1 Financial Management and the Cash Flow Cycle
1) Which of the following statements best represents what finance is about?
A) How political, social, and economic factors affect corporations
B) How corporations can maximize profits
C) How to create and maintain economic wealth
D) How to reduce shareholder risk
Answer: C
Diff: 1
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
2) The primary goal of a publicly owned firm is:
A) maximize profits.
B) minimize shareholder risk.
C) value creation.
D) maximize revenues.
Answer: C
Explanation: C) to maximize shareholder's wealth
Diff: 1
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
3) The creation of value is driven by what factors?
A) Cash flow and growth
B) Growth and risk
C) Profitability and growth
D) Reducing risk
Answer: B
Explanation: B) The primary goal of a firm is value creation, and that the creation of value is driven by two key factors: growth and risk.
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
4) The creation of value:
A) implies that one firm will gain at the expense of others.
B) provides benefits to society as scarce resources are directed to their most productive use.
C) is not a practical goal since it cannot be measured effectively.
D) is achieved only if cash flows exceed accounting profits.
Answer: B
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Ethical Understanding and Reasoning
5) If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should:
A) positively affect profits.
B) increase the market value of the firm's common stock.
C) either increase or have no effect on the value of the firm's common stock.
D) Accomplish all of the above.
Answer: B
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
6) Profit maximization does not adequately describe the goal of the firm because:
A) profit maximization does not require the consideration of risk.
B) profit maximization often has a short-term focus.
C) maximization of dividend payout ratio is a better description of the goal of the firm.
D) Both A and B
Answer: D
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
7) Which of the following goals of the firm are synonymous with the maximization of shareholder wealth?
A) Profit maximization
B) Risk minimization
C) Maximization of the total market value of the firm's common stock
D) None of the above
Answer: C
Diff: 1
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
8) In measuring value, the firm's focus should be on:
A) cash flow.
B) accounting profits.
C) time value of money.
D) earnings per share.
Answer: A
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
9) Profit maximization is NOT an adequate goal of the firm when making financial decisions because:
A) it does not necessarily reflect shareholder wealth maximization.
B) it ignores the risk inherent in different projects that will generate the profits.
C) it can over-emphasize a project's short-term returns.
D) All of the above.
Answer: D
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
10) Which of the following goals are in the best long-term interest of shareholders?
A) Profit maximization
B) Risk minimization
C) Maximizing the market value of the existing shareholders' common stock
D) Maximizing sales revenue
Answer: C
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
11) A financial manager is considering two projects, A and B; both are expected to add $5 million to profits. Project A is expected to add $5 million to profits this year, while Project B is expected to add $1 million to profits each year over the next five years. Which of the following statements is MOST correct?
A) The manager should select Project A because it maximizes profits.
B) The manager should select the project that maximizes long-term profits, not just one year of profits.
C) The manager should select Project A, of course.
D) The manager should select the project that causes shareholder wealth to increase the most, which could be A or B.
Answer: D
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Analytic Skills
12) Do corporate decisions that increase the value of the firm's equity benefit society as a whole?
A) Yes, as long as the value of the firm's equity increases, society is better off.
B) Yes. as long as the increase in the value of the firm's equity does not come at the expense of others.
C) No, any gain in the value of the firm's equity is always less than the cost to society.
D) No, any gains in the value of the firm's equity are perfectly offset by societal costs.
Answer: B
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Ethical Understanding and Reasoning
13) The financial manager is involved in these cash-related activities in the firm:
A) investing, working capital management, and financing.
B) real assets, financing, and investing
C) operations, profitability, and financing
D) investing, operating, and financing.
Answer: D
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Communication
14) The three basic types of cash-related activities that every business faces are:
A) investing, working capital management, and financing.
B) financing, operations, and investing.
C) working capital management, financing, and budgeting.
D) capital budgeting, investing, and cash management.
Answer: B
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
15) The cash flow cycle:
A) describes the flow of cash through a company.
B) illustrates that profits and cash flows are the same.
C) reminds a financial manager that profits are important.
D) focuses on financing activities only.
Answer: A
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Analytic Skills
16) Cash management is typically the responsibility of the:
A) chief executive officer.
