MGT 181 Chapter 1 Practice Problems

Which of the following is defined as a firm's short-term assets and its short-term liabilities?

a. Working capital

b. Debt

c. Investment capital

d. Net Capital

e. Capital structure

a. Working capital

A business owned by a solitary individual who has unlimited liability for its debt is called a:

a. Corporation

b. Sole proprietorship

c. General partnership

d. Limited partnership

e. Limited liability partnership

b. Sole proprietorship

A Stakeholder is:

a. A person who owns shares of stock

b. Any person who has voting rights based on stock ownership of a corporation

c. A person who initially founded a firm and currently has management control over that firm

d. A creditor to whom a firm currently owes money

e. Any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm

e. Any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm

Which of the following questions are addressed by financial managers?

I. How should a product be marketed?

II. Should customers be given 30 or 45 days to pay for their credit purchases?

III. Should the firm borrow more money?

IV. Should the firm acquire new equipment?

a. I and IV only

b. II and III only

c. I, II, and III only

d. II, III, and IV only

e. I, II, III, and IV

d. II, III, and IV only

Which one of the following functions should be the responsibility of the controller rather than the treasurer?

a. Daily cash deposit

b. Income tax returns

c. Equipment purchase analysis

d. Customer credit approval

e. Payment to a vendor

b. Income tax returns

Which one of the following is a capital budgeting decision?

a. Determining how many shares of stock to issue

b. Deciding whether or not to purchase a new machine for the production line

c. Deciding how to refinance a debt issue that is maturing

d. Determining how much inventory to keep on hand

e. Determining how much money should be kept in the checking account

b. Deciding whether or not to purchase a new machine for the production line

Which of the following accounts are included in working capital management?

I. Accounts payable

II. Accounts receivable

III. Fixed assets

IV. Inventory

a. I and II only

b. I and III only

c. II and IV only

d. I, II, and IV only

e. II, III, and IV only

d. I, II, and IV only

A general partner:

a. Is personally responsible for all the partnership debts

b. Has no say over a firm's daily operations

c. Faces double taxation whereas a limited partner does not

d. Has a maximum loss equal to his or her equity investment

e. Receives a salary in lieu of a portion of the profits

a. Is personally responsible for all the partnership debts

Which one of the following business types is best suited to raising large amounts of capital?

a. Sole proprietorship

b. Limited liability company

c. Corporation

d. General partnership

e. Limited partnership

c. Corporation

Which one of the following best states the primary goal of financial management?

a. Maximize current dividends per share

b. Maximize the current value per share

c. Increase cash flow and avoid financial distress

d. Minimize operational costs while maximizing firm efficiency

e. Maintain steady growth while increasing current profits

b. Maximize the current value per share

Decisions made by financial managers should primarily focus on increasing which one of the following?

a. Size of the firm

b. Growth rate of the firm

c. Gross profit per unit produced

d. Market value per share of outstanding stock

e. Total sales

d. Market value per share of outstanding stock

Which one of the following grants an individual the right to vote on behalf of a shareholder?

a. Proxy

b. By-laws

c. Indenture agreement

d. Stock option

e. Stock audit

a. Proxy

Which of the following parties are considered stakeholders of a firm?

I. Employee

II. Long-term creditor

III. Government

IV. Common stockholder

a. I only

b. IV only

c. I and III only

d. II and IV only

e. II, III, and IV only

c. I and III only

Which of the following represent cash outflows from a corporation?

