Archives: Quiz

1) Lease obligations currently appear only in the footnotes of U.S. corporate financial statements. 2) Companies generally prefer to maintain some minimum cash balance. Answer: TRUE 3) The Internet impacts e-commerce by creating a mechanism for improved communications between a […]

1) A “risky” financial plan will use long-term financing for fixed assets, permanent current assets, and a portion of temporary current assets. 2) The NASDAQ market is the primary market for international securities. Answer: FALSE 3) Risk is not only […]

1) In Stage I of a firm’s life cycle, the firm will pay high dividends to shareholders in order to attract additional investors. 2) The market-determined required rate of return is the appropriate discount rate used in valuation calculations. Answer: […]

1) A firm paying a stock dividend will experience a drop in its earnings per share but its shareholders’ total claim on earnings will increase. 2) The term balance of payments refers to the flow of economic transactions between the […]

1) The modified internal rate of return method assumes that inflows are reinvested at 80% of the internal rate of return. 2) Depreciation is important in calculating projected cash flows because it generates a tax deduction. Answer: TRUE 3) Firms […]

1) When a company is obligated contractually to pay interest on debt, it must pay the interest even if it shows no profit for the year, or else it may go bankrupt. 2) The higher the cost of bank financing, […]

1) The capital budgeting decisions of a firm will have no effect on the share price of the common stock. 2) Money markets refer to markets where excess corporate cash is exchanged for foreign currencies that can earn a higher […]

1) The European Central Bank that was created with the European Monetary Union has no control over monetary policy but is responsible for clearing transactions between the countries. 2) Stable dividends may cause a higher discount rate for the firm, […]

1) When choosing portfolios of assets, management should try to achieve the highest possible return at a given level of risk. 2) Short-term interest rates are generally lower than long-term interest rates. Answer: TRUE 3) Financial markets exist as a […]

1) Times interest earned is an example of a profitability ratio. 2) The dollar value of common stock issuances exceeds the level of preferred stock issuances and corporate bond issuances. Answer: TRUE 3) Finding out who is ultimately responsible for […]

1) Under a sinking fund provision, money is set aside every year until the bond matures, and then the money is used to repay the principal. 2) Because of changing economic conditions, it is difficult for companies such as Dun […]

1) One way businesses try to overcome the risk associated with new customers is to access a credit scoring report that will predict the probability of a customer causing credit problems in the future. 2) Sales projections and the ability […]

1) The interest factor for the future value of an annuity is simply the sum of the interest factors for the future value using the same number of periods. 2) The purchasing power parity theory states that currency exchange rates […]

1) Eurodollars are U.S. dollars held on deposit by foreign banks. 2) Even though one project may have superior cash flows, top management may sometimes choose a project that inflates earnings instead of cash flow. Answer: TRUE 3) At historically […]

1) The calculation of the cost of capital depends upon the historical cost of funds. 2) During an economic “boom” period, a shortage of low-cost financing alternatives exists. Answer: TRUE 3) Dividends are the active variable in the “marginal principle […]

1) The interest factor for the future value of a single sum is equal to (1 + n)i. 2) The most widely used currency in the Eurobond market is the euro. Answer: FALSE 3) With a dividend reinvestment plan, an […]

1) The use of the weighted average cost of capital assumes that the firm is in its optimum capital structure range and the cost of each component stays constant over the range of financing. Answer: TRUE 2) Firms with bright […]

1) The cost of debt, preferred stock, and common equity must all be adjusted for tax implications. 2) Operating leverage works best when volume is increasing. Answer: TRUE 3) It is more likely for financial managers to focus on cash […]

1) Profitability ratios allow one to measure the ability of the firm to earn an adequate return on sales, total assets, and invested capital. 2) The use of “float” has dramatically increased since the Check Clearing for the 21st Century […]

1) “Business risk” relates to the inability of the firm to meet its debt obligations as they come due. 2) The costs of bond refunding are the call premium and the underwriting costs on the old and new bond issue. […]

1) Markets are efficient when prices adjust rapidly to new information, continuous markets exist. and large dollar trades can be absorbed without large price movements. 2) The Internet has accounted for an acceleration of productivity for “old economy” firms. Answer: […]

1) To the individual recipient, preferred stock dividends offer no advantage over common stock dividends. 2) A warrant may carry a speculative premium above intrinsic value if it will not expire until far into the future. Answer: TRUE 3) During […]

1) Selling stockholders may receive a price well above current market or book value. 2) When a company defaults on a secured debt, it is rare for the secured asset to be sold and the proceeds distributed to the debtor. […]

1) An increase in accrued expenses results in a cash outflow on the statement of cash flows. 2) Accounting income is based on verifiably completed transactions. Answer: TRUE 3) The rate on Eurodollar certificates of deposit is usually lower than […]

1) The use of depreciation is an attempt to allocate the past and future costs of an asset over its useful life. 2) The degree of combined leverage is the sum of the degree of operating leverage and the degree […]

