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Finance
Q:
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.
Q:
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
Q:
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.
Q:
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.
Q:
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.
Q:
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.
Q:
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.
Q:
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.
Q:
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.
Q:
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.
Q:
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.
Q:
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.
Q:
The average tax rate is the total taxes divided by the taxable income.
A) True
B) False
Q:
Rent and insurance are examples of depletion expenses.
A) True
B) False
Q:
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
Q:
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
Q:
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
Q:
Cash flows from operating activities involve buying and selling of long-term assets.
A) True
B) False
Q:
Cash flows from operations are the net cash flows that support a firm's principal business activities.
A) True
B) False
Q:
The net cash provided by operating activities is another term used for net income.
A) True
B) False
Q:
Depreciation and amortization are examples of prepaid expenses.
A) True
B) False
Q:
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
Q:
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
Q:
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
Q:
The net book value of an asset is the historical cost less the accumulated depreciation.
A) True
B) False
Q:
Book value is the amount a firm paid for its assets at the time of purchase.
A) True
B) False
Q:
During rising prices, a company using the FIFO method will sell its newest, highest-cost inventory first.
A) True
B) False
Q:
During rising prices, a company using the LIFO method assumes that the sale is from the newest, highest-cost inventory.
A) True
B) False
Q:
In a balance sheet, assets are listed in order of their liquidity.
A) True
B) False
Q:
The balance sheet identity can be stated as: Total assets = Total liabilities + Total stockholders' equity.
A) True
B) False
Q:
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
Q:
The going concern assumption states that a business will be shutting down its operation in the near future.
A) True
B) False
Q:
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
Q:
Generally accepted accounting principles determine the rules for how a company can issue stocks to raise money.
A) True
B) False
Q:
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
Q:
Explain why secondary markets are so important to businesses that need to raise capital?
Q:
If a firm sells common stock to the public for the very first time, it is known as _____.
A) an underwriting
B) an initial public offering
C) a financial intermediation
D) an origination
Q:
If the supply of loanable funds decreases relative to the demand for those funds, then we would expect:
A) interest rates to remain unchanged.
B) interest rates to increase.
C) interest rates to decrease.
D) the cost of money to remain unchanged.
Q:
In the United States, the real rate of interest has historically been around:
A) 1 percent.
B) 3 percent.
C) 5 percent.
D) 7 percent.
Q:
During an economic expansion, we would expect:
A) interest rates to increase.
B) interest rates to decrease.
C) interest rates to remain the same.
D) the cost of money to decrease.
Q:
The general level of interest rates tends to follow:
A) deflation.
B) the business cycle.
C) the default cycle.
D) all of the above.
Q:
If inflation is anticipated to be 5 percent during the next year, while the real rate of interest for a one-year loan is 5 percent, then what should the nominal rate of interest be for a risk-free one-year loan?
A) 5 percent.
B) 10 percent.
C) 25 percent.
D) None of the above.
Q:
If you are a borrower, which would you prefer to occur during the life of your loan?
A) A level of inflation that is higher than that anticipated at the outset of the loan.
B) A level of inflation that is lower than that anticipated at the outset of the loan.
C) A level of inflation that is exactly as anticipated at the outset of the loan.
D) No inflation at all
Q:
The real rate of return can be justified, at a basic level, by:
A) compensation for inflation.
B) compensation for deferring consumption.
C) compensation for the level of international borrowing.
D) all of the above.
Q:
The nominal rate of interest is made up of:
A) the real rate of interest.
B) compensation for inflation.
C) a commodity cross-index return.
D) both A and B .
Q:
The cost of borrowing money is called:
A) inflation.
B) return.
C) interest.
D) all of the above.
Q:
If a small business opts not to borrow funds from a commercial bank, then what will probably be its next best alternative?
A) An insurance company.
B) A pension.
C) An investment fund.
D) A business finance company.
Q:
A mutual fund is an example of:
A) a line of credit.
B) an endowment fund.
C) an investment fund.
D) a pension fund.
Q:
Which of the following would not make up a major proportion of a pension fund investment portfolio?
A) Commercial paper.
B) Long-term corporate bonds.
C) Stocks.
D) None of the above.
Q:
Casualty insurance companies sell:
A) protection against loss of income in the event of the death of the insured.
B) protection against loss of property from fire, theft, accidents, and other predictable causes.
C) protection against a loss of pension revenue for retirees.
D) all of the above.
Q:
Which of the following is a primary investment vehicle for the funds in which life insurance companies must invest?
A) CDs.
B) Equity securities.
C) Long-term corporate bonds.
D) Both B and C.
Q:
A line of credit to a corporation is like _____ to an individual.
A) a term loan
B) a bond
C) a credit card
D) a debit card
Q:
The process of converting financial securities with one set of characteristics into securities with another set of characteristics is called:
A) financial bundling.
B) financial intermediation.
C) financial disintermediation.
D) none of the above.