I. Issuance of securities

II. Payment of dividends

III. New loan proceeds

IV. Payment of government taxed

a. I and III only

b. II and IV only

c. I and IV only

d. I, II, and IV only

e. II, III, and IV only

b. II and IV only

Which one of the following statements concerning stock exchanges is correct?

a. NASDAQ is a broker market

b. The NYSE is a dealer market

c. The exchange with the strictest listing requirements is NASDAQ

d. Some large companies are listed on NASDAQ

e. Most debt securities are traded on the NYSE

d. Some large companies are listed on NASDAQ

Why should financial managers strive to maximize the current value per share of the existing stock?

a. Doing so guarantees the company will grow in size at the maximum possible rate

b. Doing so increases employee salaries

c. Because they have been hired to represent the interests of the current shareholders

d. Because this will increase the current dividends per share

e. Because managers often receive shares of stock as part of their compensation

c. Because they have been hired to represent the interests of the current shareholders

Which one of the following terms is defined as the mixture of a firm's debt and equity financing?

a. working capital management

b. cash management

c. cost analysis

d. capital budgeting

e. capital structure

e. capital structure

Which one of the following is defined as a firm's short-term assets and its short-term liabilities?

A. working capital

B. debt

C. investment capital

D. net capital

E. capital structure

A. working capital

A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:

A. corporation.

B. sole proprietorship.

C. general partnership.

D. limited partnership.

E. limited liability company.

C. general partnership.

A business created as a distinct legal entity and treated as a legal "person" is called a:

A. corporation.

B. sole proprietorship.

C. general partnership.

D. limited partnership.

E. unlimited liability company.

A. corporation.

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?

A. articles of incorporation

B. corporate breakdown

C. agency problem

D. bylaws

E. legal liability

C. agency problem

The controller of a corporation generally reports directly to the:

A. board of directors.

B. chairman of the board.

C. chief executive officer.

D. president.

E. vice president of finance.

E. vice president of finance.

23. Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure?

A. The vice president of finance reports to the chairman of the board.

B. The chief executive officer reports to the president.

C. The controller reports to the president.

D. The treasurer reports to the vice president of finance.

E. The chief operations officer reports to the vice president of production.

D. The treasurer reports to the vice president of finance.

The decision to issue additional shares of stock is an example of which one of the following?

A. working capital management

B. net working capital decision

C. capital budgeting

D. controller's duties

E. capital structure decision

E. capital structure decision

Which one of the following is a working capital management decision?

A. determining the amount of equipment needed to complete a job

B. determining whether to pay cash for a purchase or use the credit offered by the supplier

C. determining the amount of long-term debt required to complete a project

D. determining the number of shares of stock to issue to fund an acquisition

E. determining whether or not a project should be accepted

B. determining whether to pay cash for a purchase or use the credit offered by the supplier

Which one of the following statements concerning a sole proprietorship is correct?

A. sole proprietorship is designed to protect the personal assets of the owner.

B. The profits of a sole proprietorship are subject to double taxation.

C. The owner of a sole proprietorship is personally responsible for all of the company's debts.

D. There are very few sole proprietorships remaining in the U.S. today.

E. A sole proprietorship is structured the same as a limited liability company.

C. The owner of a sole proprietorship is personally responsible for all of the company's debts.

Which one of the following statements concerning a sole proprietorship is correct?

A. The life of a sole proprietorship is potentially unlimited.

B. A sole proprietor can generally raise large sums of capital quite easily.

C. Transferring ownership of a sole proprietorship is easier than transferring ownership of a corporation.

D. A sole proprietorship is taxed the same as a C corporation.

E. It is easy to create a sole proprietorship.

E. It is easy to create a sole proprietorship.

Which of the following individuals have unlimited liability based on their ownership interest?

I. general partner

II. sole proprietor

III. stockholder

IV. limited partner

A. II only

B. I and II only

C. II and IV only

D. I, II, and III only

E. I, II, and IV only

B. I and II only

Which one of the following best describes the primary advantage of being a limited partner instead of a general partner?

A. tax-free income

B. active participation in the firm's activities

C. no potential financial loss

D. greater control over the business affairs of the partnership

E. maximum loss limited to the capital invested

E. maximum loss limited to the capital invested

A limited partnership:

A. has an unlimited life.

B. can opt to be taxed as a corporation.

C. terminates at the death of any limited partner.

D. has a greater ability to raise capital than a sole proprietorship.

E. consists solely of limited partners.

D. has a greater ability to raise capital than a sole proprietorship.