B) vice president of production and operations.
C) financial manager.
D) company internal auditor.
Answer: C
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
17) Investing activities are concerned with:
A) how a firm can best manage its cash flows as they arise in its day-to-day operations.
B) vice president of productions and operations.
C) managing a firm's cash budgeting procedures.
D) managing a firm's working capital.
Answer: C
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
18) Financing activities are concerned with:
A) determining whether a company's assets should be financed with debt or equity.
B) managing a firm's cash management procedures.
C) managing a firm's working capital.
D) planning sales of a corporation's equity capital.
Answer: A
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
19) Operating activities are concerned with:
A) determining whether a company's assets should be financed with debt or equity.
B) managing a firm's cash budgeting procedures.
C) managing a firm's working capital.
D) planning sales of a corporation's equity capital.
Answer: C
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
20) Determining the best way to raise money to fund a firm's long-term investments in fixed assets is an example of which cash-related activity in the cash flow cycle?
A) Operating activity
B) Profitability activity
C) Investing activity
D) None of the above
Answer: D
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
21) Ensuring that there is adequate cash to pay the firm's suppliers is an example of which cash-related activity in the cash flow cycle?
A) Operating activity
B) Profitability activity
C) Investing activity
D) Financing activity
Answer: A
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
22) Borrowing monies from financial institutions to fund the firm's revenue growth is an example of which cash-related activity in the cash flow cycle?
A) Operating activity
B) Profitability activity
C) Investing activity
D) Financing activity
Answer: D
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
23) Raising new capital through the sale of common equity is an example of which cash-related activity in the cash flow cycle?
A) Operating activity
B) Profitability activity
C) Investing activity
D) Financing activity
Answer: D
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
24) Offering discounts to accelerate the collection of accounts receivables in an example of which cash-related activity in the cash flow cycle?
A) Operating activity
B) Profitability activity
C) Investing activity
D) Financing activity
Answer: A
Diff: 2
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
25) Which of the following is NOT a cash-related activity of the financial manager?
A) Operating
B) Systems
C) Financing
D) Auditing
Answer: D
Diff: 1
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
26) To generate cash to invest in fixed assets, a firm can issue equity or obtain a loan from a bank. This is an example of which cash-related activity in cash flow management?
A) Operating activity
B) Profitability activity
C) Investing activity
D) Financing activity
Answer: D
Diff: 1
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
27) Financial management deals with the creation and maintenance of economic value or wealth.
Answer: TRUE
Diff: 1
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
28) Cash flows and profits are synonymous, in other words, higher cash flows equal higher profits
Answer: FALSE
Diff: 1
Topic: 1.1 Financial Management and Cash Flow Cycles
AACSB: Reflective Thinking
1.2 The Role of Financial Managers
1) The main duties of financial managers are:
A) assessing the current business situation and future financing needs.
B) developing long-term financing strategies.
C) assessing future investments.
D) All of the above.
Answer: D
Diff: 2
Topic: 1.2 The Role of the Financial Manager
AACSB: Reflective Thinking
2) Which of the following best describes the ultimate task of the financial managers?
A) Profit maximization
B) Risk minimization
C) Maximization of shareholders' wealth
D) None of the above
Answer: C
Diff: 1
Topic: 1.2 The Role of the Financial Manager
AACSB: Reflective Thinking
3) In general, financial managers are concerned with which of the following?
A) Creating economic wealth
B) Making investment decisions that optimize economic value
C) Making business decisions that optimize economic wealth
D) All of the above
Answer: D
Diff: 1
Topic: 1.2 The Role of the Financial Manager
AACSB: Reflective Thinking
4) If managers are making decisions to maximize shareholder wealth, they are primarily making decisions that:
A) maximize sales revenue.
B) minimize risk.
C) maximization of the market value of shareholders' common stock.
D) reduce the costs of borrowing.
Answer: C
Diff: 1
Topic: 1.2 The Role of the Financial Manager
AACSB: Reflective Thinking
5) Which of the following best describes the role of financial managers?