Q:
If your firm primarily borrows from commercial banks, then it primarily accesses the capital markets through:
A) direct financing.
B) indirect financing.
C) a legal loophole that allows all commercial banks the ability to underwrite securities.
D) none of the above.
Q:
Which of the following theories states that security prices reflect all information, whether public or private?
A) Weak-form efficiency.
B) Semistrong-form efficiency.
C) Strong-form efficiency.
D) Nominal-form efficiency.
Q:
Which of the following theories states that security prices reflect all public information, but not all private information?
A) Weak-form efficiency.
B) Semistrong-form efficiency.
C) Strong-form efficiency.
D) Nominal-form efficiency.
Q:
The most common reason that corporate firms use the futures and options markets is:
A) to hedge risk.
B) to take risk.
C) to make deposits.
D) none of the above.
Q:
If a firm needs to finance a new corporate headquarters building, then it would most likely seek the funds in the:
A) money market.
B) capital market.
C) futures market.
D) all of the above.
Q:
If a firm needs to adjust its liquidity position, then it would participate in:
A) the money market.
B) the bond market.
C) the stock market.
D) the auction market.
Q:
The term money market is used because:
A) firms that issue securities in this market are in dire need of cash.
B) it is a market where stocks are converted into money.
C) the instruments traded in this market are close substitutes for cash.
D) none of the above.
Q:
Money market instruments are generally issued by:
A) firms in dire need of cash to maintain their credit rating.
B) firms of the highest credit rating.
C) firms of the lower credit ratings.
D) all of the above.
Q:
A highly liquid financial instrument with a maturity of 90 days would be traded in:
A) the money market.
B) the bond market.
C) the stock market.
D) none of the above.
Q:
Which of the following markets has no central trading location?
A) A futures exchange.
B) An over-the-counter market.
C) An auction market.
D) None of the above.
Q:
The NYSE is an example of:
A) an over-the-counter market exchange.
B) an organized exchange.
C) a commodities exchange.
D) all of the above.
Q:
One of the main services offered by investment banks to companies is:
A) helping companies sell new debt or equity issues in the security markets.
B) making loans to companies.
C) taking deposits from companies.
D) all of the above.
Q:
The presence of a financial market increases the marketability of a financial security by:
A) essentially insuring the price of the security.
B) reducing the transaction costs for selling the security.
C) guaranteeing the accuracy of information produced by the issuer of the security.
D) none of the above.
Q:
The ease with which a security can be sold and converted into cash is called:
A) convertibility.
B) liquidity.
C) marketability.
D) none of the above.
Q:
If you just purchased a share of IBM through a New York Stock Exchange-based transaction, you participated in:
A) a primary market transaction.
B) a secondary market transaction.
C) a futures market transaction.
D) none of the above.
Q:
Secondary financial markets are similar to:
A) direct auction markets.
B) new-car markets.
C) used-car markets.
D) direct financial market.
Q:
The financial market where a new security is sold for the first time is:
A) a primary market.
B) a secondary market.
C) an indirect financial market.
D) none of the above.
Q:
Stocks that are traded in the _____ are typically those of smaller and lesser known firms.
A) National Stock Exchange
B) New York Stock Exchange
C) American Stock Exchange
D) over-the-counter
Q:
Which of the following is a process by which investment bankers purchase new securities directly from the issuing company and resell them to the investors?
A) Agency marketing.
B) Underwriting.
C) Distribution.
D) Private placement.
Q:
Which of the following act is responsible for rolling back many of the rules against commercial banks offering investment banking activities?
A) The Securities Act of 1933.
B) The Securities Exchange Act of 1934.
C) The Glass-Steagall Act of 1933.
D) The Financial Services Modernization Act of 1999.
Q:
What is the typical minimum denominated transaction size in the direct financial markets?
A) $10,000.
B) $100,000.
C) $1,000,000.
D) $10,000,000.
Q:
The major players in the direct financial markets are:
A) investment banks.
B) money center banks.
C) regional banks.
D) both A and B.
Q:
Which of the following is a major participant in the direct financial market?
A) Large corporations.
B) Wealthy individuals.
C) Investment banks.
D) All of the above.
Q:
Direct financing occurs when:
A) a lender-savers borrows directly from a borrower-spenders.
B) a borrower-spenders borrows directly from a lender-savers.
C) a lender-savers borrows from the federal government.
D) a borrower-spenders borrows from the federal government.
Q:
An important function of the financial system is:
A) to direct money to the best investment opportunities in the economy.
B) to allow the federal government to view all financial transactions.
C) to help state governments to coordinate state tax levies.
D) to direct the money from borrower-lenders to lender-savers.
Q:
_____ are the principal lender-savers in the economy.
A) Households
B) Investment banks
C) State governments
D) Businesses
Q:
A financial system's primary concern is funneling money from:
A) wealthy individuals to non-wealthy individuals.
B) lender-savers to borrower-spenders.
C) borrower-spenders to lender-savers.
D) the government to wealthy individuals.