UTD Mace EXAM 1

1, 2, 16

Which of the following is a reason for a company to go international?

The company is manufacturing the finished product in its country at a very high production cost.

The 11 sections (titles) in the Sarbanes-Oxley Act of 2002 _____.

establish standards for accountability and responsibility in reporting financial information

The 11 sections (titles) in the Sarbanes-Oxley Act of 2002 establish standards for accountability and responsibility in reporting financial information for publicly-traded corporations. Which of the following activities does the act provide that a corporation must abide by?

The corporation must provide additional information about the procedures used to construct and report financial statements.

Because financial institutions in other countries are generally less regulated than those in the United States, they generally _____.

can provide businesses a greater variety of services than U.S. banks can

A limited partner in a limited liability partnership (LLP) is _____.

liable for only the amount invested in the partnership

Institutional investors can ensure that a corporation pursues goals that are in their best interest by _____.

monitoring its financial performance to ensure that managers pursue the goal of wealth maximization

Which of the following statements is true?

Institutional differences among countries can cause significant problems in coordination of subsidiaries.

Identify a true statement about an S corporation.

The income of an S corporation passes through the company to the owners.

The Sarbanes-Oxley Act of 2002 requires the chief executive officer of a publicly-traded corporation to _____.

certify financial reports that are submitted to the Securities and Exchange Commission

Financial services refer to functions provided by organizations that _____.

deal with the management of money

Identify a true statement about the financial services provided by organizations.

Financial services organizations help individuals and companies determine how to invest money to achieve their financial goals.

Which of the following statements is true of agency problems?

One of the best means to control agency problems is to require the managers and other important decision-makers of the firm to also be owners of the firm.

Stock price maximization requires _____.

efficient, low-cost plants that produce high-quality goods and services

Actions that help a firm increase the price of its stock also _____.

require the development of products that consumers want and need

Which of the following is true of financial services provided by persons working in banks, insurance companies, and brokerage firms?

Persons working in banks, insurance companies, and brokerage firms help individuals and companies determine how to invest money to achieve their financial goals.

The treasurer of a company is a key subordinate of the _____.

financial vice president

Which of the following statements about the corporate form of business organization is correct?

a. Corporations can operate under different degrees of formality, ranging from informal, oral understandings to formal agreements filed with the secretary of the state in which the corporations do business.

b. Corporations generally are smaller than either partnerships or proprietorships.

c. In the United States, corporations generate a lower percentage of total annual sales than either partnerships or proprietorships.

d. One of the most important features of the corporate form of business organization is that stockholders have unlimited liability.

e. A corporation has the legal authority to act like a person when conducting business.

e. A corporation has the legal authority to act like a person when conducting business.

Which of the following statements is correct?

a. According to the text, "agency problems" tend to increase when managers own larger relative amounts of the company's stock.

b. Other things held constant, it is generally safer to invest money in a proprietorship than in a corporation.

c. Maximizing the income statement item "net income" might not be the best goal for a corporation if the managers are interested in maximizing the economic welfare of the firm's stockholders (that is, the firm's stock price).

d. There really is no difference between a general partnership and a corporation, because both have multiple owners and both offer limited liability to the owners.

e. If you are planning to start a business, which you will run as the sole employee, and if you expect the business to earn $1,000,000 per year before taxes, you always can minimize the total taxes you pay by setting up the business as a corporation.

c. Maximizing the income statement item "net income" might not be the best goal for a corporation if the managers are interested in maximizing the economic welfare of the firm's stockholders (that is, the firm's stock price).

Institutional investors can ensure that a corporation pursues goals that are in their best interest by _____.

monitoring its financial performance to ensure that managers pursue the goal of wealth maximization

Which of the following is true of shareholders in continental Europe?

Many shareholders assign banks their proxy votes for the directors of the companies.

Which of the following is true of the investment function of finance?

a. The investment function focuses on the optimal mix of securities based on the environment-friendly behavior of the corporations.

b. The investment function focuses on socially responsible actions taken by corporations.

c. The investment function focuses on regulations applicable to a public corporation.

d. The investment function focuses on the values, risks, and returns associated with financial assets such as stocks and bonds.

e. The investment function focuses on additional information about the procedures used to construct and report financial statements.

d.

