock.
A)
True
B)
False
Ans:
A
21.
The key financial statement that ties the other three statements together is the statement of cash
flows, which summarizes changes in the balance sheet from the beginning of the year to the
end.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
22.
Rent and insurance are examples of depletion expenses.
A)
True
B)
False
Ans:
B
23.
The average tax rate is the total taxes divided by the taxable income.
A)
True
B)
False
Ans:
A
24.
Which of the following sections do annual reports typically contain?
A)
Financial summary related to the past year’s performance
B)
Information about the company, its products, and its activities
C)
Audited financial statements, including limited historical financial data
D)
All three of the above sections are included in the annual report.
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
25.
Annual reports are prepared by a firm’s management to:
A)
communicate to its shareholders the firm’s failures in the previous year.
B)
provide a good overview of the firm’s financial and operating performance.
C)
highlight the performance of its chief competitors.
D)
provide a forecast of the economy in the coming years.
Ans:
B
26.
The generally accepted accounting principles (GAAP) are:
A)
rules that outline how a firm can operate ethically.
B)
rules on how the firm will be valued in the event of a merger.
C)
rules and procedures that define how companies are to maintain financial records and
prepare financial statements.
D)
rules for how a company can issue stock to raise money.
Ans:
C
27.
Accounting standards prescribed by generally accepted accounting principles (GAAP) are
important because:
A)
they make the financial statements of all firms standardized.
B)
they allow one to examine a firm’s performance with ease over a period of time.
C)
they make it possible for management or analysts to compare a firm’s performance with
that of other competitors.
D)
All of the above.
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
28.
The assumption of arm’s-length transaction states that:
A)
both parties to a transaction can act independently of each other and make economically
rational decisions.
B)
both parties to a transaction must have had previous transactions.
C)
one of the parties to the transaction is a bank that has full knowledge of the firm’s
creditworthiness.
D)
None of the above.
Ans:
A
29.
Your uncle, who has a second home in Bethany Beach, Delaware, is planning to sell it in the
next few weeks. You are interested in buying this beachside property, so your agent negotiates
a price for the house with your uncle’s agent. This transaction is an example of:
A)
the cost principle.
B)
the assumption of arm’s-length transactions.
C)
the realization principle.
D)
the going concern assumption.
Ans:
B
30.
The going concern assumption implies that:
A)
a firm will continue to be in business for the foreseeable future.
B)
a firm will be going out of business in the near future.
C)
a firm will continue to operate in the near future, but only after being acquired by another
firm.
D)
None of the above.
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
32.
The matching principle calls for the accountant of a firm to:
A)
identify an asset with each liability of the firm.
B)
associate the revenue generated from a sale to the costs or expenses incurred to produce
the product.
C)
match each item of inventory with the historical cost at which it was acquired.
D)
None of the above.
Ans:
B
33.
Tyson Corporation bought raw materials on April 23, 2008 and also on July 2, 2008. Products
produced during the months of May were sold in July. The firm uses FIFO to value its
inventory. According to the matching principle, the firm’s accountant should associate:
A)
the inventory acquired on July 2 with the products sold.
B)
the inventory acquired on April 23 with the products sold.
C)
neither of these dates is valid because the products were sold in July.
D)
None of the above.
Ans:
B
34.
According to the realization principle, revenue from a sale of a firm’s products are recognized:
A)
when the products are shipped to the buyer.
B)
when the buyer orders the goods.
C)
when cash is realized from the sale of the products.
D)
at the time of the sale whether or not cash is actually received.
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
35.
On June 23, 2008, Mikhal Cosmetics sold $250,000 worth of its products to Rynex
Corporation, with the payment to be made in 90 days on September 20. The goods were
shipped to Rynex on July 2. The firm’s accountants should recognize the sale on:
A)
June 23, 2008.
B)
July 2, 2008.
C)
September 20, 2008.
D)
None of the above
Ans:
A
36.
The cost principle states that an asset should be recognized on the balance sheet:
A)
at the market value of the asset.
B)
at the market value less the accumulated depreciation on the asset.
C)
at its historical cost.
D)
at its historical cost plus the accumulated depreciation on the asset.
Ans:
C
37.
Trekkers Footwear bought a piece of machinery on January 1, 2006 at a cost of $2.3 million,
and the machinery is being depreciated annually at an amount of $230,000 for 10 years. Its
market value on December 31, 2008 is $1.75 million. The firm’s accountant is preparing its
financial statement for the fiscal year end on December 31, 2008. The net value of the asset that
should be reported on the balance sheet is:
A)
$2.3 million.
B)
$1.61 million.
C)
$230,000.
D)
$1.75 million.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
38.
The conventional way of preparing a balance sheet is to list all assets in the order of their:
A)
market value.
B)
risk.
C)
liquidity.
D)
historical cost.
Ans:
C
39.
Petra, Inc., has $400,000 as current assets, $1.225 million as plant and equipment, and
$250,000 as goodwill. In preparing the balance sheet, these assets should be listed in which of
the following orders?
A)
Current assets, goodwill, and plant and equipment.
B)
Current assets, plant and equipment, and goodwill.
C)
Goodwill is not an asset and is not listed here.
D)
None of the above.
Ans:
B
40.
When prices are rising, valuing ending inventory using the FIFO method rather than LIFO
gives:
A)
inventory a higher value but lowers net income.
B)
inventory a lower value and also lowers net income.
C)
both inventory and net income a higher value.
D)
inventory a lower value and net income a higher value.
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
41.
When prices are falling, valuing inventory using the LIFO method rather than FIFO gives:
A)
inventory a higher value but lowers net income.
B)
inventory a lower value and also lowers net income.
C)
both inventory and net income a higher value.
D)
inventory a lower value and net income a higher value.
