What is the primary goal of financial management? A. Increased earnings B. Maxim

Question

What is the primary goal of financial management? A. Increased earnings

B. Maximizing cash flow
C. Maximizing shareholder wealth D. Minimizing risk of the firm

Proper risk-return management means that
A. the firm should take as few risks as possible.
B. the firm must determine an appropriate trade-off between risk and return. C. the firm should earn the highest return possible.
D. the firm should value future profits more highly than current profits.

One of the major disadvantages of a sole proprietorship is A. that there is unlimited liability to the owner.
B. the simplicity of decision making.
C. low organizational costs.

D. low operating costs.

The partnership form of an organization

avoids the double taxation of earnings and dividends found in the corporate form of

organization.

usually provides limited liability to the partners.

has unlimited life.

simplifies decision making.

A corporation is
A. owned by stockholders who enjoy the privilege of limited liability. B. easily divisible between owners.
C. a separate legal entity with perpetual life.
D. All of the above.

Agency theory examines the relationship between the
A. shareholders of the firm and the firm's investment banker. B. owners of the firm and the managers of the firm.
C. board of directors and large institutional investors.
D. shareholders and the firm's transfer agent.

Maximization of shareholder wealth is a concept in which
A. increased earnings is of primary importance.
B. profits are maximized on a quarterly basis.
C. virtually all earnings are paid as dividends to common stockholders. D. optimally increasing the long-term value of the firm is emphasized.

2

When a corporation uses the financial markets to raise new funds, the sale of securities is made in the

A. primary market. B. secondary market. C. online market.
D. third market.

The firm's price-earnings (P/E) ratio is influenced by its A. capital structure.

B. earnings volatility.
C. sales, profit margins, and earnings. D. All of the above.

An item which may be converted to cash within one year or one operating cycle of the firm is classified as a

A. current liability. B. long-term asset. C. current asset.
D. long-term liability.

Asset accounts on the balance sheet are listed in order of A. liquidity.

B. profitability. C. size.
D. importance.

Which of the following is not a primary source of capital to the firm? A. Assets

B. Common stock C. Preferred stock D. Bonds

Which account represents the cumulative earnings of the firm since its formation, minus dividends paid?

A. Paid-in capital
B. Common stock
C. Retained earnings
D. Accumulated depreciation

The primary disadvantage of accrual accounting is that
A. it does not match revenues and expenses in the period in which they are incurred. B. it does not appropriately measure accounting profit.
C. it does not recognize accounts receivable.
D. it does not adequately show the actual cash flows of the firm.

3

Depreciation is a source of cash inflow because A. it is a non-cash expense.
B. it supplies cash for future asset purchases. C. it is a tax-deductible cash expense.

D. it is a taxable expense.

Ratio analysis can be useful for
A. evaluating the operating performance of the firm
B. comparing performance of the firm against similar firms in industry. C. evaluating company management and physical facilities.
D. All of the above

A short-term creditor would be most interested in

profitability ratios.

asset utilization ratios.

liquidity ratios.

debt utilization ratios.

Asset utilization ratios
A. relate balance sheet assets to income statement sales.
B. measure how much cash is available for reinvestment into current assets. C. are most important to stockholders.
D. measure the firm's ability to generate a profit on sales.

All of the following are common examples of possible distortion in reported income except

A. inflation.
B. treatment of nonrecurring items. C. cash flow statements.
D. reporting of revenue.

Profitability ratios measure
A. the firm’s ability to earn an adequate return on sales, assets, and invested capital. B. overall debt position.
C. ability to pay short-term obligations on time.
D. ability to effectively employ its resources.

In examining the liquidity ratios, the primary emphasis is the firm's A. ability to effectively employ its resources.
B. overall debt position.
C. ability to pay short-term obligations on time.

D. ability to earn an adequate return.

4

Debt utilization ratios
A. estimate the overall debt position of the firm.
B. are used to evaluate the firm in light of its asset base and earning power C. Both A and B.
D. None of the above.

In using a systems approach to financial planning, it is necessary to develop a A. pro forma income statement.
B. cash budget.
C. pro forma balance sheet.

D. All of the above.

The key initial element in developing all pro forma statements is A. a cash budget.

B. an income statement. C. a sales forecast.
D. a collections schedule.

In the development of the pro forma financial statements, the last step in the process is the development of the

A. cash budget.
B. pro forma balance sheet.
C. pro forma income statement. D. capital budget.

Pro forma financial statements are
A. the most comprehensive means of financial forecasting. B. often required by prospective creditors.
C. projections of financial statements for a future period. D. All of the above.

Required production during a planning period will depend on the A. beginning inventory of products.
B. sales during the period.
C. desired level of ending inventory.

D. All of the above.

The need for an increase or decrease in short-term borrowing can be predicted by A. a pro forma income statement.
B. a pro forma balance sheet.
C. a cash budget.

D. None of the above.

5

The percent-of-sales method of financial forecasting
A. is more detailed than a cash budget approach.
B. requires more time than a cash budget approach.
C. assumes that balance sheet accounts maintain a constant relationship to sales. D. provides a month-to-month breakdown of data.

Leverage is:

the use of special forces or effects to produce more than normal results from a given

course of action.

a system of writing off inventory.

equal to zero.

None of the above.

31. At
A. greater than zero.

the break-even point, a firm's profits are

less than zero.

equal to zero.

Not enough information is given to determine.

A weakness of break-even analysis is that it assumes
A. revenue and costs are a linear (constant) function of volume.
B. prices and costs increase when the economy is strong and confidence is high. C. the cost of goods sold goes up as revenue increases.
D. None of the above.

Operating leverage deals with A. cash flows.

B. the impact a change in units sold has on operating income. C. the entire income statement.
D. the entire balance sheet.

Financial leverage deals with
A. the relationship of fixed and variable costs.
B. the amount of debt in the capital structure of the firm. C. the entire income statement.
D. the entire balance sheet.

Combined leverage
A. uses the entire income statement.
B. shows the impact of a change in sales or volume on bottom-line earnings per share. C. Both A and B.
D. None of the above.

6

A firms that chooses a more conservative approach:
A. is not willing to accept additional risk of a higher degree of operating leverage.
B. will only commit to lower level of fixed costs.
C. will substitute more expensive variable costs for more automated plant and equipment. D. All of the above.

Working capital management is primarily concerned with the management and financing of

cash and inventory only.

current assets and current liabilities.

current assets.

receivables and payables.

Permanent current assets are

the same thing as fixed assets.

nonmarketable assets.

current assets that will not be reduced or converted to cash within the normal operating

cycle of the firm.

inventory.

The concept of a self-liquidating asset implies that

the working capital associated with a product will be liquidated within a one-year

period.

all the product will be sold, receivables collected, and bills paid within the normal

operating cycle of the firm.

assets associated with the production of a product will be liquidated over the

depreciable life of the assets.

self-liquidating assets will be financed by long-term sources of capital.

Using the level production method:
A. allows the company to use manpower and equipment more efficiently at a lower cost. B. may cause large build-ups in inventory when sales are slack.
C. may cause inventory to drop rapidly during peak demand periods.
D. All of the above.

Ideally, which of the following type of assets should be financed with long-term financing?

A. Fixed assets only
B. Fixed assets and temporary current assets C. Fixed assets and permanent current assets D. Temporary and permanent current assets

7

Generally, more use is made of short-term financing because
A. short-term interest rates are generally lower than long-term interest rates. B. most firms do not have basic access to the capital markets.
C. short-term financing is usually more predictable than long-term financing. D. Both A and B.

Yield curves change daily to reflect
A. changing conditions in the money and capital markets. B. new inflation expectations.
C. changing conditions in the overall economy.
D. All of the above.

In managing cash and marketable securities, what should be the manager's primary concern?

A. Maximization of profit
B. Maximization of liquid assets C. Acceptable return on investment D. Liquidity and safety

Which of the following is not a valid reason for holding cash? A. To meet transaction requirements
B. To earn the highest return possible
C. To satisfy emergency needs for funds

D. To provide a compensating balance for a bank

The difference between the amount of cash on the firm's books and the amount credited to it by its bank is

A. an overdraft.
B. interest revenue.
C. extended disbursement. D. float.

The three primary policy variables to consider when extending credit include all of the following except

A. credit standards.
B. the level of inflation. C. the terms of trade. D. collection policy.

The costs of carrying inventory include
A. the interest on funds tied up in inventory.
B. the cost of warehouse space, insurance premiums, and material handling expenses. C. implicit costs associated with the risk of obsolescence and perishability.
D. All of the above.

8

Use of the economic order quantity
A. determines the reorder point.
B. provides the lowest overall inventory costs. C. determines the safety stock.
D. None of the above.

Benefits of a just-in-time inventory ordering systems include
A. reduction in warehouse space.
B. reduction in construction and overhead expenses for utility and manpower. C. elimination of waste.
D. All of the above.

Explanation / Answer

Financial management is used to analyse the various decisions taken. If the decision increases firm value, decisions will be accepted otherwise not.

Hence, Correct option is (c) Maximizing shareholder wealth.

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