The investment function focuses on the values, risks, and returns associated with financial assets such as stocks and bonds.

Identify the internal factor that influences the stock price of a firm.

Capital structure

Which of the following statements is correct?

a. In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in financial markets than other organizational forms.

b. Although stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way.

c. The corporation is a legal entity created by the state and is a direct extension of the legal status of its owners and managers, that is, the owners and managers are the corporation.

d. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.

e. A hostile takeover is the primary method of transferring ownership interest in a corporation.

a.

In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in financial markets than other organizational forms.

Which of the following mathematical expressions computes earnings per share (EPS)?

a. Earnings per share = Net Income × Number of outstanding shares of common stock

Correctb. Earnings per share = Net Income ÷ Number of outstanding shares of common stock

c. Earnings per share = (Net Income + Dividend Paid) ÷ Number of outstanding shares of common stock

d. Earnings per share = (Net Income - Dividend Paid) ÷ Number of outstanding shares of common stock

e. Earnings per share = (Net Income - Dividend Paid) × Number of outstanding shares of common stock

b. Earnings per share = Net Income ÷ Number of outstanding shares of common stock

Which of the following is true of a general partner of a limited liability partnership (LLP)?

A general partner of a limited liability partnership (LLP) is fully personally liable for all business debts.

In the United States, the most common form of business is the _____, and the form of business that generates most of the sales and profits is the _____.

proprietorship; corporation

The success of financial institutions depends on the _____.

understanding of the factors that cause interest rates and other returns in the financial markets to rise and fall

The credit manager is supervised by the _____.

treasurer

Which of the following statements is correct?

a. The use of debt financing has no effect on earnings per share (EPS) or stock price.

b. The riskiness of projected EPS can impact the firm's value.

c. Stock price is dependent on the projected EPS and the use of debt, but not on the timing of the earnings stream.

d. The optimal dividend policy is the one that satisfies management, not shareholders.

e. Dividend policy is one aspect of the firm's financial policy that is determined solely by the shareholders.

b.

The riskiness of projected EPS can impact the firm's value.

Which of the following statements concerning a firm's quest to maximize wealth is correct?

a. Actions that maximize a firm's stock price are inconsistent with maximizing social welfare.

b. The concepts of social responsibility and ethical responsibility on the part of corporations are completely different and neither is relevant in maximizing stock price.

c. If the government did not mandate socially responsible corporate actions, such as those relating to product safety and fair hiring practices, most firms in competitive markets probably would not pursue such policies voluntarily.

d. In extremely competitive industries, we would expect firms would voluntarily engage in many socially beneficial projects to try to maximize their stocks' values.

e. In a competitive market, if a group of firms does not spend resources making social welfare improvements, but another group does, in general, this will not affect the s...

c.

If the government did not mandate socially responsible corporate actions, such as those relating to product safety and fair hiring practices, most firms in competitive markets probably would not pursue such policies voluntarily.

Which of the following statements is true of corporate bylaws?

a. Corporate bylaws are a set of rules drawn up by the state to enable managers to run the firm in accordance with state laws.

b. Procedures that govern changes in corporate bylaws are contained in the corporate charter.

c. Procedures for electing corporate directors are contained in corporate bylaws.

d. The declaration of the activities that a firm will pursue and the number of directors are included in the corporate bylaws.

e. To open their doors and start their operations, corporations are legally required only to file their bylaws with the appropriate agency in the state where they incorporate.

Procedures for electing corporate directors are contained in corporate bylaws.

Which of the following is true of financial institutions?

a. Financial institutions require public corporations to adopt socially responsible work practices.

b. Managers of financial institutions should have an understanding of factors that cause interest rates and other returns in the financial markets to rise and fall.

c. Financial institutions are the regulators of interest rates and other returns in financial markets.

d. Financial institutions are accountable and responsible in reporting financial information for publicly-traded corporations.

e. Financial institutions are required by the Sarbanes-Oxley Act to disclose the environment-friendly measures taken by investment corporations.

b.