1) Regardless of the particular source of funds utilized for a project, the required rate of return, or discount rate, will be the weighted average cost of capital. 2) According to traditional financial theory, the cost of capital curve is […]

1) Insider trading involves the use of information not available to the general public to make profits from trading in a company’s stock. 2) Most dividends, like interest on corporate bonds, are paid semi-annually. Answer: FALSE 3) A tax loss […]

1) A poison pill will raise the potential for maximizing shareholder value because it deters takeover bids. 2) The Sarbanes-Oxley Act of 2002 holds a firm’s internal auditors legally accountable for the accuracy of their firm’s financial statements. Answer: FALSE […]

1) The payment of a call premium may generally be taken as an immediate tax write-off. 2) The key to current asset planning is the ability of management to forecast sales accurately and then match production schedules with the sales […]

1) Under the “modified accelerated-cost-recovery system” (MACRS) of depreciation, cash flow tends to decline with the passage of time. 2) A call provision is a commonly used device by a corporation to force conversion into common stock. Answer: TRUE 3) […]

1) Both accounts receivable and notes receivable represent claims that are expected to be collected in cash. 2) The excess of cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow. Answer: TRUE […]

1) Investment turnover (as used in determining the rate of return on investment) focuses on the rate of profit earned on each sales dollar. 2) Activity-based costing is a method of accumulating and allocating costs by department. Answer: FALSE 3) […]

1) If the market rate of interest is 8% and a corporation’s bonds bear interest at 7%, the bonds will sell at a premium. 2) If income from operations for a division is $6,000, invested assets are $25,000, and sales […]

1) The document issued by the seller that informs the buyer of the details of sales returns is called a debit memorandum. 2) All bank memorandums reported on the bank reconciliation require entries in the depositor’s accounts. Answer: TRUE 3) […]

1) It is possible for a transaction to change the makeup of assets, but to not affect assets in total. 2) A corporation has 10,000 shares outstanding of $25 par value and a current market value of $100 per share. […]

1) A criticism of a single-step income statement is that net income is not available for analysis. 2) Managerial accounting reports information primarily for stakeholders that are external to the company. Answer: FALSE 3) The merchandise inventory account is found […]

1) If a business has several bank accounts, it will have a separate record for each of them. 2) If the profit margin for a division is 11% and the investment turnover is 1.5, the rate of return on investment […]

1) When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to pay within the discount period. 2) One of the qualitative characteristics that influence capital investment analysis is […]

1) The sales budget is the starting point for preparation of the direct labor cost budget. 2) If sales total $2,000,000, fixed costs total $600,000, and variable costs are 60% of the sales, the contribution margin ratio is 40%. Answer: […]

1) The theory of constraints is a manufacturing strategy that focuses on reducing the influence of bottlenecks on production processes. 2) If fixed costs are $220,000 and the unit contribution margin is $25, the sales necessary to earn an operating […]

1) The amount of capital paid-in by the stockholders of the corporation is called legal capital. 2) If the proceeds from a sale of equipment is greater than the book value of the equipment as on the date of sale, […]

1) The main source of paid-in capital is from issuing stock. 2) The interest at 6%, on a 60-day note for $5,000 is $50. (Assume 360 days in a year) Answer: TRUE 3) The average rate of return method of […]

1) If income from operations for a division is $30,000, sales are $243,750, and invested assets are $187,500, the investment turnover would be 1.3 . 2) A qualitative characteristic that influences capital investment analysis is manufacturing productivity. Answer: TRUE 3) […]

1) Treasury stock is a contra-equity account. 2) Net income is reduced when a specific receivable is written off under the analysis of receivables method. Answer: FALSE 3) A change in fixed costs as a result of increase in the […]

1) If the standard to produce a given amount of product is 500 direct labor hours at $15 and the actual was 600 hours at $17, the time variance was $1,500 favorable. 2) Depletion is the process of transferring the […]

1) The point in operations at which revenues and expenses are exactly equal is called the break-even point. 2) One of the conditions for paying a cash dividend is formal action by the board of directors. Answer: TRUE 3) On […]

1) FICA tax is a payroll tax that is paid only by employers. 2) When a corporation issues bonds, it executes a contract with the bondholders known as a bond indenture. Answer: TRUE 3) If the standard to produce a […]

1) If merchandise costing $2,500, terms FOB destination, 2/10, n/30, with prepaid transportation costs of $100, is paid within 10 days, the amount of the purchases discount is $48. 2) Under the perpetual inventory system, the cost of merchandise sold […]

1) The internal control environment is enhanced by the hiring and retention of competent, honest employees. 2) All merchandising businesses are organized as corporations. Answer: FALSE 3) A voucher system is an example of an internal control procedure over cash […]

1) If the unit selling price is $50, the volume of sales is $450,000, sales at the break-even point amount to $375,000, and the maximum possible sales are $550,000, the margin of safety will be 2,000 units. 2) A corporation […]