A) Maximization of the total market value of the firm's common stock
B) Profit maximization
C) Risk minimization
D) None of the above
Answer: A
Diff: 2
Topic: 1.2 The Role of the Financial Manager
AACSB: Reflective Thinking
6) Which of the following goals of the firm is equivalent to the maximization of shareholder wealth?
A) Profit maximization
B) Risk minimization
C) Maximization of the total market value of the firm's common stock
D) None of the above
Answer: C
Diff: 1
Topic: 1.2 The Role of the Financial Manager
AACSB: Reflective Thinking
7) A corporate financial manager who is trying to create value for its shareholders:
A) is not concerned with ethics but rather with writing iron-clad contracts.
B) can safely ignore ethics as long as no laws are broken.
C) must behave ethically to stay out of jail.
D) is concerned with ethics because unethical behavior destroys trust, and businesses cannot function without a certain degree of trust.
Answer: D
Diff: 2
Topic: 1.2 The Role of the Financial Manager
AACSB: Ethical Understanding and Reasoning
8) Which of the following would be most likely to align the interests of managers and shareholders?
A) Fixed but high salaries
B) Large bonuses
C) Stock options
D) None of the above
Answer: C
Diff: 1
Topic: 1.2 The Role of the Financial Manager
AACSB: Reflective Thinking
9) What does it mean to "maximize the value of the firm"? In general, how is value created? What factors determine value and how does each affect the value of the firm?
Answer: To maximize the value of the firm most commonly means to maximize the market capitalization of the firm for shareholders. More specifically, this means to maximize the present value of expected cash flows.
Diff: 3
Topic: 1.2 The Role of the Financial Manager
AACSB: Reflective Thinking
1.3 A Non-Financial Perspective of Financial Management
1) Which of the following are fundamental concepts that nonfinancial managers need to understand?
A) How current business conditions can affect the firm's performance.
B) How to project financial statements and future investment needs.
C) How capital markets work to raise long-term capital.
D) All of the above.
Answer: D
Diff: 1
Topic: 1.3 Non-Financial Perspectives of Financial Management
AACSB: Reflective Thinking
2) Day-to-day cash management is one of the fundamental concepts that a nonfinancial manager should understand in order to:
A) better assess the e current environment in which the firm operates.
B) better assess future financing requirements.
C) better understand the role of capital markets in raising long-term funds.
D) better measure and create value for the shareholders.
Answer: A
Diff: 2
Topic: 1.3 Non-Financial Perspectives of Financial Management
AACSB: Reflective Thinking
3) Financial statement analysis is one of the fundamental concepts that a nonfinancial manager should understand in order to:
A) better assess the current environment in which the firm operates.
B) better assess the future financing requirements.
C) better understand the role of capital markets in raising long-term funds.
D) better measure and create value for the shareholders.
Answer: A
Diff: 1
Topic: 1.3 Non-Financial Perspectives of Financial Management
AACSB: Reflective Thinking
4) An understanding of the role of capital markets is one of the fundamental concepts that a nonfinancial manager should understand in order to:
A) better assess the current environment in which the firm operates.
B) better assess future financing requirements.
C) better understand the role of the capital markets in raising long-term funds.
D) better measure and create value for the shareholders.
Answer: C
Diff: 1
Topic: 1.3 Non-Financial Perspectives of Financial Management
AACSB: Reflective Thinking
5) An understanding of how the company's cost of capital is determined is one of the fundamental concepts that a nonfinancial manager should understand in order to:
A) better assess the current environment in which the firm operates.
B) better assess future financing requirements.
C) better understand the role of capital markets in raising long-term funds.
D) better measure and create value for the shareholders.
Answer: B
Diff: 1
Topic: 1.3 Non-Financial Perspectives of Financial Management
AACSB: Reflective Thinking
6) Some fundamental concepts that nonfinancial managers need to understand include:
A) the ability to assess day-to-day cash management.
B) the ability to assess future financing requirements.
C) the ability to understand the role of capital markets in raising long-term funds.
D) All of the above.
Answer: D
Diff: 1
Topic: 1.3 Non-Financial Perspectives of Financial Management
AACSB: Reflective Thinking
7) The ability to analyze the company's strengths and weaknesses is a fundamental concept that a nonfinancial manager should understand in order to:
A) better assess the current environment in which the firm operates.