Managers of financial institutions should have an understanding of factors that cause interest rates and other returns in the financial markets to rise and fall.

Which of the following is true of corporations that operate in several different countries?

a. Differences in legal systems of host nations make it easy for executives trained in one country to operate effectively in another.

b. A nation may expropriate the assets of multinational corporations without compensation.

c. Multinational corporations have the advantage of uniform attitudes toward risk taking from one country to the next.

d. Uniformity of tax-laws across different nations result in proper coordination and control of subsidiaries.

e. Cash flows in various parts of a multinational corporate system are denominated in one currency.

b.

A nation may expropriate the assets of multinational corporations without compensation.

Identify the external factor that affects the value of a firm's stock.

b. General level of economic activity

It is possible to limit the liability faced by some of the partners in a partnership form of business by establishing a _____.

limited liability partnership (LLP)

The prices at which the currency of one country can be converted into the currencies of other countries are known as _____.

exchange rates

Which of the following is true of the Sarbanes-Oxley Act of 2002?

a. The act requires at least 30 percent of the businesses in the United States to be formed as S corporations.

b. The act requires a publicly-traded corporation to hire an external auditing firm that renders an unbiased opinion concerning the firm's financial statements.

c. The act requires an S corporation to have more than 100 stockholders (members) and more than one type of stock.

d. The act requires a limited liability company to have a committee that consists of inside directors to oversee the firm's audits.

e. The act requires a limited liability company to be taxed like a proprietorship.

b. The act requires a publicly-traded corporation to hire an external auditing firm that renders an unbiased opinion concerning the firm's financial statements.

Which of the following forms of business offers limited personal liability to owners as well as the choice to be taxed as either a corporation or as a partnership?

Limited liability company

Which of the following is true of a firm that tries to coordinate and control the worldwide operations of its subsidiaries?

Cash flows in different subsidiaries are denominated in different currencies.

Stock price maximization requires _____.

efficient, low-cost plants that produce high-quality goods and services

Which of the following statements is correct?

a. Financial institutions in other countries generally are less regulated than in the United States.

b. One of the advantages associated with doing business in international markets is that all countries report their financial statements in the U.S. dollar.

c. One reason domestic firms "go global" is to sell products in saturated markets.

d. A multinational firm takes advantage of the cultural differences among countries and uses the same marketing strategy in every country in which it operates.

e. Often firms can avoid labor laws that apply to foreign manufacturers by establishing manufacturing units in the country where the hurdles apply.

a. Financial institutions in other countries generally are less regulated than in the United States.

Which of the following actions should be taken by managers to avoid takeover threats?

a. Managers should let the stockholders make the capital structure decisions.

b. Managers should make decisions that decrease the firm's expected future cash flows.

c. Managers should declare lower dividends.

d. Managers should ensure that high-quality goods and services are sold at the highest possible prices.

e. Managers should take action to maximize stock prices.

e.

Managers should take action to maximize stock prices.

Identify a true statement about a limited liability company (LLC).

a. Only one of the owners of a limited liability company can participate in the management of the business.

b. One of the owners of a limited liability company must be designated as a general partner with unlimited personal financial liability.

c. A limited liability company can have more than one type of stock (ownership interest) outstanding.

d. A limited liability company can be taxed as a corporation only.

e. A limited liability company can have no more than 100 stockholders.

c. A limited liability company can have more than one type of stock (ownership interest) outstanding.

Which of the following is true of the greater concentration of ownership in non-U.S. firms than in U.S. firms?

a. It makes it easy to change managers in non-U.S. firms.

b. It permits greater monitoring and control by individuals or groups than the more dispersed ownership structures of U.S. firms.

c. It makes it difficult for non-U.S. firms to access credit in times of financial difficulty.

d. It reduces the involvement of stockholders in the daily operations of non-U.S. firms.

e. It results in managers focusing on short-term goals rather than on long-term objectives.

It permits greater monitoring and control by individuals or groups than the more dispersed ownership structures of U.S. firms.

