67) If you own a bond with a six percent coupon rate and new bonds are paying six percent, what will
happen to your bond’s market price?
68) Explain the relationship between the interest rate on a bond and the default risk on a bond.
69) Why might a small investor be interested in buying a mutual fund as opposed to stock in an
individual company?
70) Explain what information that changes in the value of a firm’s stocks provide for a firm’s managers
and for investors.
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71) Briefly describe the three most widely followed stock indexes in the United States.
72) Why is a bond considered to be a loan but a share of stock is not?
6.3 Using Financial Statements to Evaluate a Corporation
1) A firm’s managers need information on the firm’s revenue and costs as well as information on the
value of a firm’s assets and the amount of the firm’s debts to answer three basic questions. Which of the
following is not one of those three basic questions?
A) what to produce?
B) how to produce it?
C) what price to charge?
D) where to produce?
2) A cost that involves spending money is
A) an implicit cost.
B) an explicit cost.
C) an opportunity cost.
D) an indirect cost.
3) Anything of value owned by a person or a firm is
A) an asset.
B) a liability.
C) an entitlement.
D) a durable good.
4) Which of the following is an example of an implicit cost a firm might incur?
A) the wages paid to employees
B) the payment for medical insurance coverage
C) the opportunity cost to investors of the funds invested in the firm
D) utility payments
5) Gross revenue minus explicit costs equals
A) accounting profit.
B) economic profit.
C) opportunity cost.
D) implicit cost.
6) If a firm has implicit costs as well as explicit costs,
A) accounting profit might be greater than economic profit.
B) economic profit will always be greater than accounting profit.
C) accounting profit will be equal to economic profit.
D) the firm has no economic profit.
7) If a firm fails to provide investors with at least a normal rate of return,
A) it will not be able to remain in business in the long run.
B) it will not be able to remain in business in the short run.
C) it will shut down in the short run but will be able to remain in business in the long run.
D) it will have a positive economic profit but a negative accounting profit.
8) Tommy’s Teddy Bears incurs $300,000 per year in explicit costs and $50,000 in implicit costs. The
shop earns $600,000 in revenues and has $1.1 million in net worth. Based on this information, what is
economic profit for Tommy’s Teddy Bears?
A) $250,000
B) $300,000
C) $500,000
D) $1.35 million
9) Tommy’s Teddy Bears incurs $300,000 per year in explicit costs and $50,000 in implicit costs. The
shop earns $600,000 in revenues and has $1.1 million in net worth. Based on this information, what is
accounting profit for Tommy’s Teddy Bears?
A) $250,000
B) $300,000
C) $500,000
D) $1.35 million
10) Aimee sells hand-embroidered dog apparel over the Internet. Her annual revenue is $128,000 per
year, the explicit costs of her business are $42,000, and the opportunity costs of her business are $30,000.
What is her accounting profit?
A) $12,000
B) $56,000
C) $86,000
D) $98,000
11) Aimee sells hand-embroidered dog apparel over the Internet. Her annual revenue is $128,000 per
year, the explicit costs of her business are $42,000, and the opportunity costs of her business are $30,000.
What are the implicit costs of her business?
A) $12,000
B) $30,000
C) $72,000
D) $86,000
12) Aimee sells hand-embroidered dog apparel over the Internet. Her annual revenue is $128,000 per
year, the explicit costs of her business are $42,000, and the opportunity costs of her business are $30,000.
What is her economic profit?
A) $12,000
B) $56,000
C) $86,000
D) $98,000
13) Which of the following is true?
A) A firm’s accounting profit is equal to its economic profit.
B) Opportunity costs are the same as explicit costs.
C) A firm’s net income is the same as its accounting profit.
D) If a firm’s accounting profits are positive, its economic profits must also be positive.
14) The rules of accounting generally require that ________ be included in a firm’s financial records.
A) only implicit costs
B) only explicit costs
C) both explicit costs and implicit costs
D) neither explicit costs nor implicit costs
15) All of the following would be considered explicit costs of operating a business except
A) utility expenses.
B) the cost of raw materials used in production.
C) the rental value of equipment the company owns and uses for its own production.
D) advertising expenses.
16) All of the following are shown on a firm’s income statement except
A) costs
B) profits
C) revenues
D) rate of return for investors
17) Assets minus liabilities equals
A) accounting profit.
B) economic profit.
C) net worth.
D) implicit costs.
18) The Aristocrat Corporation has taken out a loan to buy manufacturing equipment. The loan
represents ________ for the company.
A) an asset
B) a liability
C) a bond
D) equity
19) A nonmonetary opportunity cost is
A) an implicit cost.
B) an explicit cost.
C) a direct cost.
D) an accounting cost.
20) Which of the following are examples of explicit costs a firm might incur?
A) rent paid to the landlord
B) taxes owed to the IRS
C) wages earned by delivery drivers
D) All of the above are examples of explicit costs.
21) Gross revenue minus explicit and implicit costs is equal to
A) accounting profit.
B) opportunity cost.
C) economic profit.
D) net worth.
22) If a firm has implicit costs as well as explicit costs,
A) net income will always be less than accounting profit.
B) accounting profit will be zero.
C) net income will always be greater than accounting profit.
D) economic profit will be less than accounting profit.
23) Harry’s Hookahs incurs $700,000 per year in explicit costs and $500,000 in implicit costs. The
company earns $1.4 million in revenues and has $3.7 million in net worth. Based on this information,
what is the economic profit for Harry’s Hookas?
A) $200,000
B) $700,000
C) $900,000
D) $1.1 million
24) Harry’s Hookahs incurs $700,000 per year in explicit costs and $500,000 in implicit costs. The
company earns $1.4 million in revenues and has $3.7 million in net worth. Based on this information,
what is the accounting profit for Harry’s Hookas?
A) $200,000
B) $700,000
C) $900,000
D) $1.1 million
25) Veruca sells therapeutic bath salts on the Internet. Her annual revenue is $52,000 per year, the
explicit costs of her business are $14,000, and the opportunity costs of her business are $17,000 per year.
What is her accounting profit?
A) $14,000
B) $21,000
C) $31,000
D) $38,000
26) Veruca sells therapeutic bath salts on the Internet. Her annual revenue is $52,000 per year, the
explicit costs of her business are $14,000, and the opportunity costs of her business are $17,000 per year.
What are the implicit costs of her business?
A) $14,000
B) $17,000
C) $21,000
D) $31,000
27) Veruca sells therapeutic bath salts on the Internet. Her annual revenue is $52,000 per year, the
explicit costs of her business are $14,000, and the opportunity costs of her business are $17,000 per year.
What is her economic profit?
A) $14,000
B) $21,000
C) $31,000
D) $38,000
28) A firm’s accounting profit is measured as
A) revenue plus operating expenses minus taxes paid.
B) operating expenses minus revenue.
C) revenue minus operating expenses and taxes paid.
D) net worth minus economic profit.
29) Implicit costs are ________ and explicit costs are ________.
A) nonmonetary costs; also nonmonetary costs
B) nonmonetary costs; costs that involve spending money
C) costs that involve spending money; nonmonetary costs
D) costs that involve spending money; also costs that involve spending money
30) Which of the following would be considered an implicit cost of operating a business?
A) shipping expenses
B) Social Security contributions for employees
C) the resale value of delivery vans the company owns and uses for its deliveries
D) interest payments on a loan
31) An income statement shows a firm’s revenue, costs, and profit
A) for the firm’s fiscal year.
B) since the firm has been in operation.
C) for a particular day.
D) only if the firm is earning an accounting profit.
32) A financial statement that sums up a firm’s financial position on a particular day is
A) a balance sheet.
B) an income statement.
C) statement of cash flow.
D) an equity report.
33) Explicit costs are nonmonetary costs.
34) An increase in liabilities will reduce a firm’s net worth.
35) A firm’s net income is also its accounting profit.
36) Opportunity costs are implicit costs.
37) What is the difference between economic profit and accounting profit?
38) What is an income statement?
39) What is the difference between a firm’s assets and its liabilities?
40) Explain if a business would be expected to survive in the long run if it earned a positive accounting
profit but a negative economic profit.
6.4 Corporate Governance Policy and the Financial Crisis of 2007-2009
1) Information in a firm’s financial statements
A) helps the firm’s managers make decisions.
B) assists investors who are considering buying the firm‘s stock.
C) guide resource allocation in the economy.
D) all of the above
2) Tying the salaries of top managers to the firm’s stock price or to the profitability of the firm allows a
firm’s board of directors to
A) increase asymmetric information.
B) reduce the principal-agent problem.
C) eliminate moral hazard.
D) avoid disclosing financial statements to investors.
3) In 2002, WorldCom was accused of falsifying information regarding liabilities on WorldCom’s
balance sheets, thereby
A) increasing WorldCom’s assets on the balance sheet.
B) reducing WorldCom’s profit on the balance sheet.
C) increasing WorldCom’s net worth on the balance sheet.
D) reducing WorldCom’s net income on the income statement.
4) In response to accounting scandals in 2002, the federal government passed legislation requiring
among other things that auditors disclose any potential conflicts of interest. What is the name of this
legislation?
A) the Accountant Reliability Act
B) the 24th amendment to the Constitution
C) the Kennedy-Lott Act
D) the Sarbanes-Oxley Act
5) The Sarbanes-Oxley Act of 2002
A) created the Consumer Financial Protection Bureau to be housed in the Federal Reserve.
B) mandates that firms raise funds for expansion only through the sale of stock or from bank loans, but
not from the sale of corporate bonds.
C) requires that CEO’s personally certify the accuracy of financial statements.
D) established the Financial Stability Oversight Council to identify risks to the financial system.
6) When mortgage loans are securitized, they are
A) bundled together by financial institutions and sold to investors.
B) issued to borrowers with flawed credit histories.
C) issued to borrowers who fail to document their income.
D) guaranteed by the federal government.
7) Subprime mortgages are
A) mortgages issued to borrowers who fail to document that their incomes are high enough to afford
their mortgages.
B) mortgages which are bundled together by financial institutions and sold to investors.
C) mortgages issued to borrowers with flawed credit histories.
D) government-backed mortgages issued by Fannie Mae and Freddie Mac.