B) better assess future financing requirements.
C) better understand the role of capital markets in raising long-term funds.
D) better measure and create value for the shareholder.
Answer: A
Diff: 1
Topic: 1.3 Non-Financial Perspectives of Financial Management
AACSB: Reflective Thinking
8) The ability to identify the key industry drivers of success is a fundamental concept that a nonfinancial manager should understand in order to:
A) better assess the current environment in which the firm operates.
B) better assess future financing requirements.
C) better understand the role of capital markets in raising long-term funds.
D) better measure and create value for shareholders.
Answer: A
Diff: 1
Topic: 1.3 Non-Financial Perspectives of Financial Management
AACSB: Reflective Thinking
9) The ability to understand the short-term and long-term impact of investment decisions is a fundamental concept that a nonfinancial manager should understand in order to:
A) better assess the current environment in which the firm operates.
B) better assess future financing requirements.
C) better understand the role of capital markets in raising long-term funds.
D) None of the above.
Answer: A
Diff: 1
Topic: 1.3 Non-Financial Perspectives of Financial Management
AACSB: Reflective Thinking
10) Accounting supports financial managers by providing all of the following EXCEPT:
A) identifying relevant data related to the activities of the firm.
B) presenting data in an agreed-upon and standardized form known as generally accepted accounting practices.
C) summarizing the firm's economic activity in the form of financial statements.
D) generating revenue for the firm.
Answer: D
Diff: 1
Topic: 1.3 Non-Financial Perspectives of Financial Management
AACSB: Reflective Thinking
11) Assessing the current business environment is NOT a fundamental concept related to financial management.
Answer: FALSE
Diff: 1
Topic: 1.3 Non-Financial Perspectives of Financial Management
AACSB: Reflective Thinking
12) Each functional area is, in some way, involved in the generation or consumption of cash.
Answer: TRUE
Diff: 1
Topic: 1.3 Non-Financial Perspectives of Financial Management
AACSB: Reflective Thinking
13) S-type corporations and limited liability companies are taxed like partnerships, but have the advantage of limited liability for their owners.
Answer: TRUE
Diff: 1
Topic: 1.3 Non-Financial Perspectives of Financial Management
AACSB: Reflective Thinking
1.4 Financial Management's Relationship With Accounting and Other Disciplines
1) Financial Managers rely on the firm's ________ department to relay key financial data, such as cash flow statements, to aid in capital budgeting and financing decisions.
A) human resources
B) accounting
C) marketing
D) operations
Answer: B
Diff: 1
Topic: 1.4 Financial Management's Relationship With Accounting and Other Disciplines
AACSB: Reflective Thinking
2) The ________ measure a firm's performance over a specified period of time whereas a ________ provides a snapshot of the firm as of a specific date.
A) income and balance sheets; cash flow statement
B) balance sheet and cash flow statement; income statement
C) income and cash flow statements; balance sheet
D) None of the choices are correct.
Answer: C
Diff: 2
Topic: 1.4 Financial Management's Relationship With Accounting and Other Disciplines
AACSB: Reflective Thinking
3) Financial managers work with the managers from the other functional areas of business. For example: When the financial manager provides funds for activities such as training and hiring, they are probably working with which functional area?
A) Human Resourses
B) Information Technology
C) Marketing
D) Operations
Answer: A
Diff: 1
Topic: 1.4 Financial Management's Relationship With Accounting and Other Disciplines
AACSB: Reflective Thinking
4) Financial managers work with the managers from the other functional areas of business. For example: When the financial manager provides funds for activities such as the development of products or services, they are probably working with which functional area?
A) Human Resourses
B) Information Technology
C) Marketing
D) Operations
Answer: D
Diff: 1
Topic: 1.4 Financial Management's Relationship With Accounting and Other Disciplines
AACSB: Reflective Thinking
5) In what important ways do financial managers and the accounting discipline interact?
Answer: Financial managers deal with the management of working capital, capital structure decisions, and capital budgeting. In each of these a financial manager relies heavily on the development of accurate financial statements and the projection of those statements into the future. Thus a financial manager needs statements of cash flows, balance sheets, and income statements to better determine current costs of capital and to project pro forma financial statements.
Diff: 1
Topic: 1.4 Financial Management's Relationship With Accounting and Other Disciplines
AACSB: Reflective Thinking
1.5 Types of Firms
1) Although the firm has many important stakeholders, the ________ are most important because they are essentially the owners of the firm.
A) Shareholders
B) Investment bankers
C) Lenders
D) Managers
Answer: A
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
2) Which of the following organizational forms accounts for the greatest number of firms?
A) "S" Corporation
B) Limited partnership
C) Sole proprietorship
D) "C" corporation
Answer: C
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
3) Which of the following is NOT an advantage of a sole proprietorship?
A) Minimum legal requirements to start the business
B) Firm exists until dissolved by the owner
C) Limited liability
D) None of the above
Answer: C
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
4) Which of the following is NOT a disadvantage of a sole proprietorship as a form of business organization compared to the corporate form of business organization?
A) Access to the capital markets
B) Unlimited liability of the owners
C) Subject to the double taxation
D) Limited liability of the shareholders
Answer: D
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
5) This form of business ownership does NOT avoid double taxation.
A) Limited partnership
B) "S" corporation
C) "C" corporation
D) Limited liability company
Answer: C
Diff: 2
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
6) Which of the following organization forms accounts for the most revenue?
A) "S" corporation
B) Limited partnership
C) "C" corporation
D) Limited liability company
Answer: C
Diff: 2
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
7) Which of the following factors enable a public corporation to grow to a greater extent, and perhaps at a faster rate, than a partnership or proprietorship?
A) Access to the capital markets
B) Unlimited liability of the shareholders
C) Limited life
D) Elimination of double taxation corporate income
Answer: A
Diff: 2
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
8) Which of the following is NOT an advantage of a limited partnership?
A) Minimal legal requirements to start the business
B) Limited partnerships are limited in their management of the firm
C) Limited liability
D) None of the above
Answer: C
Diff: 2
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
9) Which type of business organization is the best for attracting new equity capital?
A) Sole proprietorship
B) Limited liability corporation
C) General partnership
D) A public corporation
Answer: D
Diff: 2
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
10) Which type of business organization is subject to initial legal requirements?
A) Sole proprietorship
B) Limited liability corporation
C) "C" corporation
D) None of the above
Answer: C
Diff: 2
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
11) Which is NOT a characteristic of a limited liability partnership?
A) One or more of the partners must be a general partner to whom the privilege of limited liability does not apply.
B) Prohibits the limited partners from participating in the management of the partnership.
C) Partners pay taxes on dividends distributed.
D) One or more partners have limited liability.
Answer: C
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
12) The limited liability company (LLC) form of business organization is:
A) able to retain limited liability for its owners.
B) a cross between a partnership and a corporation.
C) it is taxed like a partnership.
D) All of the above.
Answer: D
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
13) Which type of business ownership has limited liability?
A) Sole proprietors
B) General partners
C) Shareholders of a corporation
D) None of the above
Answer: C
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
14) This form of business organization does not distinguish between business and personal assets:
A) sole proprietorship.
B) limited liability corporation.
C) general partnership.
D) Both A and C
Answer: D
Diff: 2
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
15) The major disadvantage of a general partnership is:
A) each partner is fully responsible for the liabilities incurred by the partnership.
B) it is difficult to raise equity capital.
C) the costs of forming the partnership are high.
D) profits are taxed double.
Answer: A
Diff: 2
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
16) Which of the following statements regarding limited partnership is TRUE?
A) There is no limit on a limited partner's liability.
B) A limited partner is not liable until all the assets of the general partners have been exhausted.
C) A general partner's liability is limited by the amount of their investment.
D) A limited partner's liability is limited by the amount of their investment.
Answer: D
Diff: 2
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
17) Which of the following statements is/are advantages of incorporation?
A) Access to capital markets
B) Limited liability
C) Unlimited life
D) All of the above
Answer: D
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
18) Which of the following statements is TRUE?
A) An advantage of a corporation is that there is less regulation of the business.
B) An advantage of a corporation is that it is subject to double taxation.