Which of the following represents a difference between an S corporation and a limited liability company (LLC)?

a. An S corporation is subject to unlimited personal liability of the owners, whereas an LLC is subject to limited personal liability.

b. An S corporation's business income is subject to double taxation, whereas an LLC's business income is taxed only once.

c. An S corporation can choose to be taxed as a corporation or as a partnership, whereas an LLC is taxed as a corporation only.

d. An S corporation has no more than 100 stockholders, whereas an LLC can have more than 100 stockholders (members).

e. An S corporation can have more than one type of stock outstanding, whereas an LLC can have only one type of stock outstanding.

An S corporation has no more than 100 stockholders, whereas an LLC can have more than 100 stockholders (members).

Industrial groups that exist in foreign countries are _____.

organizations that tie together all the functions of production and sales from start to finish

The management's primary goal is stockholder wealth maximization, which translates into _____.

maximizing the value of the firm as measured by the price of its common stock

The primary goal of a publicly-owned firm interested in serving its stockholders should be to _____.

maximize the stock price per share

All else equal, in which of the following forms of business would the possibility of an agency problem be the greatest?

d.

A U.S. corporation in which individual stockholders own extremely small proportions of the company.

Which of the following mathematical expressions computes earnings per share (EPS)?

Earnings per share = Net Income ÷ Number of outstanding shares of common stock

Which of the following is a feature of an S corporation?

a. The income of an S corporation is taxed as capital gains to the owners.

b. An S corporation is required to have more than one type of stock outstanding.

c. The income of an S corporation is taxed twice, at the corporate level and the owner level.

d. The income of an S corporation is taxed the same as income earned by proprietorships and partnerships.

e. An S corporation is required to have more than 100 stockholders.

The income of an S corporation is taxed the same as income earned by proprietorships and partnerships.

The accounting and tax departments are the responsibility of the _____.

controller

Which of the following is an example of ethical behavior of the management of a corporation?

a. Management actions often result in large gains for themselves and large losses for stockholders.

b. Payment of bribe by the management of the corporation to foreign governments to obtain business.

c. The management of the corporation uses confidential information for personal gain.

d. The management takes steps to adhere to laws and regulations relating to product safety.

e. Executives of the corporation pursue their own personal interests when making important business decisions.

d.

The management takes steps to adhere to laws and regulations relating to product safety.

Which of the following statements concerning the complexity of the manager's task in a multinational corporation is correct?

a. Cash flows in the various parts of a multinational corporate system are often denominated in the same currencies.

b. The currency values of different countries in which a multinational corporation operates often experience fluctuations.

c. All the countries in which a multinational corporation operates have uniform political and economic institutions.

d. No nation can place constraints on the transfer of corporate resources.

e. The management personnel of the subsidiaries of a multinational corporation are fluent in English and several other languages.

b. The currency values of different countries in which a multinational corporation operates often experience fluctuations.

Which of the following actions is consistent with social responsibility and is not necessarily inconsistent with stockholder wealth maximization?

a. Selling a smokestack "scrubber" required by the firm's air pollution policy that is also mandated by law.

b. Investing in a smokestack filter to reduce sulphur-dioxide emissions to decrease the tax being levied on the firm by the state for pollution it produces each year.

c. Dumping effluent discharge into a river, where it ruins the drinking water of the community around the plant. The installation of machinery to treat the effluents is very expensive.

d. Making a large corporate donation to the local community for funding a recreation complex that can be used by the firm's employees only.

e. Taking over the competitor's business in an attempt to establish a monopoly for its product in the market.

b.

Investing in a smokestack filter to reduce sulphur-dioxide emissions to decrease the tax being levied on the firm by the state for pollution it produces each year.

Everything else equal, including firm size, dollar sales, type of product sold, and so forth, the primary difference between proprietorship and partnership business forms is that _____.

a partnership has more owners than a proprietorship

Identify the correct statement about business ethics.

a. Good business ethics result in recurring fines and legal expenses.

b. Good business ethics attract business from customers who appreciate and support specific political parties.

c. Good business ethics reduce the economic viability of the communities where these firms operate.

d. Good business ethics decrease shareholders' trust in the company.

e. Good business ethics attract and keep employees of the highest caliber.

e. Good business ethics attract and keep employees of the highest caliber.

