CHAPTER 1

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
26. To start a business, the owners need
A) a market where there is demand for their product.
B) a clear vision of what products or services they want to produce.
C) the know-how to successfully market their product.
D) all of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
27. A stakeholder is
A) anyone geographically close to the firm's headquarters.
B) anyone with a claim on the cash flows of the firm.
C) any governmental agency.
D) all of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
28. If you have loaned capital to a firm, then you could be

A) a shareholder.
B) a stakeholder.
C) a partner.
D) all of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Medium
29. Which of the following are stakeholders?
A) a shareholder
B) a lender
C) the IRS
D) all of the above
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Medium
30. A trademark is an example of
A) a productive asset.
B) an intangible asset.
C) a nebulous asset.
D) none of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Medium
31. Which of the following is a basic source of funds for the firm?
A) debt
B) equity
C) asset liquidations
D) a and b above
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
32. The cash remaining after the firm has met its operating expenses, payments to creditors,
and taxes is called
A) earnings per share.
B) capital contributed in excess of par.
C) residual cash.
D) assets.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
33. Cash dividends are paid out of
A) residual cash.
B) liquidated assets.
C) long-term debt.
D) all of the above.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Medium
34. Current liabilities are liabilities that
A) will be converted to cash within a year.
B) must be paid within a year.
C) will be converted to equity within a year.
D) none of the above
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Medium
35. Capital budgeting involves
A) how a firm's day-to-day financial matters should be managed.
B) how the firm should finance its assets.
C) which productive assets the firm should employ.
D) all of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
36. Working capital management decisions involve
A) how a firm's day-to-day financial matters should be managed.
B) how the firm should finance its assets.
C) which productive assets the firm should employ.
D) all of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Medium
37. Capital budgeting decisions generally involve
A) the fixed asset portion of the balance sheet.
B) the short-term portion of the balance sheet.
C) the current liability portion of the balance sheet.
D) all of the above.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
38. A good capital budgeting decision is
A) one in which the benefits of the project are equal to the cost of the asset.
B) one in which the benefits of the project are less than the cost of the asset.
C) one in which the benefits of the project are more than the cost of the asset.
D) all of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Medium
39. Financial markets in which equity and debt instruments with maturities greater than one
year are traded are called
A) money markets.
B) capital markets.
C) stock markets.
D) none of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
40. Profitability of a firm can be negatively affected by
A) too much inventory.
B) too little inventory.
C) either a or b.
D) neither a nor b.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Easy
41. About 75 percent of all businesses in the United States are
A) sole proprietorships.
B) partnerships.
C) corporations.
D) limited liability partnerships.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Medium
42. Which of the following business organizational forms subjects the owner(s) to
unlimited liability?
A) sole proprietorship
B) partnership
C) corporation
D) a and b
Ans:

Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Medium
43. Which of the following business organizational forms creates a tax liability on income
at the personal income tax rate?
A) sole proprietorship
B) partnership
C) corporation
D) a and b
Ans:

Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Medium
44. Which of the following business organizational forms is easiest to raise capital?
A) sole proprietorship
B) partnership
C) corporation
D) a and b
Ans:

Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Easy
45. Which of the following owners is protected by limited liability?
A) a sole proprietor
B) a general partner
C) a limited partner
D) none of the above
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Medium
46. Which of the following cannot be engaged in managing the business?
A) a sole proprietor
B) a general partner
C) a limited partner
D) none of the above
Ans:

Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Easy
47. Which organizational form accounts for 90 percent of the revenues of all firms in the
United States?
A) sole proprietorship
B) partnership
C) corporation
D) a and b
Ans:

Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Easy
48. Which organizational form best enables a firm to sell its securities to the market?
A) sole proprietorship
B) partnership
C) private corporation
D) public corporation
Ans:

Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Easy
49. Which of the following organizational forms is subject to the most SEC regulations?
A) sole proprietorship
B) partnership
C) private corporation
D) public corporation
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Medium
50. Which organizational form best enables the owners of the firm to monitor the actions of
other owners of the same firm?
A) sole proprietorship
B) partnership
C) private corporation
D) public corporation
Ans:

Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Medium
51. Which of the following is considered a hybrid organizational form?
A) sole proprietorship
B) partnership
C) corporation
D) limited liability partnership
Ans:

Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Easy
52. Which of the following reports directly to the owners of the firm (assume the firm is a
public corporation)
A) CFO
B) CEO
C) board of directors
D) audit committee
Ans:

Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Easy
53. Which of the following is responsible for seeing that the best possible financial analysis
is presented?
A) CFO
B) CEO
C) board of directors
D) audit committee
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Medium
54. Which of the following is responsible for performing an independent audit of the firm's
financial statements?
A) CFO
B) CEO
C) CPA firm
D) audit committee
Ans:

Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Easy

55. How is the CPA firm insulated from being pressured by management?
A) The audit committee approves hiring, firing and fees paid to external auditors.
B) The chairman of the board approves the external auditor's fees as well as the
engagement letter.
C) The IRS approves the external auditor's fees as well as the engagement letter.
D) The CPA firm is not insulated from management.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 4
Level of Difficulty:  Easy
56. Which of the following is an appropriate goal for the firm?
A) profit maximization
B) revenue maximization
C) shareholder wealth maximization
D) tax minimization
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 4
Level of Difficulty:  Easy
57. When analysts and investors determine the value of a firm's stock, they should consider
A) the size of the expected cash flows associated with owning the stock.
B) the timing of the cash flows.
C) the riskiness of the cash flows.
D) all of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Medium
58. One reason for the existence of agency problems between managers and share holders
is that
A) there is a separation of ownership and control of the firm.
B) managers know how to manage the firm better than shareholders.
C) shareholders have unreasonable expectations about managerial performance.
D) none of the above
Ans:

Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Medium
59. Which of the following is a principal within the agency relationship?
A) a company engineer
B) the CEO of the firm
C) a shareholder
D) the board of directors
Ans:

Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Easy
60. Shareholders elect ______________ to represent their interest in the firm.
A) a chairman
B) CEO
C) a board of directors
D) all of the above
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Medium
61. An example of a direct agency cost is
A) a manager turning down a value-contributing project because of its risks.
B) a manager expensing a large dinner on the company expense report.
C) a manager using too little debt within the firm's capital structure because of the
additional risk associated with debt.
D) all of the above
Ans:

Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Medium
62. Which of the following can help align the behavior of managers with the goals of
shareholders?
A) management compensation
B) managerial labor markets
C) an independent board of directors
D) all of the above
Ans:

Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Easy

63. If a firm has had an agency problem that is reflected in a poor performing stock for a
long period of time, then the firm may become a target of _________________.
A) an SEC investigation.
B) a corporate raider.
C) an IRS investigation.
D) a bankruptcy lawyer.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Medium

64. Executives that repeatedly put their own interests before that of the firm may find that
they have difficulty finding another job after their current one. This is an example of
A) the managerial labor market disciplining managers.
B) the market for corporate control.
C) the board of directors affecting the prospects of a manager.
D) none of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Easy
65. Who or what is responsible for setting the agenda at meetings of the board of directors?
A) chairman of the board of directors
B) president
C) nominating committee
D) audit committee
Ans:

Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Easy
66. A director who is not an employee of the firm is called
A) an executive director.
B) an inside director.
C) an independent director.
D) an official director.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Easy
67. Which of the following is NOT one of the strategies incorporated in the Sarbanes-
Oxley Act of 2002?
A) attain greater board independence
B) establish compliance programs
C) establish ethics programs
D) dictate maximum compensation levels
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Medium
68. Which of the following powers does the audit committee have the authority to do?
A) audit the personal bank account of the CEO
B) question any person employed by the firm
C) audit the compensation files of firms in the same industry
D) none of the above
Ans:

Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Easy
69. What is the major complaint concerning the Sarbanes-Oxley Act of 2002 by firms?
A) the legislative maximum allowable compensation for a CEO
B) the legal requirement to disclose project information
C) the cost of compliance
D) the cost of maintaining an SEC-employed officer at the firm's premises
Ans:

Format:  Multiple Choice
Learning Objective:  LO 6
Level of Difficulty:  Medium
70. A society's ideas about what actions are right and wrong are
A) morals.
B) ethics.
C) laws.
D) unwritten laws.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 6
Level of Difficulty:  Easy
71. The golden rule is an example of
A) a current law.
B) an historical law.
C) an unworkable rule in financial markets.
D) an ethical norm.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 6
Level of Difficulty:  Medium
72. An example of an economy that had trouble establishing a stock market and attracting
foreign investment is
A) Russia.
B) China.
C) the Czech Republic.
D) Japan.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 6
Level of Difficulty:  Easy
73. Corruption in business
A) creates inefficiencies in an economy.
B) inhibits growth in an economy.
C) slows the rate of economic growth in a country.
D) all of the above
Ans:

Format:  Multiple Choice
Learning Objective:  LO 6
Level of Difficulty:  Medium
74. Which corporate officer, when he or she is guilty of serious misconduct, can subject the
firm to the most serious losses in financial wealth?
A) CEO
B) CFO
C) Chief Technology Officer
D) Chief Risk Officer
Ans:
 CHAPTER 3
26. Annual reports are prepared by a firm's management to
A) communicate to shareholders the firm's failures in the previous year.
B) provide 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.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
27. 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 reports.
D) rules for how a company can issue stock to raise money.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
28. Accounting standards prescribed by GAAP are important because
A) they make the financial statements of all firms standardized.
B) they allow one to examine a firm's performance over time.
C) they make it possible for management or analysts to compare the firm's
performance to that of other competitors.
D) all of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Medium
29. 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
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
30. 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.
E) the matching principle.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
31. 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
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
32. Dell Computer Corporation has receivables of $2.5 million and inventory worth $1.8
million. The firm plans to borrow $2 million for working capital purposes from Austin
First National Bank. In evaluating the loan request, the bank should place the most
emphasis on
A) the matching principle.
B) the realization principle.
C) the going-concern assumption.
D) the assumption of arm's-length transactions.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Medium
33. 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 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
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Medium
34. Tyson Corporation bought raw materials on April 23, 2008 and also on July 2, 2008.
Products produced in 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.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Medium
35. According to the realization principle, revenue from a sale of the 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.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Medium
36. 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.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Easy
37. The cost principle states that an asset should be recognized on the balance sheet at
A) 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 less the accumulated depreciation on the asset.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Medium
38. Trekkers Footwear bought a piece of machinery on January 1, 2006 at a cost of $2.3
million, and the machinery is being depreciated annually at an amount of $230,000 for
10 years. Its market value on December 31, 2008 is $1.75 million. The firm's
accountant is preparing its financial statement for the fiscal year end on December 31,
2008. The asset's value should be recognized on the balance sheet at
A) $2.3 million.
B) $1.61 million.
C) $230,000.
D) $1.75 million.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Medium
39. The conventional way of preparing a balance sheet is to list all assets in the order of
their
A) market value.
B) risk.
C) liquidity.
D) historical cost.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Medium
40. Petra, Inc., has $400,000 as current assets, $1.225 million as plant and equipment, and
$250,000 as goodwill. In preparing the balance sheet, these assets should be listed in
which of the following orders?
A) current assets, goodwill, and plant and equipment
B) current assets, plant and equipment, and goodwill
C) goodwill is not an asset and is not listed here
D) none of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Medium

41. When prices are rising, valuing ending inventory using the FIFO method rather than
LIFO gives
A) inventory a higher value but lowers net income.
B) inventory a lower value and also lowers net income.
C) both inventory and net income a higher value.
D) inventory a lower value and net income a higher value.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Medium
42. When prices are falling, valuing inventory using the LIFO method rather than FIFO
gives
A) inventory a higher value but lowers net income.
B) inventory a lower value and also lowers net income.
C) both inventory and net income a higher value.
D) inventory a lower value and net income a higher value.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Medium
43. Which one of the following is NOT true about goodwill?
A) It is an intangible asset.
B) It represents the value of all unrecorded assets acquired in a merger.
C) It equals the premium paid over the fair market value of the assets acquired in a
merger.
D) When goodwill appears on a firm's balance sheet, it reduces the firm's net worth
by that amount.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Medium
44. Which of the following is NOT true about treasury stock?
A) It is the firm's own shares repurchased in the market by the firm.
B) It can be reissued under stock option and other employee benefit plans.
C) It lowers the value of the company.
D) It increases the net worth of the company.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Medium
45. The major disadvantages of market-value accounting include
A) the difficulty in estimating the current value for some assets.
B) the difficulty in applying some of the valuation models used to estimate market
values.
C) the resulting numbers are potentially open to abuse.
D) All of the above are disadvantages of market-value accounting.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 4
Level of Difficulty:  Medium
46. Which one of the following does NOT belong on an income statement?
A) depreciation and amortization
B) goodwill
C) extraordinary items
D) nonrecurring expenses
Ans:

Format:  Multiple Choice
Learning Objective:  LO 4
Level of Difficulty:  Medium
47. Which one of the following are NOT all noncash items?
A) depreciation, deferred taxes, and prepaid expenses
B) depletion charges, taxes, and amortization
C) depletion charges, deferred taxes, and prepaid expenses
D) depreciation, amortization, and prepaid taxes
Ans:

Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Medium
48. Which one of the following is NOT a cash flow from operating activities?
A) cash payments on the principal of long-term debt
B) payments for utilities and rent
C) payments to purchase raw materials
D) cash receipts from selling goods and services
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Hard
49. Cash flows from financing activities include all but one of the following:
A) cash payments on the principal of long-term debt
B) issuing and paying out on insurance contracts
C) cash purchases of treasury stock
D) cash proceeds from a bank loan
Ans:

Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Hard
50. Which one of the following is NOT a cash flow from investing activities?
A) buying and selling bonds or stock of other firms
B) buying or selling of land, buildings, and plant and equipment
C) cash payments of dividends to shareholders
D) issuing and paying out on insurance contracts
Ans:

Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Medium
51. Trident Corporation had the following cash flows in the current year. Which one of the
following is a financing activity cash flow?
A) Rent on a warehouse amounting to $1.1 million
B) Purchase of $125,000 worth of five-year bonds issued by Towson Utilities
C) Preferred dividends to the tune of $330,000 paid to shareholders
D) Lease income received on a piece of land
Ans:

Format:  Multiple Choice
Learning Objective:  LO 7
Level of Difficulty:  Medium
52. Clarity Music Company has a marginal tax rate of 34 percent and an average tax rate of
32 percent this year. It is planning to construct a new recording studio next year. The
appropriate tax rate to be applied on the income generated from the new studio is
A) the average tax rate.
B) the marginal tax rate.
C) either one.
D) none of the above.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 7
Level of Difficulty:  Medium
53. Which one of the following is NOT true for a corporation?
A) Interest paid on bonds issued last year is tax deductible.
B) Common-stock dividends to be paid this year are not tax deductible.
C) Common-stock dividends to be paid this year will be tax deductible if the firm
has a net loss for the year.
D) Preferred stock dividends to be paid this year are not tax deductible.
Ans:

54. Maddux, Inc., has completed its fiscal year and reported the following
information. The company had current assets of $153,413, net fixed assets of $
412,331, and other assets of $7,822. The firm also has current liabilities worth
$65,314, long-term debt of $178,334, and common stock of $162,000. How much
retained earnings does the firm have?
A) $ 405,648
B) $243,648
C) $167,918
D) $573,566
Ans:
55. Galan Associates prepared its financial statement for 2008 based on the information
given here. The company had cash worth $1,234, inventory worth $13,480, and
accounts receivables of $7,789. The company's net fixed assets are $42,331, and other
assets are $1,822. It had accounts payables of $9,558, notes payables of $2,756,
common stock of $22,000, and retained earnings of $14,008. How much long-term debt
does the firm have?
A) $54,342
B) $76,342
C) $12,314
D) $18,334
Ans:

56. Tumbling Haven, a gymnastic equipment manufacturer, provided the following

information to its accountants. The company had current assets of $145,332, net
fixed assets of $356,190, and other assets of $4,176. The firm has long-term debt
of $76,445, common stock of $200,000, and retained earnings of $134,461. What
amount of current liabilities does this firm have?
A) $94,792
B) $505,678
C) $171,217
D) none of the above
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57. Teakap, Inc., has current assets of $ 1,456,312 and total assets of $4,812,369 for
the year ending September 30, 2006. It also has current liabilities of $1,041,012,
common equity of $1,500,000, and retained earnings of $1,468,347. How much
long-term debt does the firm have?
A) $1,844,022
B) $2,303,010
C) $2,123,612
D) $803,010
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58. Chandler Sporting Goods produces baseball and football equipment and lines of
clothing. This year the company had cash and marketable securities worth
$335,485, accounts payables worth $1,159,357, inventory of $1,651,599,
accounts receivables of $1,488,121, short-term notes payable worth $313,663,
and other current assets of $121,427. What is the company's net working capital?
A) $3,596,632
B) $1,801,784
C) $2,123,612
D) $1,673,421
Ans:
59. Tre-Bien Bakeries generated net income of $233,412 this year. At year end, the
company had accounts receivables of $47,199, inventory of $63,781, and cash of
$21,461. It also had accounts payables of $51,369, short-term notes payables of
 $11,417, and accrued taxes of $6,145. The net working capital of the firm is
A) $68,931
B) $63,510
C) $69,655
D) none of the above
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60. Spartan, Inc., is a manufacturer of automobile parts located in Greenville, South