C) Unlike a partnership, a disadvantage of a corporation is that it has limited liability.
D) Corporations face more regulations when compared to partnerships.
Answer: D
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
19) A limited liability company is:
A) a limited partnership without limited partners.
B) just another name for a limited partnership.
C) a limited partnership without a general partner.
D) just another name for a corporation.
Answer: C
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
20) A limited partnership provides limited liability to:
A) all general partners.
B) only limited partners responsible for day-to-day management of the firm's operations.
C) only to limited partners who do not participate in the management of the business.
D) all partners.
Answer: C
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
21) Limited partnerships are not as prevalent as corporations because:
A) limited partners can lose up to three times the amount they invested in the partnership if the business goes bankrupt.
B) limited partnerships have the disadvantage of double taxation.
C) the general partner has no liability, making it difficult for the partnership to borrow money.
D) it is easier to transfer ownership by selling common stock than it is to sell the partnership.
Answer: D
Diff: 2
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
22) One of the advantages of a sole proprietorship is:
A) limited liability for its owners.
B) double taxation for its owners.
C) complexity of transferring ownership.
D) no significant legal requirements for starting the business.
Answer: D
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
23) The true owners of the corporation are the:
A) holders of debt issues of the firm.
B) board of directors of the firm.
C) creditors.
D) common stockholders.
Answer: D
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
24) The distinguishing feature of a corporation is that:
A) a corporation is a legally defined, artificial being, separate from its owners.
B) there are no legal differences between the corporation and its owners.
C) it spreads the liability for its corporate obligations to all shareholders.
D) it provides limited liability only to small shareholders.
Answer: A
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
25) Which of the following statements about the corporate form of business organization is TRUE?
A) The corporate form has the disadvantage of double taxation relative to a sole proprietorship.
B) The corporate form is preferred over the sole proprietorship because a corporation is easier to form and faces less regulation.
C) Sole proprietorship is the most common form of business organization because liability is limited to the amount invested in the business by the sole proprietor.
D) The corporate form has the advantage of unlimited liability.
Answer: A
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
26) S-type corporation have all the following advantages EXCEPT:
A) they are taxed as a partnership.
B) the owners have limited liability.
C) distributions are taxed twice, similar to corporate dividend payments.
D) all owners must be people, not corporations.
Answer: C
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
27) In terms of costs to organize each, which of the following sequences is correct, moving from highest to lowest cost?
A) General partnership, sole proprietorship, limited partnership, corporation.
B) Sole proprietorship, general partnership, limited partnership, corporation.
C) Corporation, limited partnership, general partnership, sole proprietorship.
D) Sole proprietorship, general partnership, corporation, limited partnership.
Answer: C
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
28) Which of the following forms of organizations have earnings that are taxed twice, once as business income and once as personal income, when earnings are distributed to the owners in the form of dividends?
A) Corporations
B) General partnerships
C) Limited partnerships
D) Both A and C
Answer: A
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
29) Which of the following forms of business organization has the greatest ability to attract new capital?
A) Sole proprietorship
B) "C" Corporation
C) General partnership
D) "S" Corporation
Answer: B
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
30) Which of the following is NOT considered to be a disadvantage of the sole proprietorship form of a business organization?
A) Limited ability to raise capital
B) Its life is limited to that of the owner
C) Unlimited liability of business owners
D) Fewer regulations and reporting requirements
Answer: D
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
31) Which of the following reasons is the most responsible for corporations being the most important form of business organization in the United States?
A) Corporations have limited life.
B) Stockholders have unlimited liability.
C) Corporations are subject to less government regulation than other forms of business organizations.
D) Corporations have the ability to raise larger sums of capital than other forms of business organizations.
Answer: D
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
32) Mary has developed a diet pill for obesity. She wants to create a new company with a major drug company. She is concerned about liability if someone becomes sick or dies after using the diet pill. What is the best form of business organization for the new company?
A) A sole proprietorship
B) General partnership with Mary and the drug company as equal partners
C) S-type corporation with Mary and the drug company owning equal shares
D) Limited liability company with Mary and the drug company owning equal s hares
Answer: D
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
33) Joe is deciding whether or not to invest $10,000 in a business that has pending lawsuits against it. If Joe invests and the business loses the lawsuits, the most Joe can lose is:
A) $10,000 if Joe is a general partner.
B) $10,000 if Joe is a sole proprietor.
C) $10,000 if Joe is a limited partner.
D) $10,000 plus his share of the lawsuits if Joe is a limited partner.
Answer: C
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
34) General partners have unrestricted transferability of ownership, while limited partners must have the consent of all partners to transfer their ownership.
Answer: FALSE
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
35) In a sole proprietorship, the owner is personally responsible without limitation for the liabilities incurred by the company.
Answer: TRUE
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
36) Limited partners may actively manage the business.
Answer: FALSE
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
37) In a general partnership, each partner is liable for the partnership's obligations only up to the percentage of the obligation equal to that partner's percentage of ownership in the partnership.
Answer: FALSE
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
38) The best form of business entity to attract new capital is the sole proprietorship because investors only need to deal with one owner.
Answer: FALSE
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
39) The owners of a corporation enjoy limited liability.
Answer: TRUE
Diff: 1
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
40) List three forms of business organizations. What are the advantages and disadvantages of each?
Answer: We begin with the most common, the sole proprietorship. This has the advantage of easy start-up and that the owner is his or her "own boss." However, such firms generally have limited capital, unlimited liability, and ends when the owner dies or dissolves the business.
Partnerships have greater capital potential, but also suffer from unlimited liability and often alack of expertise in at least one or more functional areas of business.
Corporations dominate in the United States due to their ability to raise greater amounts of capital, ease of transition to new owners, and limited liability. They do suffer agency costs and double taxation.
Diff: 2
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
41) Explain the differences between an S-corporation and a C corporation.
Answer: S corporations are limited to a maximum of 100 employees and they have the advantage of single taxation as the personal rate rather than taxing both the corporation and the individual.
Diff: 3
Topic: 1.5 Types of Firms
AACSB: Reflective Thinking
1.6 A Financial Management Framework
1) The financial management framework:
A) examines the factors in the external environment in which the firm operates.
B) elaborates on the three main cash-related activities of the firm.
C) examines how value is created and measured.
D) All of the above.
Answer: D
Diff: 1
Topic: 1.6 A Financial Management Framework
AACSB: Reflective Thinking
2) Which of the following is NOT considered to be a factor that affects the external environment?
A) Interest rates
B) Expansion and recession of the economy
C) Dividend policy
D) Credit conditions
Answer: C
Explanation: A) 111
Diff: 2
Topic: 1.6 A Financial Management Framework
AACSB: Reflective Thinking
3) Which of the following is NOT considered a factor that affects the industry in which the firm operates?
A) Technology
B) Interest rates
C) Regulation
D) Credit conditions
Answer: D
Diff: 1
Topic: 1.6 A Financial Management Framework
AACSB: Reflective Thinking
4) All of the following is a financing factor that impacts the firm's leverage EXCEPT:
A) debt financing.
B) new equity.
C) suppliers.
D) marketing.
Answer: D
Diff: 1
Topic: 1.6 A Financial Management Framework
AACSB: Reflective Thinking
5) One component of the financial management framework is the examination of the external environment in which the firm operates.
Answer: TRUE
Diff: 1
Topic: 1.6 A Financial Management Framework
AACSB: Reflective Thinking
6) Corporate managers work for the owners of the corporation. Consequently, they should make decisions that are in the best interests of the owners, rather than in their self-interests. What strategies are available to shareholders to help ensure that managers are motivated to make decisions in the interest of shareholders?
Answer: Generally speaking shareholders may use the "carrot" of performance-based compensation such as bonuses or stock options whereby good performance by the firm results in higher compensation for managers. Stockholders also may use the "stick" of board of director oversight to monitor managers to make sure they are optimally fulfilling their responsibilities. There is also the market for corporate control where well-capitalized stockholders may take control of what they view as under-valued firms. Such outside forces should "encourage" managers to maximize firm value.
Diff: 3
Topic: 1.6 A Financial Management Framework
AACSB: Reflective Thinking