Which of the following statements is true of a hostile takeover?

a. A hostile takeover results when management wants the firm to be taken over.

b. A hostile takeover is most likely to occur when a firm's stock is undervalued relative to its potential.

c. After a hostile takeover, managers of the acquired firm generally retain the positions they had prior to the takeover.

d. A hostile takeover results in poor management and inefficient operations after the takeover is completed.

e. A hostile takeover does not allow managers to take actions that maximize stock prices.

b. A hostile takeover is most likely to occur when a firm's stock is undervalued relative to its potential.

In many countries, the terms under which companies compete, the actions that must be taken or avoided, and the terms of trade of various transactions are determined by _____.

direct negotiation between the host government and the multinational corporation

Which of the following is a disadvantage of the corporate form of business?

a. Setting up a corporation is more complex and time-consuming than setting up a proprietorship or a partnership.

b. A corporation faces difficulty in attracting substantial amounts of funds.

c. Ownership interests cannot be transferred as easily as proprietorship or partnership interests.

d. A corporation is said to have limited life.

e. The owners of a corporation are subject to unlimited personal liability for the business' debts.

a. Setting up a corporation is more complex and time-consuming than setting up a proprietorship or a partnership.

Which of the following statements is correct? Assume everything else equal.

a. Investors generally receive higher returns on investments with low risk than investments with high risk.

b. Riskier assets are more valuable than (preferred to) less risky assets.

c. Investors generally prefer short-term, high-risk assets investments.

d. The sooner cash is received, the more valuable it is.

e. Riskier assets always have higher market values.

d. The sooner cash is received, the more valuable it is.

Paying Payroll Service (PPS) recently declared bankruptcy. The price of PPS's stock has dropped from approximately $10 per share one year ago to $1 today. You can imagine that stockholders are not happy that the value of their stock has dropped so significantly. At the same time the financial position of the firm was deteriorating, PPS executives increased their salaries and perquisites substantially. Nothing they did violated any laws or was considered an unethical act. We would most likely describe this situation as _____.

an agency problem

Which of the following statements is correct?

a. An agency relationship exists when one or more persons hire another person to perform some service but withhold decision-making authority from that person.

b. Given the multi-owner nature of most large corporations, the agency costs associated with perquisite consumption are not really a problem.

c. Managers may operate in the stockholders' best interests, but they may also operate in their own personal best interests. As long as managers stay within the law, there simply are not any effective controls that stockholders can implement to affect managerial decision making.

d. The potential for agency problems is greatest when individual stockholders own extremely small proportions of the companies and managers have little, if any, of their own wealth tied up in these companies.

e. Managers rule out any potential conflicts of interest with the shareholders by selling...

d. The potential for agency problems is greatest when individual stockholders own extremely small proportions of the companies and managers have little, if any, of their own wealth tied up in these companies.

Which of the following financial statements shows a firm's financing activities (how funds were generated) and investment activities (how funds were used) over a particular period of time?

Statement of retained earnings

b. Proxy statement

c. Income statement

d. Balance sheet

e. Statement of cash flows

e. Statement of cash flows

Which of the following is an example of a noncash item reported in the income statement of a firm?

a. Depreciation

b. Taxes

c. Interest

d. Net sales

e. Dividends

a. Depreciation

All firms that are publicly traded in the United States will be required to adopt the _____ in the near future.

International Financial Reporting Standards (IFRS)

Emerald Corporation's current ratio is 0.5, while Ruby (Emerald's competitor) Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?

a. The current ratios of both firms will be increased.

b. Only Emerald Corporation's current ratio will be increased.

c. The transactions will have no effect on the current ratios.

d. Only Ruby Company's current ratio will be increased.

e. The current ratios of both firms will be decreased.

b. Only Emerald Corporation's current ratio will be increased

Ruby Enterprises Ltd. has long-term bonds worth $20 million, retained earnings of $45 million, accounts payable of $10 million, notes payable of $12 million, and inventory worth $18 million. What is the value of total liabilities of Ruby Enterprises?

a. $60 million

b. $85 million

c. $87 million

d. $42 million

e. $105 million

d. $42 million

Long-term bonds (20mil) + AP (12mil) + NP (10mil) = 42mil

Alumbat Corporation has $800,000 in debt outstanding, and pays an interest rate of 10 percent annually on its bank loan. Alumbat's annual sales are $3,200,000, its average tax rate is 40 percent, and its net profit margin on sales is 6 percent. If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result. What is Alumbat's current times interest earned ratio?

a. 3.4 times

b. 4.0 times

c. 3.6 times

d. 5.0 times

e. 2.4 times

d. 5.0 times

TIE = EBIT/Interest

Which of the following provides information about a firm's performance during the past year and also provides information regarding new developments that will affect the future performance of the firm?

a. A memorandum of understanding

b. Articles of incorporation

c. Proxy statements

d. The annual report

e. A DuPont chart

d. The annual report

Which of the following financial statements is prepared to show the changes in the common equity accounts between balance sheet dates?

a. Income statement

b. Statement of cash flows

c. Statement of retained earnings

d. Pro forma statement

e. Proxy statement

c. Statement of retained earnings

If a firm's existing quick ratio is 1.2, and all other variables remain unchanged, the quick ratio can be increased by _____.

receiving interest income

Market value ratios indicate _____.

what investors think of the company's future prospects based on its past performance

Which of the following is the most appropriate measure to examine whether management of a firm is pursuing the goal of maximizing the firm's stock price?

a. Earnings per share

b. Accounting profits

c. Retained earnings

d. Cash flows

e. Net income

d. Cash flows

A firm has total interest charges of $10,000 per year, sales of $1 million, a tax rate of 40 percent, and a net profit margin of 6 percent. What is the firm's times interest earned ratio?

11 times

Which of the following ratios shows the relationship between a firm's current assets and its current liabilities?

a. Asset management ratios

b. Liquidity ratios

c. Debt management ratios

d. Profitability ratios

e. Market value ratios

b. Liquidity ratios

Which of the following is considered a use of cash in a cash flow statement?

e. Increase in fixed assets

Which of the following is considered by analysts when comparing the operations of two firms that are financed differently?

a. Gross profit

b. Retained earnings

c. Total assets

d. Earnings before interest and taxes

e. Net sales

d. Earnings before interest and taxes

The funds provided by common stockholders that consist of common stock, paid-in capital, and retained earnings are referred to as the firm's ______.

a. net cash flows

b. cash equivalents

c. accruals

d. market value

e. net worth

e. net worth

The proportion of a firm's funds that is provided by shareholders is equal to _____.

1 minus the debt ratio

Which of the following ratios indicate how much investors are willing to pay for a firm's stock for each dollar of reported profits?

a. Price/earnings ratio

b. Market-to-book ratio

c. Earnings per share

d. Net profit margin

e. Return on equity

a. Price/earnings ratio

Which of the following financial statements summarizes the revenue generated and the expenses incurred by a firm during the accounting period?

a. Proxy statement

b. Balance sheet

c. Statement of retained earnings

d. Income statement

e. Statement of cash flows

d. Income statement

Daisy Inc.'s book value per share is $10, and its market-to-book ratio is 1.5. If its earnings per share is $2.5, calculate its price/earnings (P/E) ratio.

P/E = 6.0

A limitation of ratio analysis is that _____.

firms can employ window-dressing techniques to make their financial statements look better

Which of the following transactions will not affect the quick ratio of a company?

a. Inventory sold on credit

b. Accounts receivable collected

c. Payment for accounts payable

d. Bank loan repaid

e. Cash purchase of equipment

b. Accounts receivable collected

An analysis of a firm's financial ratios over time used to determine the improvement or deterioration in its financial situation is called _____.

trend analysis

Which of the following mathematical expressions calculates the debt ratio?