Ans:
C
42.
Which of the following is NOT true about goodwill?
A)
It is an intangible asset.
B)
It represents the value of all unrecorded assets acquired in a merger.
C)
It equals the premium paid over the fair market value of the assets acquired in a merger.
D)
When goodwill appears on a firm’s balance sheet, it reduces the firm’s net worth by that
amount.
Ans:
43.
Which of the following is NOT true about treasury stock?
A)
It is a firm’s own shares repurchased in the market by the firm.
B)
It can be reissued under stock option and other employee benefit plans.
C)
It lowers the value of the company.
D)
It increases the net worth of the company.
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
44.
Maddux, Inc., has completed its fiscal year and reported the following information. The
company had current assets of $153,413, net fixed assets of $412,331, and other assets of
$7,822. The firm also has current liabilities worth $65,314, long-term debt of $178,334, and
common stock of $162,000. Calculate the amount of retained earnings.
A)
$405,648
B)
$243,648
C)
$167,918
D)
$573,566
Ans:
C
45.
Galan Associates prepared its financial statement for 2008 based on the information given here.
The company had cash worth $1,234, inventory worth $13,480, and accounts receivables worth
$7,789. The company’s net fixed assets are $42,331, and other assets are $1,822. It had
accounts payables of $9,558, notes payables of $2,756, common stock of $22,000, and retained
earnings of $14,008. How much long-term debt does the firm have?
A)
$54,342
B)
$76,342
C)
$12,314
D)
$18,334
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
46.
Tumbling Haven, a gymnastic equipment manufacturer, provided the following information to
its accountant. The company had current assets of $145,332, net fixed assets of $356,190, and
other assets of $4,176. The firm has long-term debt of $76,445, common stock of $200,000,
and retained earnings of $134,461. What amount of current liabilities does this firm have?
A)
$94,792
B)
$505,678
C)
$171,217
D)
None of the above.
Ans:
A
Total assets = $145,332 + 356,190 + $4,176 = $505,698
47.
Teakap, Inc., has current assets of $1,456,312 and total assets of $4,812,369 for the year ending
September 30, 2006. It also has current liabilities of $1,041,012, common equity of $1,500,000,
and retained earnings of $1,468,347. How much long-term debt does the firm have?
A)
$1,844,022
B)
$2,303,010
C)
$2,123,612
D)
$803,010
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
48.
Chandler Sporting Goods produces baseball and football equipment and lines of clothing. This
year the company had cash and marketable securities worth $335,485, accounts payables worth
$1,159,357, inventory of $1,651,599, accounts receivables of $1,488,121, short-term notes
payable worth $313,663, and other current assets of $121,427. What is the company’s net
working capital?
A)
$3,596,632
B)
$1,801,784
C)
$2,123,612
D)
$1,673,421
Ans:
C
49.
Tre-Bien Bakeries generated net income of $233,412 this year. At year end, the company had
accounts receivables of $47,199, inventory of $63,781, and cash of $21,461. It also had
accounts payables of $51,369, short-term notes payables of $11,417, and accrued taxes of
$6,145. The net working capital of the firm is
A)
$68,931.
B)
$63,510.
C)
$69,655.
D)
None of the above
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
50.
Spartan, Inc., is a manufacturer of automobile parts located in Greenville, South Carolina. At
the end of the current fiscal year, the company had net working capital of $157,903. The
company showed accounts payables of $94,233, accounts receivables of $83,112, inventory of
$171,284, and cash and marketable securities of $12,311. Calculate the amount of notes
payables. (Assume that notes payable and accounts payable are the only two current liabilities
of the company.)
A)
$14,571
B)
$26,882
C)
$15,471
D)
None of the above
Ans:
A
51.
The major disadvantages of market-value accounting include:
A)
the difficulty in estimating the current value for some assets.
B)
the difficulty in applying some of the valuation models used to estimate market values.
C)
the resulting numbers are potentially open to abuse.
D)
All of the above are disadvantages of market-value accounting.
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
52.
Which of the following is the best example of how a market-value balance sheet item differs
from the firm’s book-value balance sheet item?
A)
A firm issued long-term bonds five-years ago that currently sell for par value.
B)
A firm sold common stock twenty-years ago for $20.00 a share. The firm’s common
stock is currently selling for $96.50 per share.
C)
A firm has $5 million of accrued liabilities on the books.
D)
A firm issued preferred stock ten-years ago. These shares of preferred stock currently are
selling for par value.
Ans:
B
53.
Which of the following statements is NOT a limitation associated with market valuation of
balance sheet accounts?
A)
It can be difficult to identify the market value of an asset, particularly if there are few
transactions involving comparable assets.
B)
The estimates of market value can involve complex financial modeling, and the resulting
numbers can be open to manipulation and abuse.
C)
Marking to market provides decision makers with a better chance of making the correct
economic decision, given the information available.
D)
Mark-to-market accounting can become inaccurate if market prices deviate from the
“fundamental” values of assets and liabilities.
Ans:
C
54.
Which of the following does NOT belong to an income statement?
A)
Depreciation expense
B)
Goodwill
C)
Extraordinary items
D)
Amortization expense
Fundamentals of Corporate Finance 3e Test Bank
55.
Which of the following is NOT a noncash item?
A)
Depreciation
B)
Taxes
C)
Prepaid expenses
D)
Prepaid taxes
Ans:
B
56.
Centennial Brewery produced revenues of $1,145,227 in 2008. It has expenses (excluding
depreciation) of $812,640, depreciation of $131,335, and interest expense of $81,112. It pays
an average tax rate of 34 percent. What is the firm’s net income after taxes? Round your final
answer to the nearest dollar.
A)
$120,140
B)
$248,475
C)
$79,292
D)
$40,848
Ans:
C