AE 191 Financial Management 1

Midterm – Test 1
Instruction: Choose the best answer.

Although conforming to social values may not lead in the most optimal use of assets or the lowest prices, it will enhance the firm's image.
True False
After estimation of the amount required and the selection of assets required to be purchased, the next financing decision comes into the picture.
True False
Accounting involves reporting past financial transactions in a meaningful form of financial statements whereas financial management involves
planning about the future by analyzing and interpretation of financial statements.
True False
The treasurer’s focus tends to be more internal, whereas the controller’s focus is more external.
True False
Manufacturing and marketing are critical for the survival of a firm because these areas determine what will be produced and how these products
will be sold. These two departments can survive without the need of a finance manager.
True False
_____ is concerned with the maximization of a firm's stock price.
Shareholder wealth maximization Stakeholder welfare maximization
Profit maximization Maximization of EPS (Earnings Per Share)
To whom does the Treasurer most likely report?
Vice President for Operations Chief Executive Officer
Chief Financial Officer Board of Directors
The focal point of financial management in a firm is:
the pesos profit earned by the firm the minimization of the amount of taxes paid by the firm
the number and types of products or services provided by the the creation of value for shareholders.
firm
The market price of a share of common stock is determined by:
the board of directors of the firm the president of the company
individuals buying and selling the stock the stock exchange on which the stock is listed
Financial manager's roles include the following, except:
developing financial plans or budgets
extending credit to customers
evaluating proposed large expenditures
developing marketing strategies for the firm's new product
Which of the following statements is false?
The treasurer would be responsible for activities such as managing cash balances, granting credit to customers and managing the process of
issuing new securities.
The optimal capital structure is the best combination of long-term debt and equity.
It is necessary to determine the appropriate risk-return trade-off to maximize the market value of the firm for its shareholders.
The financing decision involves the process of allocating funds for investment in competing assets.
A common argument against corporate involvement in socially responsible behavior is that
It encourages government intrusion in decision making.
In a competitive market, such behavior incurs costs that place the company at a disadvantage.
It creates goodwill.
As a legal person, a corporation is accountable for its conduct.
Proper-risk return management means that
consistent with the objectives of the firm, an appropriate trade-off between risk and return should be determined.
the firm should take as few risks as possible.
the firm should earn highest return possible.
the firm should value future profits more highly than current profits.
Working capital management is managing
short term assets and liabilities only short-term assets
long terms liabilities long term assets
Financial leverage aids in the assessment of ________.
business risk operational risk
financial risk market risk
A difference between debt financing and equity financing is that:
equity financing must be repaid, while repayment of debt financing is not required.
debt financing must be repaid, while repayment of equity financing is not required.
only debt financing can be used to purchase assets.
only equity financing can be used to purchase assets
The mix of debt and equity in a firm is referred to as the firm's _______.
Primary capital. Cost of capital.
Capital structure. Capital composition.
________ is concerned with the acquisition, financing, and management of assets with some overall goal in mind.
Financial management. Social responsibility.
Agency theory. Profit maximization.
Shareholder's wealth depends on both the dividends paid and the market price of the equity shares.
True False

The decision function of financial management can be broken down into the _________ decisions.
financing and investment financing and dividend
capital budgeting, cash management, and credit management investment, financing, and asset management
Which of the following is not normally a responsibility of the controller of the modern corporation?
Forecasts and Budgets Cost accounting
Asset management Financial reporting
The controller's responsibilities are primarily ____ in nature, while the treasurer's responsibilities are primarily related to _____.
operational; financial management financial management; accounting
accounting; financial management financial management; operations
The long-run objective of financial management is to:
maximize earnings per share maximize return on investment
maximize market share maximize the value of the firm's common stock
Advantages of this business type are that the owner is their own boss and gets to keep all the profits.
Partnership Sole Proprietorship
Corporation Franchise
CP and A want to start a clothing business together. What is an advantage of organizing the business as a corporation rather than a partnership?
Corporations can be started up quickly. Corporation has a wider source of capital.
Corporate owners have unlimited legal liability. Corporations need a legal charter to begin.
The partnership form of 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.
Statement 1: One characteristic of a corporation is that its owners are personally liable for any losses incurred by the business.
Statement 2: The personal liability of a partner is limited to the amount of his investment.
Statement 1: TRUE; Statement 2: FALSE Statement 1: FALSE; Statement 2: TRUE
Statement 1: FALSE; Statement 2: FALSE Statement 1: TRUE; Statement 2: TRUE
Statement 1: For accounting reporting purposes, the personal assets and debts of a business owner should be combined with the assets and debts
of the business.
Statement 2: Stockholders are allowed to withdraw their investment under any circumstances.
Statement 1: TRUE; Statement 2: FALSE Statement 1: FALSE; Statement 2: TRUE
Statement 1: FALSE; Statement 2: FALSE Statement 1: TRUE; Statement 2: TRUE
Statement 1: Commercial partnership is a tax-exempt entity.
Statement 2: Sole proprietors can report to their own income tax return the income from business.
Statement 1: TRUE; Statement 2: FALSE Statement 1: FALSE; Statement 2: TRUE
Statement 1: FALSE; Statement 2: FALSE Statement 1: TRUE; Statement 2: TRUE
All of the following are functions of the financial manager except
Analyzing and planning the company's performance. Allocating the funds to the most profitable asset.
Anticipating the company's financial needs. Assigning the market price of the company's stock.
Technically, outsourcing means:
using an organization's own personnel or other resources to accomplish a task
the delegation of non-core operations from internal production to an external entity specializing in the management of that operation
buying resources from outside a company’s main domestic market
spread of products, technology, information, and jobs across national borders and cultures.
Statement 1: An organization opted outsourcing in the interest of lowering firm costs or to make more efficient use of worldwide labor, capital,
technology and resources.
Statement 2: One criticism of outsourcing is that product quality suffers.
Statement 1: TRUE; Statement 2: FALSE Statement 1: FALSE; Statement 2: FALSE
Statement 1: TRUE; Statement 2: TRUE Statement 1: FALSE; Statement 2: TRUE
How is it possible for a firm to be profitable and still go bankrupt?
Earnings have increased more rapidly than sales.
The firm has positive net income but has failed to generate cash from operations.
Net income has been adjusted for inflation.
Sales have not improved even though credit policies have been eased.
Corporate social responsibility is
Effectively enforced through the controls envisioned by classical economics
The obligation to shareholders to earn a profit
The duty to embrace service to the public interest
The obligation to serve long-term organizational interests
Which if the following statement is true?
The higher the profit of a firm, the higher the value of the firm is assured of receiving in the market.
Social responsibility and profit maximization are synonymous.
Maximizing the earnings of the firm is the primary goal of financial management.
There are some serious problems with the financial goal of maximizing the earnings of the firm.