a. Debt ratio = Long-term liabilities ÷ Current liabilities

b. Debt ratio = Interest charges ÷ Total liabilities

c. Debt ratio = Total liabilities ÷ Total assets

d. Debt ratio = Net operating income ÷ Total debt

e. Debt ratio = Sales ÷ Total liabilities

Debt ratio = Total liabilities ÷ Total assets

Which of the following statements is true regarding debt ratios?

a. Firms with relatively low debt ratios have higher expected returns when business is good.

b. Firms with relatively low debt ratios are exposed to more risk compared to firms with relatively high debt ratios.

c. Firms with relatively high debt ratios have higher expected returns when business is good.

d. Firms with relatively high debt ratios have higher expected returns when business is bad.

e. Firms with relatively low debt ratios have higher expected returns when business is poor.

c. Firms with relatively high debt ratios have higher expected returns when business is good.

Which of the following is an example of a current asset?

a. Plant and equipment

b. Common stock

c. Accounts payable

d. Retained earnings

e. Inventory

e. Inventory

Violet Solutions Ltd. has net sales of $850 million, variable operating costs of $475 million, and fixed operating costs including depreciation of $100 million. What is the net operating income of Violet Solutions?

$275 million

_____ is an example of cash flow from an investing activity in a cash flow statement.

a. Repayment of debt

b. Repurchase of stock

c. Purchase of equipment

d. Purchase of inventory

e. Payment of dividends

c. Purchase of equipment

Retained earnings is the total amount of _____.

income that has been saved and reinvested in assets since the firm started business

Which of the following items appears at the top of an income statement when determining the net income of a firm?

a. Earnings before tax

b. Gross profit

c. Retained earnings

d. Net sales

e. Operating costs

d. Net sales

Which of the following statements is true about net worth?

a. A firm's net worth is the amount to be paid by the shareholders to the firm on liquidation of the firm.

b. A firm's net worth should be higher than the stockholders' equity.

c. A firm's net worth should be equal to 50 percent of the value of the total assets of the firm.

d. A firm's net worth is the amount that the firm's assets can generate on their liquidation.

e. A firm's net worth is equal to total assets minus total liabilities.

e. A firm's net worth is equal to total assets minus total liabilities.

Techniques employed by firms to make their financial statements look better than they actually are, are called _____.

window-dressing techniques

Which of the following ratios measures how effectively a firm is managing its assets?

a. Times interest earned ratio

b. Inventory turnover ratio

c. Profit margin ratio

d. Price earnings ratio

e. Quick ratio

b. Inventory turnover ratio

Which of the following statements is true about net worth?

a. A firm's net worth should be equal to 50 percent of the value of the total assets of the firm.

b. A firm's net worth should be higher than the stockholders' equity.

c. A firm's net worth is the amount that the firm's assets can generate on their liquidation.

d. A firm's net worth is the amount to be paid by the shareholders to the firm on liquidation of the firm.

e. A firm's net worth is equal to total assets minus total liabilities.

e. A firm's net worth is equal to total assets minus total liabilities.

Which of the following accounts contains the actual money that can be spent by a firm?

a. Net worth

b. Cash and equivalents

c. Accounts receivable

d. Inventories

e. Notes payable

b. Cash and equivalents

If an analyst's goal is to determine how effectively a firm is managing its assets, which of the following would he or she examine?

a. Quick ratio, debt ratio, and times interest earned

b. Time interest earned, profit margin, and fixed asset turnover ratio

c. Inventory turnover ratio, days sales outstanding ratio, and fixed asset turnover ratio

d. Total assets turnover ratio, price earnings ratio, and return on total assets

e. Profit margin, current ratio, and fixed charge coverage ratio

c. Inventory turnover ratio, days sales outstanding ratio, and fixed asset turnover ratio

Which of the following is the formula to calculate a firm's inventory turnover ratio?

a. Inventory turnover = Inventory ÷ Current assets

b. Inventory turnover = Sales ÷ Inventory

c. Inventory turnover = (Sales - Cost of goods sold) ÷ Inventory

d. Inventory turnover = Cost of goods sold ÷ Inventory

e. Inventory turnover = Inventory ÷ Accounts receivables

d. Inventory turnover = Cost of goods sold ÷ Inventory