Carolina. At the end of the current fiscal year, the company had net working capital of
$157,903. The company showed accounts payables of $94,233, accounts receivables of
$83,112, inventory of $171,284, and cash and marketable securities of $12,311. What
amount of notes payables does the firm have?
A) $14,571
B) $26,882
C) $15,471
D) none of the above
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introduction-to-sociology/ch03-meer-kennis-toevoegen-kennis-toevoegen-
labhkjebfksajfbkasjfbajsvhfjs/21588753

61. Centennial Brewery produced revenues of $1,145,227 in 2008. It has expenses

(excluding depreciation) of $812,640, depreciation of $131,335, and interest
expense of $81,112. It pays an average tax rate of 34 percent. What is the firm's
net income after taxes?
A) $120,140
B) $248,475
C) $79,292
D) $40,848
Ans:

62. Simplex Healthcare had net income of $5,411,623 after paying taxes at 34 percent. The
firm had revenues of $20,433,770. Their interest expense for the year was $1,122,376,
while depreciation expense was $2,079,112. What was the firm's operating expenses
excluding depreciation?
A) $8,199,429
B) $9,032,853
C) $9,321,805
D) none of the above
Ans:
63. Triumph Trading Company provided the following information to its auditors. For the
year ended March 31, 2008, the company had revenues of $1,122,878, operating
expenses (excluding depreciation and leasing expenses) of $612,663, depreciation
expenses of $231,415, leasing expenses of $126,193, and interest expenses equal to
$87,125. If the company's tax rate was average 34 percent, what is its net income after
taxes?
A) $43,218
B) $65,482
C) $152,607
D) none of the above
Ans:

64. Parrino Corporation has announced that its net income for the year ended June 30,
2008, is $1,824,214. The company had an EBITDA of $ 5,174,366, and its depreciation
and amortization expense was equal to $1,241,790. The company's average tax rate is
34 percent. What is the amount of interest expense for the firm?
A) $2,763,961
B) $939,747
C) $1,187,720
D) $1,168,615
Ans:

65. During 2008, Towson Recording Company increased its investment in marketable
securities by $36,845, funded fixed assets acquisition by $109,455, and had marketable
securities to the tune of $14,215 mature. What is the net cash provided (used) in
investing activities?
A) $132,085
B) $145,940
C) –$132,085
D) none of the above
Ans:
66. Trident Manufacturing Company's treasurer identified the following cash flows
during this year as significant. It had repaid existing debt to the tune of $425,110,
while raising additional debt capital of $750,000. It also repurchased stock in the
open markets for a total of $63,250. It paid $233,144 in dividends to its
shareholders. What is the net cash provided (used) by financing activities?
A) $28,496
B) $91,746
C) –$28,496
D) –$91,746
Ans:
 76. EBIT: Arco Steel, Inc. generated total sales of $45,565,200 during fiscal 2010.
Depreciation and amortization for the year totaled $2,278,260, and cost of goods sold
was $27,339,120. Interest expense for the year was $9,641,300 and selling, general, and
administrative expenses totaled $4,556,520 for the year. What is Arco’s EBIT for
2010?
A) $9,641,300
B) $11,391,300
C) $13,275,030
D) $18,490,000
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80. Statement of Cash Flows – Cash from Financing Activities: Natural Lite, Inc.
reported the following items during fiscal 2010. The firm purchased marketable
securities of $87,500, paid down a long-term loan in the amount of $650,000,
purchased $4,250,000 of new equipment. The firm also sold $6,250,000 of common
stock, paid $350,225 in dividends to its common shareholders, and repurchased
$1,250,000 of common stock in the open market. What is the net cash provided by
financing activities? (Round off to the nearest)
A) $4,575,210
B) $1,733,285
C) $3,999,775
D) $2,467,915
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CHAPTER 4
26. Financial statements can be analyzed from the following three different perspectives:
A) management, regulator, and bondholder
B) management, shareholder, and creditor
C) regulator, shareholder, and creditor
D) shareholder, creditor, and regulator
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 Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
27. Shareholders analyze financial statements in order to:
A) assess the cash flows that the firm will generate from operations/
B) determine the firm's profitability, their return for that period, and the dividend
they are likely to receive.
C) focus on the value of the stock they hold.
D) All of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
28. The creditors of a firm analyze financial statements so that they can focus on
A) the firm's amount of debt.
B) the firm's ability to generate sufficient cash flows to meet all legal obligations
first and still have sufficient cash flows to meet debt repayment and interest
payments.
C) the firm's ability to meet its short-term obligations.
D) All of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
29. A firm's management analyzes financial statement's so that:
A) they can get feedback on their investing, financing, and working capital decisions
by identifying trends in the various accounts that are reported in the financial
statements.
B) similar to shareholders, they can focus on profitability, dividend, capital
appreciation, and return on investment.
C) they can get more stock options.
D) a and b.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
30. Anyone analyzing a firm's financial statements should
A) use audited financial statements only.
B) do a trend analysis.
C) perform a benchmark analysis.
D) All of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 1
Level of Difficulty:  Easy
31. An individual analyzing a firm's financial statements should do all but one of the
following:
A) Use unaudited financial statements.
B) Do a trend analysis.
C) Perform a benchmark analysis.
D) Compare the firm's performance to that of its direct competitors.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Easy
32. All but one of the following is true of common-size balance sheets.
A) Each asset and liability item on the balance sheet is standardized by dividing it by
total assets.
B) Balance sheet accounts are represented as percentages of total assets.
C) Each asset and liability item on the balance sheet is standardized by dividing it by
sales.
D) Common-size financial statements allow us to make meaningful comparisons
between the financial statements of two firms that are different in size.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Easy
33. All but one of the following is true of common-size income statements.
A) Each income statement item is standardized by dividing it by total assets.
B) Income statement accounts are represented as percentages of sales.
C) Each income statement item is standardized by dividing it by sales.
D) Common-size financial statement analysis is a specialized application of ratio
analysis.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 2
Level of Difficulty:  Easy
34. Common-size financial statements:
A) are a specialized application of ratio analysis.
B) allow us to make meaningful comparisons between the financial statements of
two firms that are different in size.
C) are prepared by having each financial statement item expressed as a percentage of
some base number, such as total assets or total revenues.
D) All of the above are true.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Medium
35. Which of the following is true of ratio analysis?
A) A ratio is computed by dividing one balance sheet or income statement by
another.
B) The choice of the scale determines the story that can be garnered from the ratio.
C) Ratios can be calculated based on the type of firm being analyzed or the kind of
analysis being performed.
D) All of the above are true.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Medium
36. Which of the following is NOT true of liquidity ratios?
A) They measure the ability of the firm to meet short-term obligations with short-
term assets without putting the firm in financial trouble.
B) There are two commonly used ratios to measure liquidity—current ratio and
quick ratio.
C) For manufacturing firms, quick ratios will tend to be much larger than current
ratios.
D) The higher the number, the more liquid the firm and the better its ability to pay its
short-term bills.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Easy
37. All but one of the following is true about quick ratios.
A) The quick ratio is calculated by dividing the most liquid of current assets by
current liabilities.
B) Service firms that tend not to carry too much inventory will see significantly
higher quick ratios than current ratios.
C) Inventory, being not very liquid, is subtracted from total current assets to
determine the most liquid assets.
D) Quick ratios will tend to be much smaller than current ratio for manufacturing
firms or other industries that have a lot of inventory.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Easy
38. Which one of the following does NOT change a firm's current ratio?
A) The firm collects on its accounts receivables.
B) The firm purchases inventory by taking a short-term loan.
C) The firm pays down its accounts payables.
D) None of the above.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Easy
39. All else being equal, which one of the following will decrease a firm's current ratio?
A) a decrease in the net fixed assets
B) a decrease in depreciation
C) an increase in accounts payable
D) None of the above
Ans:

Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Easy
40. All but one of the following is true about the inventory turnover ratio.
A) It is calculated by dividing inventory by cost of goods sold.
B) It measures how many times the inventory is turned over into saleable products.
C) The more times a firm can turnover the inventory, the better.
D) Too high a turnover or too low a turnover could be a warning sign.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Medium
41. Which one of the following statements is NOT true?
A) The accounts receivables turnover ratio measures how quickly the firm collects
on its credit sales.
B) One ratio that measures the efficiency of a firm's collection policy is days' sales
outstanding.
C) The more days that it takes the firm to collect on its receivables, the more
efficient the firm is.
D) DSO measures in days, the time the firm takes to convert its receivables into
cash.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Medium
42. One of the following statements is NOT true of asset turnover ratios.
A) Asset turnover ratios measure the level of sales per dollar of assets that the firm
has.
B) The fixed assets turnover ratio is less significant for equipment-intensive
manufacturing industry firms than the total assets turnover ratio.
C) The higher the total asset turnover, the more efficiently management is using total
assets.
D) All of the above are true.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Easy
43. Which one of the following statements is correct?
A) The lower the level of a firm's debt, the higher the firm's leverage.
B) The lower the level of a firm's debt, the lower the firm's equity multiplier.
C) The lower the level of a firm's debt, the higher the firm's equity multiplier.
D) The tax benefit from using debt financing reduces a firm's risk.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Medium
44. If firm A has a higher debt-to-equity ratio than firm B, then
A) firm A has a lower equity multiplier than firm B.
B) firm B has a lower equity multiplier than firm A.
C) firm B has lower financial leverage than firm A.
D) None of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Medium
45. Which one of the following statements is NOT correct?
A) A leveraged firm is more risky than a firm that is not leveraged.
B) A leveraged firm is less risky than a firm that is not leveraged.
C) A firm that uses debt magnifies the return to its shareholders.
D) All of the above statements are correct.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 3
Level of Difficulty:  Easy
46. Coverage ratios, like times interest earned and cash coverage ratio, allow
A) a firm's management to assess how well they meet short-term liabilities.
B) a firm's shareholders to assess how well the firm will meet its short-term
liabilities.
C) a firm's creditors to assess how well the firm will meet its interest obligations.
D) a firm's creditors to assess how well the firm will meet its short-term liabilities
other than interest expense.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 4
Level of Difficulty:  Easy
47. For a firm that has no debt in its capital structure,
A) ROE > ROA.
B) ROE < ROA.
C) ROE = ROA.
D) None of the above.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 4
Level of Difficulty:  Easy
48. For a firm that has both debt and equity,
A) ROE > ROA.
B) ROE < ROA.
C) ROE = ROA
D) None of the above.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 4
Level of Difficulty:  Medium
49. Which one of the following statements is NOT correct?
A) The DuPont system is based on two equations that relate a firm's ROA and ROE.
B) The DuPont system is a set of related ratios that links the balance sheet and the
income statement.
C) Both management and shareholders can use this tool to understand the factors
that drive a firm's ROE.
D) All of the above are correct.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 4
Level of Difficulty:  Easy
50. The DuPont equation shows that a firm's ROE is determined by three factors:
A) net profit margin, total asset turnover, and the equity multiplier
B) operating profit margin, ROA, and the ROE
C) net profit margin, total asset turnover, the ROA
D) ROA, total assets turnover, and the equity multiplier
Ans:

Format:  Multiple Choice
Learning Objective:  LO 4
Level of Difficulty:  Medium
51. Which one of the following is a criticism of equating the goals of maximizing the ROE
of a firm and maximizing the firm's shareholder wealth?
A) ROE is based on after-tax earnings, not cash flows.
B) ROE does not consider risk.
C) ROE ignores the size of the initial investment as well as future cash flows.
D) All of the above are criticisms of ROE as a goal.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 4
Level of Difficulty:  Easy
52. Which one of the following is NOT an advantage of using ROE as a goal?
A) ROE is highly correlated with shareholder wealth maximization.
B) ROE and the DuPont analysis allow management to break down the performance
and identify areas of strengths and weaknesses.
C) ROE does not consider risk.
D) All of the above are advantages of using ROE as a goal.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Medium
53. Which one of the following statements about trend analysis is NOT correct?
A) This benchmark is based on a firm's historical performance.
B) It allows management to examine each ratio over time and determine whether the
trend is good or bad for the firm.
C) The Standard Industrial Classification (SIC) System is used to identify
benchmark firms.
D) All of the above are true statements.
Ans:

Format:  Multiple Choice
Learning Objective:  LO 5
Level of Difficulty:  Medium
54. Peer group analysis can be performed by
A) management choosing a set of firms that are similar in size or sales, or who
compete in the same market.
B) using the average ratios of this peer group, which would then be used as the
benchmark.
C) identifying firms in the same industry that are grouped by size, sales, and product
lines in order to establish benchmark ratios.
D) Only a and b relate to peer group analysis.
Ans:
 Format:  Multiple Choice
Learning Objective:  LO 6
Level of Difficulty:  Hard
55. Limitations of ratio analysis include all but
A) Ratios depend on accounting data based on historical costs.
B) Differences in accounting practices like FIFO versus LIFO make comparison
difficult.
C) Trend analysis could be distorted by financial statements affected by inflation.
D) All of the above are limitations of ratio analysis.
Ans:
58. Liquidity ratio: Zidane Enterprises has a current ratio of 1.92, current liabilities of
$272,934, and inventory of 197,333. What is the firm's quick ratio?
A) 0.72
B) 1.20
C) 1.92
D) None of the above
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59. Liquidity ratio: Ronaldinho Trading Co. is required by its bank to maintain a
current ratio of at least 1.75, and its current ratio now is 2.1. The firm plans to
acquire additional inventory to meet an unexpected surge in the demand for its
products and will pay for the inventory with short-term debt. How much
inventory can the firm purchase without violating its debt agreement if their total
current assets equal $3.5 million?
A) $0
B) $777,777
C) $1 million
D) None of the above
Ans:

61. Efficiency ratio: If Viera, Inc., has an accounts receivable turnover of 3.9 times
and net sales of $3,436,812, what is its level of receivables?
A) $881,234
B) $13,403,567
C) $1,340,357
D) $81,234
Ans:

62. Efficiency ratio: Jason Traders has sales of $833,587, a gross profit margin of
32.4 percent, and inventory of $178,435. What is the company's inventory
turnover ratio?
A) 4.67 times
B) 3.16 times
C) 4.1 times
D) None of the above
Ans:

65. Efficiency ratio: Ellicott City Manufacturers, Inc., has sales of $6,344,210, and a
gross profit margin of 67.3 percent. What is the firm's cost of goods sold?
A) $2,074,557
B) $2,745,640
C) $274,560
D) None of the above
 Ans:
66. Efficiency ratio: Deutsche Bearings has total sales of $9,745,923, inventories of
$2,237,435, cash and equivalents of $755,071, and days' sales outstanding of 49
days. If the firm's management wanted its DSO to be 35 days, by how much will
the accounts receivable have to change?
A) $373,816.23
B) -$373,816.23
C) -$379,008.12
D) $379,008.12
Ans:

67. Coverage ratio: Trident Corp. has debt of $3.35 million with an interest rate of 6.875
percent. The company has an EBIT of $2,766,009. What is its times interest earned?
A) 13 times
B) 12 times
C) 11 times
D) None of the above
Ans:

68. Coverage ratios: Sectors, Inc., has an EBIT of $7,221,643 and interest expense of
$611,800. Its depreciation for the year is $1,434,500. What is its cash coverage ratio?
A) 15.42 times
B) 18.34 times
C) 14.15 times
D) None of the above
Ans:
Profitability ratio: Juventus Corp has total assets of $4,744,288, total debt of
$2,912,000, and net sales of $7,212,465. Their net profit margin for the year is 18
percent. What is Juventus's ROA?
A) 25.6%
B) 18%
C) 27.4%
D) None of the above
Ans:

78. DuPont equation: Andrade Corp has debt of $2,834,950, total assets of
$5,178,235, sales of $8,234,121, and net income of $812,355. What is the firm's
return on equity?
A) 7.1%t
B) 34.7%
C) 28.1%
D) 43.2%
Ans:

79. DuPont equation: Saunders, Inc., has a ROE of 18.7 percent, an equity multiplier of
2.53, sales of $2.75 million, and a total assets turnover of 2.7 times. What is the firm's
net income?
A) $75,281.80
B) $514,250.00
C) $51,425.00
D) $7,528.10
Ans:

80. DuPont equation: Sorenstam Corp has an equity multiplier of 2.34 times, total
assets of $4,512,895, a ROE of 17.5 percent, and a total assets turnover of 3.1
times. Calculate the firm's ROA.
A) 6.23%
B) 4.53%
C) 7.48%
D) 5.79%
Ans:
83. Return on Equity: In the latest year, Photon, Inc. reported $276,000 in net income.
The firm maintains a debt ratio of 30% and has total assets of $3,000,000. What is
Photon's return on equity? (Round off to the nearest 0.1%)
A) 13.1%
B) 14.6%
C) 22.5%
D) 18.7%
Ans: