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Solutions Test Bank For Principles of Managerial Finance

15th Edition by Zutter
Accounting & Finance (New York University)

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Principles of Managerial Finance, 15e (Zutter)

Chapter 1 The Role of Managerial Finance

1.1 Finance and the firm.

1)Afir
mi sabus
ine
ssor
gani
zat
iont
hats
ell
sgoodsands
ervi
ces
.
Answer:TRUE
Diff:
1
Topic:Financ
eandt hefirm
LearningObj.
:LG1
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

2)I
nfinanc
ewes a
ytha
tthegoaloft
hefir
m oughtt
obet
omaxi
mizepr
ofit
s.
Answer:FALSE
Diff:
1
Topic:Financ
eandt hefirm
LearningObj.
:LG1
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

3)Othe
rthingsbe
inge
qual
,iti
sbe
tte
rtor
ece
ivemone
ysoone
rra
the
rthanl
ate
r.
Answer:TRUE
Diff:
1
Topic:ManagingtheFirm
LearningObj
.:LG4
LearningOutc
ome :F-01
AACSB:Anal yti
calThinking

4)Fi
nancialmana gerseval
uat
ingdec
isi
onalt
erna
tive
sorpot
ent
ialac
tionsmus
tcons
ide
r________.
A)onlyrisk
B)onlyreturn
C)eit
herriskorr et
ur n
D)ris
k,return,andt heimpac
tonsharepr
ice
Answe r
:D
Diff:
1
Topic:MaximizeSharehol
derWe
alt
h
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

5)I
fafir
me ar
nsapr
ofit
,itwi
llne
ces
sar
il
yal
soge
ner
ateapos
iti
vec
ashflow.
Answer:FALSE
Diff:
2
Topic:ManagingtheFirm
LearningObj
.:LG4
LearningOutc
ome :F-01
AACSB:Anal yti
calThinking

1
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6)Ifafir
m'sst
ockholde
rsar
eriskavers
e,t
hefir
mcanmakei
tss
toc
khol
der
sbe
tte
roffbye
arni
ngt
he
highes
tpossi
bleret
urnsonit
sinve
s t
me nt
s.
Ans wer:FALSE
Diff:
2
Topic:ManagingtheFirm
LearningObj
.:LG4
LearningOutc
ome :F-01
AACSB:Anal yti
calThinking

7)Whi c
hoft hefol
lowi
ngi
sane
xampl
eofafir
m'ss
take
hol
der
?
A)supplier
s
B)FederalReser
ve
C)me dia
D)compe ti
tors
Answe r
:A
Diff:
1
Topic:WhatAboutStakeholde
rs?
LearningObj
.
:LG3
LearningOut
come :F-01
AACSB:Anal yt
icalThinki
ng

8)Afinanc
ialmanagermus
tchoosebet
wee
nf ouralt
erna
tiveAs
set
s:1,2,3,and4.Eac
has
setc
ost
s$35,
000
andi
se xpect
edtoprovi
deear
ningsove
rathr
e e
-yearper
iodasdes
cri
bedbe low.

Bas
edont hewe
alt
hmaxi
miza
tiongoal
,thefinanc
ialmana
gerwoul
dchoos
e________.
A)Asset1
B)Ass
et2
C)Asse
t3
D)Asset4
Answer:A
Diff:
2
Topic:MaximizeSharehol
derWe
alt
h
LearningObj.
:LG3
LearningOutcome :F-
01
AACSB:Re fle
c t
iveThi
nking

9)I
nthemostrec
entyear
,twodiffe
rentcompani
esgene
rat
edt
hes
amee
arni
ngspe
rshar
e.Thes
toc
ksof
the
setwocompanie
sshouldt
radea tthesamepr
ice
.
Answer:F
ALSE
Diff:
2
Topic:ManagingtheFirm
LearningObj
.:LG4
LearningOutc
ome :F-01
AACSB:Anal yti
calThinking

10)Oner e
asonthatfir
mse xis
tist ha
tmos ti
nves
tor
sareri
ska
ver
se,s
othe
yar
enotwi
ll
ingt
omaket
he
kindsofri
skyinve
s t
me nt
st hatfir
mst ypi
cal
lyundert
ake
.
Ans wer
:F ALSE
Diff:
1
Topic:Financ
eandt
hefir
m
LearningObj.
:LG1
2
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Le
arni
ngOutc
ome :F-01
AACSB:Anal
yti
calThinki
ng

11)Whichofthefol
lowingistr
ueofstakeholders
?
A)Theyaretheowne r
sofafirm.
B)The
yar egroupstowhom afirm hasfinanci
alobli
gati
ons.
C)Theyaregroupshavingadirec
teconomi cli
nkt oafir
m.
D)Theyincl
udeonlyt hebondhol
ders,commons t
ockholde
rs,andpr
efe
rre
dst
ockhol
der
s.
Answer:C
Diff:
1
Topic:WhatAboutStakeholde
rs?
LearningObj
.
:LG3
LearningOut
come :F-01
AACSB:Anal yt
icalThinki
ng

12)Whi chofthefol
lowi ngist
ruer egardingcas
hflow?
A)Pr ofit
sdonotne cessari
lyresulti
nc ashflowsavai
labletot hest
ockhol
ders
.
B)I tisguar antee
dthatt heboardofdi r
e c
torswil
lincreasedividendswhennetc
as hflowsinc
reas
e.
C)Afir m' sinc
omes ta
teme ntwi l
lnevershow apos i
ti
vepr ofitwhenitsc
ashout
flowse xc
eeditsc
ash
inflows .
D)Ani ncreaseinre
venuewi l
lalwaysr esul
tinanincreaseinc as
hflow.
Ans wer :A
Diff:
1
Topic:MaximizeSharehol
derWe
alt
h
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

13)Inve
stor
swhoar
eri
ska
ver
sewi
llmaker
iskyi
nve
stme
ntsasl
ongast
heye
xpe
ctc
ompe
nsa
tionf
or
doingso.
Ans wer
:TRUE
Diff:
1
Topic:ManagingtheFirm
LearningObj
.:LG4
LearningOutc
ome :F-01
AACSB:Anal yti
calThinking

3
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14)Whichofthefol
lowingistrueofcashflowsandr i
sk?
A)Lowercashflow andlowerris
kr e
sultinani ncr
easeins harepri
ce.
B)Higherc
ashflow andlowerr i
skresultinanincreaseinsharepric
e.
C)Highercas
hflow andhigherriskresultinanincreaseinsharepri
ce.
D)Lowercashflow andhigherris
kresultinani nc
reaseins harepr
ice.
Answer:B
Diff:
1
Topic:MaximizeSharehol
derWe
alt
h
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

15)Thegoalofbusi
nes
set
hicsi
stomoti
vatebusi
nessandmarke
tpar
tic
ipantst
oadheretobot
hthel
ett
er
andthespir
itofl
awsandregul
ati
onsi
nallaspe
ctsofbus
ine
ssandprof
essi
onalpr
act
ice.
Answer:TRUE
Diff:
1
Topic:TheRoleofBus
inessEthi
cs
LearningObj
.:LG3
LearningOut
come :F-
01
AACSB:Et hi
calUnders
tandingandRe
asoni
ng

16)Theprimarygoalofafinanc
ialmana
geri
s________.
A)minimizingri
sk
B)maximizingprofit
C)maximizingwe alt
h
D)mi ni
mizingret
ur n
Answe r
:C
Diff:
1
Topic:MaximizeSharehol
derWe
alt
h
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

17)Corporat
eowne rsearnar eturn________.
A)byr eal
izi
nggai nsthroughi ncr
easesi nsharepric
eandi
nte
res
tear
nings
B)byr e
ali
zinggai nsthroughinc r
easesi nsharepri
ceandc
ashdi
vide
nds
C)throughc apit
alappr eci
ati
onandr e
t aine
de arni
ngs
D)throughint e
restearningsande arningspe rshar
e
Answe r:B
Diff:
1
Topic:MaximizeSharehol
derWe
alt
h
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

4
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18)Thewe alt
hoftheowne
rsofac
orpor
ati
oni
sre
pre
sent
edby________.
A)profits
B)earningspe rs
hare
C)shareval ue
D)cashflow
Answe r:C
Diff:
1
Topic:MaximizeSharehol
derWe
alt
h
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

19)Wealthmaximiza
tionast
hegoalofafir
mimpl
iese
nhanc
ingt
hewe
alt
hof________.
A)theaudit
ors
B)thecredi
tor
s
C)thefeder
alres
erve
D)thefir
m'sstoc
kholders
Answer:D
Diff:
1
Topic:MaximizeSharehol
derWe
alt
h
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

20)Theamounte ar neddur
ingt
heac
count
ingpe
riodone
achout
standi
ngs
har
eofc
ommons
toc
kis
cal
led________.
A)dividendpe rshare
B)earningspe rshare
C)netpr ofit
saftertaxes
D)bookval uepers har
e
Answe r:B
Diff:
1
Topic:MaximizeSharehol
derWe
alt
h
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

21)Fir
m Age ne
rat
esmorecas
hflow whi
let
aki
ngl
essr
iskt
hanFi
rm B.Thes
toc
kpr
iceofFi
rm As
houl
d
behigherthant
hestoc
kpri
ceofFir
m B.
Answe r:TRUE
Diff:
2
Topic:ManagingtheFirm
LearningObj
.:LG4
LearningOutc
ome :F-01
AACSB:Anal yti
calThinking

5
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22)Whi chofthefollowingisNOTar easontha

tafirmthatmaxi mizesprofitsmayf ai
ltomaximize
shareholde
rwe alt
h.
A)Thet imingofpr ofit
sma tter
s.Share
hol de
rsmightpref
erl owerprofit
sthatarri
ves ooner
.
B)Ri s
kma tte
rs.Shareholdersareriskaverse
,sotheypref
erle s
sris
kyi nvestmentsthatgener
atel
owe r
profit
s.
C)Shar e
holderwe althdepe ndsonc as
hflow whichisnotthes ameaspr ofit
.
D)Ifafirm maximi zesprofitsbyengaginginunethic
albusinesspract
ices,it
'ss
tockpr i
cema ybe
adve r
sel
yaffect
ed.
Answe r:B
Diff:
2
Topic:ManagingtheFirm
LearningObj
.:LG4
LearningOutc
ome :F-01
AACSB:Anal yti
calThinking

23)________poolinve
stme
ntcapi
tal,makeris
kyinves
tme
ntdec
isi
ons,andmana
ger
iskyi
nve
stme
ntson
behalfofi
nvestor
swhowouldotherwisenotbeablet
odosoownthei
rown.
A)Firms
B)Stockholde
rs
C)Stakeholder
s
D)Re gula
tors
Answe r:A
Diff:
1
Topic:Financ
eandt hefirm
LearningObj.
:LG1
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

24)Fi
nanceis________.
A)thesyst
em ofverif
yi ng,analyzi
ng,andrecor
dingbus i
nes
st r
ansact
ions
B)thesci
enceofthepr oduc t
ion,dis
tri
buti
on,andc ons
umptionofgoodsands e
rvice
s
C)thesci
enceandar tofhow i ndivi
dualsandbusiness
esrai
se,all
oca
te,andi
nvestmone
y
D)theartofme r
chandi si
ngpr oductsandservi
ces
Answer:C
Diff:
1
Topic:Whati
sFinance?
LearningObj
.
:LG1
LearningOut
come :F-01
AACSB:Anal yt
icalThinki
ng

6
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25)I nMar ch2017,Amaz onandCl oroxreporte

dnearl
yide
nti
cale
arningspe
rs hare
,butt
hes
tockpri
ceof
Amaz onwasmor ethans ixti
me shigherthantheClor
oxst
ockpri
ce.Themos tli
kel
yexpl
ana
tionf
orthat
differe
nc eisthat________.
A)Cl oroxisbadf ort hee nvir
onme nt
B)Amaz onisar i
skiercompany
C)i nvestor
ss eebett
e rlong-ter
m prospect
sf orAmazon
D)Amaz onhasmor eshar esofst
ockout s
tanding
Ans we r:C
Diff:
1
Topic:ManagingtheFirm
LearningObj
.:LG4
LearningOutc
ome :F-01
AACSB:Anal yti
calThinking

26)Theweal
thofc
orpor
ateowne
rsi
sme
asur
edbyt
hes
har
epr
iceoft
hes
toc
k.
Answer:TRUE
Diff:
1
Topic:MaximizeSharehol
derWe
alt
h
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

27)Ri
sk,t
hemagni
tudeandti
mingofc
ashflowsar
etheke
yde
ter
minant
sofs
har
epr
ice
,whi
chr
epr
ese
nt
theweal
thoft
heownersi
nthefir
m.
Answer:TRUE
Diff:
1
Topic:MaximizeSharehol
derWe
alt
h
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

28)Ahi
ghe
rear
ningspe
rshar
e(EPS)doe
snotne
ces
sar
il
ytr
ans
lat
eint
oahi
ghe
rst
ockpr
ice
.
Answer
:TRUE
Diff:
1
Topic:MaximizeSharehol
derWe
alt
h
LearningObj.
:LG3
LearningOutcome :F-
01
AACSB:Re fle
c t
iveThi
nking

29)Thepr ofitmaxi
miza
tiongoali
gnor
est
het
imi
ngofr
etur
ns,doe
snotdi
rec
tlyc
ons
ide
rcas
hflows
,and
ignore
sr i
sk.
Ans wer:TRUE
Diff:
1
Topic:MaximizeSharehol
derWe
alt
h
LearningObj.
:LG3
LearningOutcome :F-
01
AACSB:Re fle
c t
iveThi
nking

7
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30)Whe ncons
ideri
ngafir
m'sfinanci
aldeci
si
onalt
ernat
ive
,financ
ialmana
ger
sshoul
dac
ceptonl
ythos
e
act
ionstha
tareexpect
edtomaxi mizeshar
ehol
derval
ue.
Answe r
:TRUE
Diff:
1
Topic:MaximizeShar
e holde
rWe al
th
LearningObj
.:LG3
LearningOutcome:F-01
AACSB:Et hic
alUnders t
andingandReas
oni
ng

31)Anincr
eas
ei nafir
m'sris
kwi l
lal
waysr
esul
tinahi
ghe
rshar
epr
ices
inc
ethes
toc
khol
dermus
tbe
compensa
tedforthegrea
terri
sk.
Answer:FALSE
Diff:
1
Topic:MaximizeSharehol
derWe
alt
h
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

32)Anobj e
cti
ont omanagingafir m onbe hal
fofs t
akehol
dersrat
herthanshar
ehol
dersist
hat________
.
A)stakehol
dersha venoeconomi cinte
restinthefirm
B)stake
holdershaveaninterestonlyinshor t
-te
rm outcomes
C)thereisnoclearwa yt
os at
isfyallst
akeholderswhos eec
onomi ci
ntere
stsmaybeatoddswitheach
other
D)thegoalofmana gi
ngonbe halfofstakeholdersi
stoonarrow
Answe r
:C
Diff:
1
Topic:Financ
eandt hefirm
LearningObj.
:LG1
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

33)Ane ffectiveethi
cspr ogram ________.
A)canwe ake ncorporatevalue
B)hasnoe ffectonac orporati
on'svalue
C)canenhanc eacorporation'
svalue
D)willres ultinhighe mployeea t
trit
ionrat
e
Answe r
:C
Diff:
1
Topic:Ethi
csandShar
ePr i
ce
LearningObj.
:LG3
LearningOutcome:F-
01
AACSB:Et hic
alUnders
tandingandRe
asoni
ng

34)Whe ncons
ideri
ngafir
m'sfinanci
aldeci
si
onalt
erna
tive
,financ
ialmana
ger
sshoul
dac
ceptonl
ythos
e
act
ionstha
tareexpect
edtoinc
re as
ethefir
m'spr
ofit
abi
li
ty.
Answe r
:FALSE
Diff:
1
Topic:MaximizeShar
e holde
rWe al
th
LearningObj
.:LG3
LearningOutcome:F-01
AACSB:Et hic
alUnders t
andingandReas
oni
ng
35)________arethes
tandar
dsofconduc
tormor
alj
udgme
ntt
hatappl
ytope
rsonse
nga
gedi
ncomme
rce
.
A)Gove rnmentr e
gul
ati
ons
B)TheUni form Commerci
alCode
s
C)Ther ulesoffai
rpl
ay
D)Bus i
ne s
sethics
Answe r:D

8
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Diff:
1
Topic:Financ
eandt hefirm
LearningObj.
:LG1
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

36)Cashflowsandr i
skarethekeyde
ter
minant
sins
har
epr
ice
.Inc
reas
edr
isk,ot
hert
hingsr
emai
ningt
he
same,re
sul t
sin________.
A)alowe rsharepri
ce
B)ahighers har
eprice
C)anunc hangedshareprice
D)anunde t
erminedsharepric
e
Answer:A
Diff:
2
Topic:MaximizeSharehol
derWe
alt
h
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

37)Cashflowsandr is
karethekeyde
ter
minant
sins
har
epr
ice
.Inc
reas
edc
ashflow r
esul
tsi
n________,
othe
rthingsr emainingthesame.
A)alowe rsharepr i
ce
B)ahighers hareprice
C)anunc hange dsharepric
e
D)anunde t
ermi ne
ds harepri
ce
Answer:B
Diff:
1
Topic:MaximizeSharehol
derWe
alt
h
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

9
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1.2 Managing the firm.

1)Atre
asure
risr es
pons i
blef
orthefir
m'saccountingac
tivi
ti
es,s
uchasc
orpor
ateac
count
ing,t
ax
management
,financialac
counti
ng,andcostaccounti
ng.
Answer:FALSE
Diff:
1
Topic:LegalFormsofBus i
nessOr
gani
zat
ion
LearningObj.
:LG2
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

2)________de c
isionsfoc
usonhow ac
ompanywil
lspendit
sfinanci
alres
ource
sonlong-
ter
m pr
oje
cts
thatult
ima t
elyde t
erminewhet
hert
hefir
msucc
ess
full
ycre
atesvaluefori
tsowner
s.
A)Investment
B)Financing
C)Wor kingcapital
D)Ri s
kmana geme nt
Ans wer:A
Diff:
1
Topic:ManagingtheFirm
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinking

3)Thepr incipleoftheti
meval ueofmone ybasicall
ys a
ystha t________.
A)be causefirmspa ymana gersagr ea
tde al
,mana gersneedt ous ethei
rtimeveryeffe
cti
vely
B)mone yreceivedtodayismor evaluablethanmone yrec
eive dint hefut
urebecaus
emone yint
hefut
ure
ismor erisky
C)mone yr e
ceivedtodayismor eval
uablethanmone yrecei
ve dint hefut
urebecausefir
msand
indivi
dual scaninvestmone ythe yhavetodayande arnar eturnont ha
tmoney
D)be causeoft heprinc
ipal-a
ge ntproble
m,i nve
storscannott rustthatmoneyfir
mspr omi s
etopayi
nthe
futurewi l
leverar r
ive
Ans we r
:B
Diff:
1
Topic:ManagingtheFirm
LearningObj
.:LG4
LearningOutc
ome :F-01
AACSB:Anal yti
calThinking

4)Thepr i
marypr i
nci
plethatfinanc
eborr
owsf
rom e
conomi
csi
s________.
A)generall
yaccept
edac c
ountingprinc
ipl
es
B)cas
hiski ng
C)marginalcost
-bene
fitanal
ysis
D)share
hol de
rvaluemaxi mizati
on
Answer:C
Diff:
1
Topic:ManagingtheFirm
LearningObj
.:LG4
LearningOutc
ome :F-01
AACSB:Anal yti
calThinking
5)Fi
nanci
ngdeci
sionsde
alwi
tht
hel
eft
-hands
ideoft
hefir
m'sbal
anc
eshe
et.
Answer:FALSE
Diff:
1
Topic:Pri
maryAc t
ivi
tiesoftheFi
nanc
ialMana
ger
LearningObj
.
:LG5
LearningOut
come :F-01
AACSB:Anal yt
icalThinking
10
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6)Whi chofthefollowingac
t i
vit
iesofafinanc
emana
gerde
ter
mine
sthet
ype
sofas
set
sthefir
m hol
ds?
A)budge tal
loca
tion
B)i
nve st
me ntdecisions
C)financi
ngde ci
sions
D)analyzingandpl anni
ngcashflows
Answe r:B
Diff:
1
Topic:Pri
maryAc t
ivi
tiesoftheFi
nanc
ialMana
ger
LearningObj
.
:LG5
LearningOut
come :F-01
AACSB:Anal yt
icalThinking

7)Youownabuildingsupplys t
ore.Todayyous oldconst
ruct
ionma t
erial
stoac
ontract
orfor$10,000t
ha t
youacquir
edawe e
ka gofor$8,000.Youpai dforthema t
eri
alsincas
h,butyousol
dt hemtothe
cont
ract
oroncre
dit,andyoue xpecthi mtopayhi sbi
lli
nafew months.Basedonthisi
nformationduring
theweekyouearne
dapos i
ti
vepr ofitbutexpe
riencedanegati
vecashflow.
Answer:TRUE
Diff:
2
Topic:ManagingtheFirm
LearningObj
.:LG4
LearningOutc
ome :F-01
AACSB:Anal yti
calThinking

8)The r
eisatende ncyforCEOsofl argercompaniestoearnmor emone yt
hanCEOsofs mal
ler
compani e
s.Suppos eaCEO de cidestoac quir
eanothercompany,t husincr
easi
ngt hesi
zeoft
heCEO's
fir
m.Suppos ealsothatthepr i
ceoft hestockoftheacquir
ingfir
mf al
lswhe nitl
earnsoft
heupcomi
ng
acquisi
ti
on.Thisappe arst obeane xampl eof________.
A)aCEO pur suingpr ofitmaxi mizationrathert
hanwe alt
hmaxi mi zat
ion
B)thepr i
nci
pal-
a gentpr oblem
C)aCEO be havingune thi c
ally
D)t hegener
alprincipalt hatacquis
itionsaregeneral
lynotgoodi nvestments
Ans wer:B
Diff:
2
Topic:ManagingtheFirm
LearningObj.
:LG6
LearningOutcome :F-
01
AACSB:Re fle
c t
iveThi
nking

11
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9)Acor
por
ati
on'
sst
ockhol
der
sel
ecti
tsCEO.
Answer
:FALSE
Diff:
1
Topic:ManagingtheFirm
LearningObj.
:LG3
LearningOutcome :F-
01
AACSB:Re fle
c t
iveThi
nking

10)Themone ythatfir
msr
ais
etofinanc
ethe
irac
tivi
ti
esi
scal
led________.
A)thecapit
albudget
B)workingcapi
tal
C)capi
tal
D)accr
uals
Answer:C
Diff:
1
Topic:ManagingtheFirm
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinking

11)Mar
ginalc
ost
-bene
fitanal
ysi
sstat
esthatfinanc
ialdec
isi
onss
houl
dbemadeanda
cti
onss
houl
dbe
take
nonlywhentheadde dbene
fit
sexce
e dtheadde dcost
s.
Answer
:TRUE
Diff:
1
Topic:Rel
ati
onshiptoEconomi
cs
LearningObj
.:LG4
LearningOutcome:F-03
AACSB:Anal ytic
alThinki
ng

12)Thetreasur
ert
ypi
cal
lymana
gesafir
m'sc
ash,i
nve
sti
ngs
urpl
usf
undswhe
navai
labl
eands
ecur
ing
outs
idefinanci
ngwhennee
ded.
Answer:TRUE
Diff:
1
Topic:Rel
ati
onshiptoAccount
ing
LearningObj
.:LG4
LearningOutcome:F-01
AACSB:Anal ytic
alThinki
ng

13)Ac
orpor
atet
reas
ure
r'sf
ocust
endst
obemor
eext
ernal
,whi
let
hec
ont
rol
ler
'sf
ocusi
smor
eint
ernal
.
Answe
r:TRUE
Diff:
1
Topic:Organi
zati
onoft heFi
nanc
eFunc
tion
LearningObj.
:LG4
LearningOutcome:F-01
AACSB:Anal ytic
alThinking

12
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14)Theac
crualme
thodr
ecogni
zesr
eve
nuea
tthepoi
ntofs
aleandr
ecogni
zese
xpe
nse
swhe
ninc
urr
ed.
Answer:TRUE
Diff:
1
Topic:Rel
ati
onshiptoAccount
ing
LearningObj
.:LG4
LearningOutcome:F-01
AACSB:Anal ytic
alThinki
ng

15)At r
easureriscommonlyr
espons
ibl
eforhandl
ing________.
A)taxmana geme nt
B)corporat
eac c
ounting
C)invest
ingsurplusfunds
D)costaccounti
ng
Answe r
:C
Diff:
1
Topic:Organi
zati
onoft heFi
nanc
eFunc
tion
LearningObj.
:LG4
LearningOutcome:F-01
AACSB:Anal ytic
alThinking

16)Whichofthefollowingist
rueofaccr
ualbasisacc ounti
ng?
A)Expense
sar erecognize
de i
the
rwhe ntheyareinc urredorcas
hispaid.
B)Reve
nuei srec
ogni ze
dwhe nac us
tomerpaysc ash.
C)Expense
sar erecognize
dwhe ntheyareinc
ur r
e d.
D)Revenueisrecognizedwhenac ust
ome rpayscashors howsinte
res
ttopur
chas
ethepr
oduc
tors
ervi
ce.
Answer:C
Diff:
1
Topic:Rel
ati
onshiptoAccount
ing
LearningObj
.:LG4
LearningOutcome:F-01
AACSB:Anal ytic
alThinki
ng

17)J
ohns on,I
nc .hasj ustende dthec al
endaryearmakingasaleintheamountof$10, 000ofme rchandis
e
purchasedduringt heye aratatotalcostof$7,
000.Alt
houghthefirm paidi
nf ullf
ortheme rchandise
duri
ngt heyear,itisye ttocollec
ta tyearendfrom t
hec us
tomer.Thene tpr
ofitandcashflow fr
om this
sal
efortheyearar e________.
A)$3,000and$10, 000,r espe
c t
ivel
y
B)$3,000and-$7,000,r especti
vely
C)$7,000and-$3, 000,respecti
vely
D)$3,000and$7, 000,r espec
tivel
y
Answe r:B
Diff:
2
Topic:Rel
ati
onshiptoAccount
ing
LearningObj
.:LG4
LearningOutcome:F-02
AACSB:Anal ytic
alThinki
ng

13
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18)Afirm hasjuste nde di t

sc alenda rye a
rmaki ngasal
eintheamountof$150,000ofme rchandise
purchasedduringt heye ara tatot alcostof$112,
500.Al
thoughthefir
m pai
di nful
lfortheme rchandi
se
duri
ngt heyear,itisye ttoc ollecta tyearendfrom thec
ustomer
.Thene tpr
ofitandcashflow fr
om thi
s
sal
efort heye
arar e________.
A)$0and$150, 000,r espective l
y
B)$37,500and-$150, 000,res pective l
y
C)$37,500and- $112,500,r espe c
tive l
y
D)$150,000and$112, 500,res pectively
Answe r:C
Diff:
2
Topic:Rel
ati
onshiptoAccount
ing
LearningObj
.:LG4
LearningOutcome:F-02
AACSB:Anal ytic
alThinki
ng

19)St
ockhol
derse
xpectt
oear
nhigherr
ate
sofr
etur
noni
nve
stme
ntswi
thl
owe
rri
skandl
owe
rra
tesof
ret
urnoninves
tment
swithhi
ghe
rr i
sk.
Answer:FALSE
Diff:
1
Topic:MaximizeSharehol
derWe
alt
h
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

20)Astheri
skofas t
ockinve
s t
me ntincre
ase
s,i
nve
stor
s'________.
A)retur
nwillincr
ease
B)ret
urnwilldecr
ease
C)requir
edrat
eofr e
turnwil
lde cre
as e
D)requir
edrateofret
urnwillinc
rease
Answe r
:D
Diff:
1
Topic:MaximizeSharehol
derWe
alt
h
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

21)Theprincipal-
agentproble
m arise
swhe n________.
A)theowne rsofthefirm ar
enotthepe oplemana gingthefir
m
B)theowne rsofthefir
m alsomana gethefirm
C)mana ge
r sserveonafirm'sboardofdi r
ectors
D)afirmisor ganize
dasas olepropriet
orship
Answer:A
Diff:
2
Topic:ManagingtheFirm
LearningObj.
:LG6
LearningOutcome :F-
01
AACSB:Re fle
c t
iveThi
nking

14
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22)Whichoft hefollowingworksasac
ondui
tofi
nfor
mat
ionbe
twe
ent
hefir
m andi
tsi
nve
stor
s?
A)thetreas
ure r
B)thecontr
oller
C)thedirect
orofint er
nalaudit
D)thedirect
orofi nvest
orrel
ati
ons
Answer:D
Diff:
1
Topic:ManagingtheFirm
LearningObj
.:LG3
LearningOutc
ome :F-01
AACSB:Anal yti
calThinking

23)________de cisi
onsre
fert
ohow afir
m mana
gesi
tss
hor
t-t
ermr
esour
cesonada
y-t
o-da
ybas
is.
A)Financ i
ng
B)Investment
C)Wor kingc apital
D)Mana geri
alfinance
Answe r:C
Diff:
1
Topic:ManagingtheFirm
LearningObj.
:LG3
LearningOutcome :F-
01
AACSB:Re fle
c t
iveThi
nking

24)Thereisat radeoffbet
wee nris
kandreturn(i.
e.
,toearnhi
gherre
tur nsyouge ne
r al
lyhavet
otakemore
ris
k)because________.
A)invest
orsl i
ker i
skandr et
ur nandwantmor eofboth
B)inve
storsar eris
ka ver
se,s
ot heywil
lnotacceptris
kieri
nve
stmentsunlesstheyofferhi
gherret
urns
C)toearnhi ghe rr
eturnsyouha vetomakebiggerinves
tment
sandbi ggerinves
tme ntsar
ealwaysri
ski
er
thansmallerone s
D)invest
orsc areaboutreturnsbutnotaboutri
sks
Ans wer
:A
Diff:
2
Topic:ManagingtheFirm
LearningObj.
:LG4
LearningOutcome :F-
01
AACSB:Re fle
c t
iveThi
nking

25)Thet i
mevalueofmone
yprinc
ipleimpli
est
hatal
lothe
rthingsbe i
ngequal
,inve
stme
ntst
hatpr
oduc
e
profit
sfast
erar
epref
err
edove
rthosethatpr
oducemoredist
antprofit
s.
Answe r:TRUE
Diff:
1
Topic:ManagingtheFirm
LearningObj
.:LG4
LearningOutc
ome :F-01
AACSB:Anal yti
calThinking

15
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26)The________hasar ol
ethatfoc
use
sonbudge
ting,ac
count
ing,andt
rac
kingt
hepe
rfor
manc
eofa
si
nglebus inessunit.
A)controller
B)tre
asur er
C)chieffinancialoffic
er
D)directorofr i
skmana ge
me nt
Answe r:A
Diff:
1
Topic:ManagingtheFirm
LearningObj.
:LG3
LearningOutcome :F-
01
AACSB:Re fle
c t
iveThi
nking

27)Whenmanagersar
etr
yingt
ocr
eat
eval
uef
ors
har
ehol
der
s,t
hei
rpr
imar
yfoc
uss
houl
dbeone
arni
ngs
rat
hert
hancas
hflow.
Answer:F
ALSE
Diff:
1
Topic:ManagingtheFirm
LearningObj
.:LG4
LearningOutc
ome :F-01
AACSB:Anal yti
calThinking

1.3 Organization forms, taxation, and the principal-agent relationship.

1)Whic hofthefoll
owingl
egalf
ormsofor
gani
zat
ioni
smos
texpe
nsi
vet
oor
gani
ze?
A)sol
epr oprie
torshi
ps
B)partners
hips
C)corporati
ons
D)li
mi tedpartner
ship
Answe r:C
Diff:
1
Topic:LegalFormsofBus i
nessOr
gani
zat
ion
LearningObj.
:LG5
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

2)Whic hofthefol
lowingl
egalf
ormsofor
gani
zat
ionhast
hee
aseofdi
ssol
uti
on?
A)sol
epr oprie
tors
hips
B)partners
hips
C)li
mi tedpart
nershi
ps
D)corporati
ons
Answe r:A
Diff:
1
Topic:LegalFormsofBus i
nessOr
gani
zat
ion
LearningObj.
:LG5
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

16
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3)Unde rwhichofthef
oll
owi
ngl
egalf
ormsofor
gani
zat
ioni
sowne
rshi
pre
adi
lyt
rans
fer
abl
e?
A)sol
epr oprie
tor
ships
B)partners
hips
C)li
mi tedpart
ners
hips
D)corporati
ons
Answe r:D
Diff:
1
Topic:LegalFormsofBus i
nessOr
gani
zat
ion
LearningObj.
:LG5
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

4)Whichofthef ol
lowingformsofor
gani
zat
ionsi
sthee
asi
estt
ofor
m?
A)sol
eproprietors
hips
B)l
imite
dliabil
itycorpora
tion
C)l
imitedpartnershi
p
D)S-c
orporat
ions
Answer:A
Diff:
1
Topic:LegalFormsofBus i
nessOr
gani
zat
ion
LearningObj.
:LG5
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

5)Ama jorwe aknessofapartner

shipis________.
A)thedifficult
yi nmaintai
ningowne r
s'contr
ol
B)t
hedi ffic
ul t
yi nl
iquidat
ingortrans
fer
ringowne rs
hip
C)thedoubl etaxat
ionofincome
D)itshi
ghor ganizati
onalcost
s
Answe r
:B
Diff:
1
Topic:LegalFormsofBus i
nessOr
gani
zat
ion
LearningObj.
:LG5
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

6)Whic
hoft hefoll
owingisastr
engt
hofac
orpor
ati
on?
A)l
ow taxes
B)l
imit
edliabil
it
y
C)l
ow organiza
tioncost
s
D)le
ssgovernme ntr
egulat
ion
Answer
:B
Diff:
1
Topic:LegalFormsofBus i
nessOr
gani
zat
ion
LearningObj.
:LG5
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

17
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7)Whichofthefol
lowi
ngl
egalf
ormsofor
gani
zat
ionsi
schar
act
eri
zedbyunl
imi
tedl
iabi
li
ty?
A)sol
epropriet
ors
hip
B)l
imite
dpar t
ners
hip
C)cor
porat
ion
D)C-c
orporati
on
Answer:A
Diff:
2
Topic:LegalFormsofBus i
nessOr
gani
zat
ion
LearningObj.
:LG5
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

8)Whi c
hoft hefoll
owi ngi
strueofapar tnershipandac orpor
ati
on?
A)Inac or
por at
ion,incomeistaxedatthec orpora
televel
;whereas,i
napar t
ners
hip,i
nc omeistaxed
twice
.
B)Inapartne r
ship,incomeistaxedoncea ttheindivi
dualleve
l;whereas
,inacorporat
ion,inc
omei stax
ed
twice
.
C)Incomef rom bothformsoforganizat
ionsar edouble-
taxed.
D)Inapar tners
hip,incomeise x
empt e
df rom taxupt o$10mill
ion;whereas
,inacorporati
on,inc
omei s
tax
edt wic
e.
Answe r:B
Diff:
1
Topic:Taxe
s
LearningObj.
:LG5
LearningOutcome:F-01
AACSB:Anal ytic
alThinki
ng

9)Whi choft hef

ollowingi st
rueofsolepr opri
etorshipsandc or
por ati
ons?
A)Itisdifficultt
otransferownershipofc orpor
ationsc omparedtot hatofsolepropriet
ors
hips.
B)Incomef rom bothformsofor ganiza
tionsaretaxe donlyatthec orporat
elevel
.
C)Boths ol epropriet
orshipsandc or
pora t
ionsareequal l
ys c
ruti
nize dandr e
gulatedbygove r
nme nt
bodies.
D)Ins ol
epr opri
etorshi
ps ,ownershaveunl i
mitedliabili
ty;whereas,incorporat
ions,ownershaveli
mit
ed
li
abil
ity.
Answe r:D
Diff:
1
Topic:LegalFormsofBus i
nessOr
gani
zat
ion
LearningObj.
:LG5
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

10)I
npart
ner
shi
ps,par
tne
rsc
anr
eadi
lyt
rans
fert
hei
rwe
alt
htoot
herpar
tne
rs.
Answer
:FALSE
Diff:
1
Topic:LegalFormsofBus i
nessOr
gani
zat
ion
LearningObj.
:LG5
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

18
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11)Asolepropri
etorhasunli
mit
edliabi
li
ty;hi
sorhe
rtot
ali
nve
stme
nti
nthebus
ine
ss,butnothi
sorhe
r
pers
onalass
e t
s,c
anbet ake
nt os
ati
sfycr
editor
s.
Answer:FALSE
Diff:
1
Topic:LegalFormsofBus i
nessOr
gani
zat
ion
LearningObj.
:LG5
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

12)I
nalimi
tedpar
tne
rshi
p,al
lpar
tne
rs'
liabi
li
ti
esar
eli
mit
edt
othe
iri
nve
stme
nti
nthepar
tne
rshi
p.
Answer
:TRUE
Diff:
1
Topic:LegalFormsofBus i
nessOr
gani
zat
ion
LearningObj.
:LG5
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

13)Underapr ogre
ssivetaxstr
uc t
ureinwhi cht axratesrisewithincomele
vel
s________.
A)themarginaltaxrateandthea vera
get axratearet hesame
B)theaver
aget axra
teiswha treall
yma tt
e r
swhe nani ndividualorbusi
nessi
smakingafinanc
ial
deci
sion
C)themarginaltaxrateisus
uallylessthant hea ve
ra getaxrate
D)themarginaltaxrateisus
ual l
ygr ea
terthant hea vera
get axrat
e
Answe r
:D
Diff:
2
Topic:Taxe
s
LearningObj.
:LG5
LearningOutcome:F-01
AACSB:Anal ytic
alThinki
ng

14)Thet erm" doubl etaxa t

ion"me anstha t________.
A)par tnershipsands ol epr opr i
etorshipspa ytaxont heincomet hatthe yearn,andthe nincome
dist
r i
but edfrom thebus i
ne sstot heowne ristaxedagainatthei ndividualle
ve l
B)thehi ghe stfederalinc omet axr at
efac edbyc orporati
onsistwi c
et hehighesttaxr
a teface
dby
individuals
C)c orporationspa yt axont hei ncomet heye arnandt henshareholderspa ytaxonincomet ha tt
he
corporationdi st
r i
but estot hem
D)ac or porationpa yst axont hei ntere
s titpaystobondholde r
sandt henbondhol derspa ytaxagai
non
theinterestpa yme ntst heyr ece i
vef rom firms
Ans we r
:C
Diff:
2
Topic:Taxe
s
LearningObj .
:LG5
LearningOut come :F-
01
AACSB:Re fle
c t
iveThi
nking

19
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15)Supposeac ert
ainbusine
sspays10% taxoni
tsfir
s t$10,
000i
ncome,12% t
axoninc
omeabove$10,
000
butbelow $40,
000,and22% taxonincomeabove$40,000.Supposet
hebusines
sear
ns$50,
000i
nincome
thi
syear.It'smargi
naltaxrat
eis________.
A)10%
B)12%
C)22%
D)greaterthan22%
Answe r:C
Diff:
2
Topic:Taxe
s
LearningObj.
:LG5
LearningOutcome:F-01
AACSB:Anal ytic
alThinki
ng

16)Corporategover nancer ef
ersto________.
A)therules,processes,andl awsbywhi chcompani e
sareoperate
d,cont
roll
ed,andr egula
ted
B)thefactthatcorpor a
tionshe avi
lyinfluenc
et heacti
onsofgovernment
sthrought heirl
obbyingeffor
ts
C)thenotiont hatcorpor a
tionsa c
tli
keade moc r
acyinthesensetha
teveryshareholderhasanequalvote
oncorporatede c
isions
D)theideat hatacor porateCEO i sr
eallyaccountabl
etonooneandmus tbecons t
rainedbygover
nme nt
act
ion
Answer:A
Diff:
1
Topic:Corpor at
eGovernance
LearningObj .
:LG6
LearningOut come :F-
01
AACSB:Re fle
c t
iveThi
nking

17)Agenc ycos tsare________.

A)cost
st hatmana gersbearwhe nthe
ydonotac
ti nt
hei nt
ere
stsofshar
eholders
B)cost
st hatfirmsmus tpaytocomplywit
htheregul
ationsi
mpos e
dbyf ederalgove
rnme ntage
nci
es
C)cost
st hatar eexemptf rom t
axat
ion
D)coststhats hareholdersbearbec
ausemana
gerspursuethei
rowni nte
rest
sr at
herthanacti
ngint
he
int
ere
stsofs har eholders
Answer :D
Diff:
2
Topic:LegalFor msofBusine
ssOr
gani
zat
ion
LearningObj .
:LG6
LearningOut come :F-
01
AACSB:Re fle
c t
iveThi
nking

18)Firmsarel
egal
lyr
equi
redt
opa
ydi
vide
ndst
ost
ockhol
der
sjus
tast
heymus
tmakei
nte
res
tpa
yme
nts
tolenders
.
Answe r:FALSE
Diff:
1
Topic:LegalFor msofBusine
ssOr
gani
zat
ion
LearningObj .
:LG5
LearningOut come :F-
01
AACSB:Re fle
c t
iveThi
nking

19)Supposeac ert
ainbusi
nesspa
ys10% t
axonitsfir
s t$10,
000i
ncome,12% t
axoninc
omeabove$10,
000
butbelow $40,
000,and22% t
axonincomeabove$40,000.Supposet
hebusines
sear
ns$50,
000i
nincome
thi
syear.Itsaver
agetaxrat
eiscl
oses
tto____
____.
A)22%
B)14%
C)10%
D)17%
20
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Ans
wer
:B
Diff:
2
Topic:Taxe
s
LearningObj.
:LG5
LearningOutcome:F-01
AACSB:Anal ytic
alThinki
ng

20)Di
videndsar
epe
riodi
cdi
str
ibut
ionsofc
asht
othes
toc
khol
der
sofafir
m.
Answer:TRUE
Diff:
1
Topic:LegalFor msofBusine
ssOr
gani
zat
ion
LearningObj .
:LG5
LearningOut come :F-
01
AACSB:Re fle
c t
iveThi
nking

21)Suppos eac ert

ainbusi
nesspa ys10% t
axonitsfir
s t$10,
000i
ncome,12% t
axoninc
omeabove$10,
000
butbelow $40,000,and22% taxoni ncomeabove$40,000.Supposet
hebusines
sear
ns$50,
000i
nincome
thi
sye ar.I
ttaxliabi
lit
yis________.
A)$6,800
B)$11,000
C)$9,800
D)$5,800
Answe r:A
Diff:
2
Topic:Taxe
s
LearningObj.
:LG5
LearningOutcome:F-01
AACSB:Anal ytic
alThinki
ng

22)Underafla
ttaxs
truct
ure,whe r
ethesamet axrateappli
est
oal
linc
omel
eve
ls________.
A)themargi
naltaxra
teisgreat
erthantheaveragetaxrate
B)themargi
naltaxr
ateisl
essthantheaveragetaxrate
C)themargi
naltaxr
ateisequaltotheaver
aget axr
a t
e
D)themargi
naltaxrat
eisirr
ele
vant
Answer:C
Diff:
2
Topic:Taxe
s
LearningObj.
:LG5
LearningOutcome:F-01
AACSB:Anal ytic
alThinki
ng

21
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23)Inpart
nershi
ps,owne
rsha
veunl
imi
tedl
iabi
li
tyandma
yha
vet
ocove
rde
btsofot
herl
essfinanc
ial
ly
soundpartne
rs.
Answe r
:TRUE
Diff:
1
Topic:LegalFormsofBus i
nessOr
gani
zat
ion
LearningObj.
:LG5
LearningOutcome :F-01
AACSB:Anal yt
icalThinki
ng

24)Theboardofdi
rect
orsi
sre
spons ibl
eformana
gingda
y-t
o-da
yope
rat
ionsandc
arr
yingoutt
hepol
ici
es
est
abli
shedbythechi
efexe
cut
iveoffice
r.
Answe r
:FALSE
Diff:
1
Topic:Corpor
a t
eGove rnance
LearningObj.
:LG6
LearningOutcome :F-26
AACSB:Anal yticalThinki
ng

25)I
nst
ituti
onali
nve
stor
sar
epr
ofe
ssi
onali
nve
stor
swhowor
konbe
hal
fofi
ndi
vidual
s,bus
ine
ss,and
gove
rnme nt
.
Answer:TRUE
Diff:
1
Topic:Corpor
a t
eGove rnance
LearningObj.
:LG6
LearningOutcome :F-26
AACSB:Anal yticalThinki
ng

26)Themaj
orpur
poseoftheSar
banes-
Oxl
eyAc
tof2002wast
opl
acec
apsont
hec
ompe
nsa
tiont
hat
coul
dbepaidt
ocorpor
ateexe
cuti
ves
.
Answer:F
ALSE
Diff:
1
Topic:Corpor
a t
eGove rnance
LearningObj.
:LG6
LearningOutcome :F-26
AACSB:Anal yticalThinki
ng

27)Theboar dofdi r
e ct
orsistypical
lyres
ponsi
blefor________.
A)appr ovingstra
tegicgoalsandpl ans
B)mana gingda y-
to-dayope r
a t
ions
C)arrangingfinanceforappr ovedlong-t
erminves
tme nts
D)mai ntai
ningandc ontr
olli
ngt hefir
m'sdai
lycashbalances
Answe r:A
Diff:
1
Topic:Corpor
a t
eGove rnance
LearningObj.
:LG6
LearningOutcome :F-26
AACSB:Anal yticalThinki
ng

22
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28)Ther es
pons i
bil
ityformana
gingda
y-t
o-da
yope
rat
ionsandc
arr
yingoutc
orpor
atepol
ici
esbe
longst
o
the________.
A)boar dofdirect
ors
B)chiefexecut
iveoffic
er
C)stockholder
s
D)creditor
s
Answe r:B
Diff:
1
Topic:Corpor
a t
eGove rnance
LearningObj.
:LG6
LearningOutcome :F-26
AACSB:Anal yticalThinki
ng

29)Whi chofthefollowingisanexampleofa
gencycos
t?
A)cos t
sincurre
df orset
tingupana ge
ncy
B)fail
uret omakeani nvest
me ntt
hatwouldmakeshar
ehol
der
swe
alt
hie
r
C)pa ymentofincomet ax
D)pa yme ntofint
erest
Ans wer:B
Diff:
1
Topic:TheAgencyIs
sue
LearningObj
.
:LG6
LearningOut
come:F-26
AACSB:Et hi
calUnders
tandi
ngandRe
asoni
ng

30)Whichofthef oll
owingisar outi
newaythatboar
dstrytoali
gntheint
ere
stsofmana
gersand
st
ockholder
s?
A)firemanage
rswhoar eineffici
ent
B)removemana ge ment
'sperqui sit
es
C)tiemanageme ntcompensa tiontotheperf
ormanceofthecompany'
scommons toc
kpri
ce
D)tiemanageme ntcompe ns
a tiontothele
velofdivi
dendpershare
Answe r
:C
Diff:
1
Topic:TheAgencyIs
sue
LearningObj
.
:LG6
LearningOut
come:F-26
AACSB:Et hi
calUnders
tandi
ngandRe
asoni
ng

31)Themargi
nalt
axr
atepai
donafir
m'sor
dinar
yinc
omec
anbec
alc
ula
tedbydi
vidi
ngi
tst
axe
sbyi
ts
netinc
ome.
Answe r
:FALSE
Diff:
1
Topic:Ordi
naryIncome
LearningObj
.:LG5
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

23
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32)Thea ve
raget
axr
atepai
dont
hefir
m'sor
dinar
yinc
omec
anbec
alc
ula
tedbydi
vidi
ngi
tst
axe
sbyi
ts
taxabl
eincome.
Ans wer:TRUE
Diff:
1
Topic:Ordi
naryIncome
LearningObj
.:LG5
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

33)Thetaxde ductibil
ityofvari
ousexpensessuc
hasge
ner
alandadmi
nis
tra
tivee
xpe
nse
s________.
A)incre
asesthe i
rpr et
axc os
t
B)reducestheiraft
e r
-taxcost
C)hasnoe ffe
ctont heirafte
r-t
axcos
t
D)hasanunpr edic
tableeffec
tontheiraf
ter
-taxcos
t
Answe r
:B
Diff:
1
Topic:Ordi
naryIncome
LearningObj
.:LG4
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

34)J
ennings,I
nc.hasat
axl
iabi
li
tyof$170,
000onpr
etaxi
ncomeof$500,
000.Wha
tist
hea
ver
aget
axr
ate
forJ
enni
ngs ,I
nc.
?
A)34percent
B)46percent
C)25percent
D)40percent
Answer:A
Diff:
2
Topic:Ordi
naryIncome
LearningObj
.:LG5
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

35)Thea vera
get
axr
ateofac
orpor
ati
onwi
thor
dinar
yinc
omeof$105,
000andat
axl
iabi
li
tyof$24,
200i
s
________.
A)46pe rcent
B)23pe rce
nt
C)34pe rcent
D)15pe rcent
Ans wer:B
Diff:
2
Topic:Ordi
naryIncome
LearningObj
.:LG5
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

24
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36)Ifac orpor
ationse
llsc
ert
ainc
apitalequi
pmentf
ormorethanitsini
ti
alpur
chas
epr
ice
,thedi
ffe
renc
e
betwe e
nt hesalepri
ceandthepurc
has epri
cei
scal
leda(
n)________.
A)or di
nar ygai
n
B)revenuegai n
C)capitalgain
D)abnor malgai n
Ans wer:C
Diff:
1
Topic:Capi
talGains
LearningObj
.:LG5
LearningOutcome:F-01
AACSB:Anal ytic
alThinki
ng

37)Ingener
al,mostc
orpor
atec
api
talgai
nsar
etax
eda
t________t
axr
ate
.
A)theaverage
B)theregul
arcorpor
ate
C)thehist
oric
D)a30pe rcent
Answe r
:B
Diff:
1
Topic:Capi
talGains
LearningObj
.:LG4
LearningOutcome:F-01
AACSB:Anal ytic
alThinki
ng

38)CorporationXne eds$1,
000,000andcanrai
sethi
sthroughdebta
tanannualr
ateof6perc
ent,or
pref
erredstocka tanannualcostof8perce
nt.I
fthecor
porati
onhasa21per
centt
axrate
,theaft
er-
taxc
ost
ofeachis________.
A)debt:$60,000;pref
err
edstock:$80,
000
B)debt:$47,400;pre
ferr
edstock:$63,
200
C)debt:$47,400;pref
err
edstock:$80,
000
D)debt:$60,000;pref
erredst
ock:$63,
200
Answe r:C
Diff:
2
Topic:Ordi
naryIncome
LearningObj
.:LG5
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

39)Themargi
nalt
axr
ater
epr
ese
ntst
her
atea
twhi
cht
hene
xtdol
larofi
ncomei
stax
ed.
Answer:TRUE
Diff:
1
Topic:Ordi
naryIncome
LearningObj
.:LG5
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

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40)Al
ldivi
dendinc
omer
ece
ive
dbyac
orpor
ati
oni
sex
empt
edf
rom t
axa
tion.
Answer:FALSE
Diff:
1
Topic:Ordi
naryIncome
LearningObj
.:LG4
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

41)Thet
axl
iabi
li
tyofas
olepr
opr
iet
ors
hipwi
thor
dinar
yinc
omeof$105,
000i
scl
ose
stt
o________.

Rangeoft
axabl
einc
ome Mar
ginalr
ate

$ 0 t
o $ 9,
525 10%
9,
525 t
o 38,
700 12
38,
700 t
o 82,
500 22
82,
500 t
o 157,
500 24

A)$25,
200
B)$22,
050
C)$32,
090
D)$19,
490
Answer:D
Diff:
2
Topic:Ordi
naryIncome
LearningObj
.:LG5
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

42)Thet
axl
iabi
li
tyofas
olepr
opr
iet
ors
hipwi
thor
dinar
yinc
omeof$450,
000i
scl
ose
stt
o________.

Rangeoft
axabl
einc
ome Mar
ginalr
ate

$ 0 t
o $ 9,
525 10%
9,
525 t
o 38,
700 12
38,
700 t
o 82,
500 22
82,
500 t
o 157,
500 24
157,500 t
o 200,
000 32
200,000 t
o 500,
000 35

A)$157,500
B)$133,190
C)$94,500
D)$114,700
Answe r:B
Diff:
2
Topic:Ordi
naryIncome
LearningObj
.:LG5
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

43)Pr i
ort
ot heTaxCutsandJ obsAc t,c
orporat
ionsfacedaprogressi
vet
axrateschedulewithrat
es
rangingfr
om 15% to39%.Unde rthatoldt
axl a
w,afirm wit
ht axabl
einc
omeof$100mi ll
ionwouldhave
owe dtaxe
sof$35mi ll
ion.Unde rtheTaxCutsandJ obsAct
,thec or
pora
tetaxrateisafla
t21%.Forafir
m
thatmakes$100mi l
li
oni ntaxableincome,thesizeofthet
axre duct
iont
hatthefirmenjoysbec
auseofthe
newt axla
wi sc
los
estto________.
A)$18mi ll
ion
26
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B)$21mil
li
on
C)$14mil
li
on
D)$35mil
lion
Answer:C
Diff:
2
Topic:Ordi
naryIncome
LearningObj
.:LG5
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

44)Cor porat
ionAownsas mal lpercent
ageofthes t
ockofcorpor
ati
onB.Corpora
tionBpa yscorpora
tion
A$100, 000individends.Cor
por at
ionApa ystaxa ta21% r
ateandisall
owedtoexcludefrom t
axable
income50% ofdi videndsrec
eivedf r
om otherfir
ms .Thei
ncrementalt
axest
hatCorporat
ionAmus tpay
ont hedividendsrecei
vedare________.
A)$21,000
B)$10,500
C)$0
D)$1,050
Ans wer:B
Diff:
2
Topic:Ordi
naryIncome
LearningObj
.:LG4
LearningOutc
ome :F-01
AACSB:Anal yti
calThinki
ng

27
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45)Cons i
de rtwofirms,GoDe btcorpor at
ionandNoDe btcorpor
a t
ion.Bothfirmsar ee xpect
edt ohave
earningsbeforeinter
e s
tandt axesof$100, 000dur ingthecomi ngyear .I
nadditi
on,GoDe btisexpe c
tedto
incur$40,000inintereste
xpens esasar e
sultofitsbor rowingswhe r
e asNoDe btwi lli
nc urnoi nter
est
expensebe causeitdoesnotus ede btfinancing.Bot hfirmsareinthe21pe rcenttaxbrac ket
.Cal c
ulatethe
earningsaftertaxforbothfir
ms .Compar et hediffere
nc ei
naf t
er-
taxe arni
ngstot hediffere
ncei ninter
est
expense.Canyour econci
lethatdiffer
e nce?
Ans wer:

GoDe bthaslowe rearningsa

f t
ertaxesc omparedtoNoDe bt,andt hediffe
renc eis$31,600($79,
000-
$47,400).Thediffer
enceinint
e re
stexpe ns ei
s$40,
000.Therec e
ntthedifferenceine arningsisle
ssthan
thedi ffe
renc
eini nter
estexpenseisthatt heint
ere
stexpens
et hatGoDe btpa yss a
ve sthecompany$8, 400
intaxe s(anumbe rwhi c
hyouc anc alc
ul atebymulti
plyi
ng21% t i
met he$40, 000inter
e stexpens
e).
Diff:
3
Topic:Taxe
s
LearningObj.
:LG5
LearningOutcome:F-01
AACSB:Anal ytic
alThinki
ng

28
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1.4 Developing skills for your career.

1)Communi c
ationskil
lsareveryimpor t
anttofinancialandnonfinanc ialmanage
rsbecaus
e________.
A)theywil
lbec ommuni ca
tingwi ththeinvest
me ntcommuni tyregularly
B)the
ywor ktogetheri
nc r
oss -
functi
onalteamsandne edtounde r
standhow me mber
softhei
rteams
thi
nk
C)theywil
lwr i
ter e
portst
ha taredisc
losedinthefir
m' sfinancialreports
D)theyar
eallresponsi
blefors el
li
ngthefirmsgoodsands er
vicestoc ustomer
s
Answer:B
Diff:
1
Topic:Devel
opings ki
ll
sforyourc
are
er
LearningObj.
:LG1
LearningOutcome :F-
01
AACSB:Re fle
c t
iveThinki
ng

2)De velopingfinancialcomput i
ngs ki
ll
s,suchase xpert
isewithsof
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ikeExcel
,isi
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________.
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m ne edstounde rs
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eportsandmodelsatsomelevel
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edi nExcel
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Ans wer:B
Diff:
1
Topic:Devel
opingski
llsforyourc
are
er
LearningObj
.:LG1
LearningOutcome:F-01
AACSB:Anal ytic
alThinking

29
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